The False Claims Act

A Retrospective Look At Twenty Years of Effective Fraud Fighting In America (PDF)

History

The False Claims Act, including its qui tam provisions, was initially enacted at the urging of President Lincoln in 1863, a few months before the Battle of Gettysburg. It was a response to reports of widespread fraud by Civil War profiteers. A critical position known as Little Roundtop, for example, was almost overrun by Confederate troops because of a lack of Union rifles and ammunition: the boxes in which they had supposedly been shipped by private suppliers contained only sawdust.

The False Claims Act was designed to encourage citizens with knowledge of fraud against the government to come forward by authorizing them to file a civil suit in the name of the government, and by rewarding them with a percentage of the recovery.

Although the so-called "Lincoln Law" was a wartime initiative, it was not limited to defense fraud. In 1863, private citizen enforcement was an integral part of the U.S. statutory framework. The qui tam action was borrowed from the English common law, which had recognized it since the thirteenth century. Ten of the fourteen statutes passed by the first Congress contained qui tam provisions designed to supplement government enforcement, including statutes relating to bank regulation, import duties and copyright infringement. As a California court noted in 1989, the qui tam laws "are firmly rooted in the American legal tradition."

Today's federal False Claims Act provides for treble damages and penalties of $11,000 per violation for virtually any kind of fraud on federally funded programs. The qui tam provisions of the statute permit a private citizen (individual or corporation) who brings suit under the False Claims Act - known as the "relator" - to receive up to 30% of the recovery, with the average share hovering around 17%.

Click on the following link to see the text of the current False Claims Act

A number of states have followed the federal lead by enacting False Claims Acts to combat fraud committed against their own programs: See State and City False Claims Acts.

Key Features of the False Claims Act

• Almost any false claim or false statement that involves payment or a demand for payment from the Federal Government, or which deprives it of revenues in some way, is actionable. Making, and causing to be made, false claims or statements are covered; for example, a subcontractor who makes false claims for payment to a general contractor knowing that an overpayment by the government will result is liable.
  
  
• Specific intent to defraud is not required to create civil liability under the False Claims Act. The "knowing" submission of false claims under the False Claims Act includes not just actual knowledge, but also deliberate ignorance and reckless disregard for the truth. Thus government contractors have a duty to ascertain that they are entitled to the public funds to which they lay claim. Conscious avoidance of an enquiry which would reveal the existence of fraud could also attract liability.
  
  
• False claims made under the Internal Revenue Code are expressly excluded from the False Claims Act and its qui tam provisions.
  
  
• A qui tam complaint is filed in federal court under seal and is not initially served on the defendant. The complaint is delivered, together with a "disclosure statement" containing all facts material to the action, to the Department of Justice and the United States Attorney's Office in the district in which the complaint is filed. The government then has a period of time within which to investigate the relator's allegations in the complaint and decide whether to "intervene in," (or join) the action. While the statutory period of time for the government to investigate and make that decision is 60 days, the government is allowed to ask the court to extend this period and almost always does so. Complex qui tam cases, particularly those involving a criminal investigation, frequently are under seal for several years. If the government decides not to join, the relator may pursue the action alone. The government has the right to intervene at a later date upon a showing to the court of good cause. Whether or not the government intervenes in the action, the government may dismiss or settle the action over the objections of the relator provided that the court has afforded the relator an opportunity to be heard.
  
  
• If the government decides not to join the action, the relator may pursue the action alone. The government has the right to intervene at a later date upon a showing to the court of good cause. Whether or not the government intervenes in the action, the government may dismiss or settle the action over the objections of the relator provided that the court has afforded the relator an opportunity to be heard.
  
  
• The relator's share of the recovery is 15-25% if the government intervenes, and 25-30% if the relator pursues the action alone. In certain circumstances, lower percentages apply: where an action is based primarily on "specific information" that is publicly disclosed, the relator's share is limited to 0-10%. Also, the court is authorized to reduce the share of a relator who "planned and initiated" the wrongdoing. A relator who is criminally convicted for conduct arising from his or her role in the fraud alleged in the qui tam case must be dismissed from the case and will not receive any share of the proceeds.
  
  
• Qui tam actions are prohibited if they are "based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless . the person bringing the action is an original source of the information." An original source is defined as "an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action."
  
  
• The "public disclosure" bar is intended to prohibit qui tam cases in which the relator seeks to rely on information that is acquired from public sources - so-called "parasitic" claims - unless the relator is an "original source" of the information as defined in the False Claims Act. This issue has been the subject of a great deal of case-law and the judicial circuits have sometimes disagreed on what disclosures are "public," what constitutes "direct and independent" knowledge, and what is meant by "based on." Whether or not the public disclosure bar is relevant to a particular case may depend upon an analysis of the caselaw in the state or judicial circuit in which the case is brought. In general, the "public disclosure" bar operates to ensure that suits cannot be filed by persons who have contributed nothing substantial to uncovering and reporting the essential elements of the case.
  
  
• If more than one relator files essentially the same case, only the first to file survives. The statute bars any subsequent case that is based on the "facts underlying the pending action." Current case-law supports a broad construction of this phrase and the notion of a "race to the courthouse" between relators with knowledge of the same fraud.
  
  
• The 1986 amendments to the False Claims Act created a federal cause of action for employees who experience retaliatory conduct by their employers because of their acts in furtherance of a qui tam action, providing for double the amount of back pay plus interest, reinstatement and compensation for special damages. The employee need not be a qui tam relator in order to bring an action under this section, but for practical purposes an employment retaliation action under the False Claims Act usually is brought in conjunction with a qui tam case.
  
  
• In a successful suit, the relator's attorney fees and costs are recoverable from the defendant. If the government does not intervene in the case and the defendant prevails, the court may award attorneys' fees and costs to the defendant and against the relator upon a finding that the claim was clearly frivolous, vexatious, or brought primarily for purposes of harassment.
  
  
• A False Claims Act case must be brought within six years of the violation or within three years of the date the government learns, or should have learned, of the facts material to the violation, but in no event more than ten years after the violation. So in other words you have six years from the date of the violation, or, if the fraud was concealed from the government, you have ten years from the date of the violation, but in such case you must bring it within three years of the time that the government knew, or should have known, that that there was or might be a violation.

Notable Qui Tam Cases

Since 1986, more than 5,500 qui tam cases have been filed and more than $20 billion in settlements and recoveries have been recouped by the federal government under the False Claims Act.

During the first six years of its operation, the revamped False Claims Act was aimed primarily at defense procurement fraud. In November 1992, a $110 million settlement and criminal plea by National Health Laboratories, one of the nation's premier clinical testing labs, inaugurated the era of big dollar health care fraud settlements. Since 1996, around half of all qui tam cases and more than two thirds of all qui tam recoveries have involved health care fraud. In FY 2006, 72% of all False Claims Act recoveries were generated by health care fraud cases.

In 1988, qui tam cases returned $390,000 to the Treasury. In FY 2006, they returned $1.3 billion. This explosive growth has been largely fueled by multi-million dollar settlements arising from qui tam suits against pharmaceutical companies, hospital corporations and clinical testing laboratories.

Other big dollar health care cases have involved nursing home operators, insurance companies that process Medicare claims, hospital management companies, and other providers of specialized health care such as renal dialysis. Although eclipsed by health care, defense procurement fraud suits have continued to result in substantial recoveries -- over $193 million in 2003, for example.

In other areas — now termed "non-traditional" — the so-called "oil and gas" cases have constituted the most high profile group. These series of cases, alleging underpayment of royalties on the production of oil, gas and minerals from public lands, recouped nearly $440 million from various oil and energy companies. Recent recoveries also include over $140 million in settlements with twenty-five brokerage firms that allegedly sold open market securities with artificially low yields to municipalities refunding tax-exempt bonds, thereby reducing the municipalities' purchase of special low-interest Treasury bonds.

Other qui tam settlements include cases involving construction, computers and environmental testing. Prior to a Supreme Court ruling in 2000 the qui tam law had also been used to sue state governments and agencies for fraud on federally-funded state -administered programs. Since this ruling, states may no longer be sued by qui tam relators. Local governments, however, are not so exempt.

The average reward paid to relators stands at approximately 17% of the recovery. Relator shares usually are resolved by negotiation with the DOJ, which makes the successful relator an "offer" after the case is settled. Since the minimum statutory share, in the normal case, is 15%, it is clear that the DOJ reserves offers of higher percentages for cases in which the relator has provided extraordinary assistance. In a case against the pharmaceutical company Bayer which settled in April 2003 for $251 million, Getnick & Getnick represented the relator, a former Bayer marketing executive who gave a videotaped deposition to preserve his evidence three months before he passed away. The DOJ awarded his estate a 24% share of the federal recovery.

If the DOJ and the relator cannot agree on a percentage, the relator may ask the court for a ruling. Relators rarely do this. In two recent cases, the court awarded the relators 24% and 20% respectively.

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