False Claims Act

History

Qui tam laws have history dating back to the Middle Ages in England. In 1318, King Edward II offered one third of the penalty to the relator when the relator successfully sued government officials who moonlighted as wine merchants. The Maintenance and Embracery Act 1540 of Henry VIII provided that common informers could sue for certain forms of interference with the course of justice in legal proceedings that were concerned with the title to land. This act is still in force today in the Republic of Ireland, although in 1967 it was extinguished in England. The idea of a common informer bringing suit for damages to the Commonwealth was later brought to Massachusetts, where "penalties for fraud in the sale of bread [are] to be distributed one third to inspector who discovered the fraud and the remainder for the benefit of the town where the offense occurred." Other statutes can be found on the colonial law books of Connecticut, New York, Virginia and South Carolina.

The American Civil War (1861–1865) was marked by fraud on all levels, both in the Union north and the Confederate south. During the war, unscrupulous contractors sold the Union Army decrepit horses and mules in ill health, faulty rifles and ammunition, and rancid rations and provisions, among other unscrupulous actions. In response, Congress passed the False Claims Act on March 2, 1863, 12 Stat. 696. Because it was passed under the administration of President Abraham Lincoln, the False Claims Act is often referred to as the "Lincoln Law".

Importantly, a reward was offered in what is called the qui tam provision, which permits citizens to sue on behalf of the government and be paid a percentage of the recovery. Qui tam is an abbreviated form of the Latin legal phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur ("he who brings a case on behalf of our lord the King, as well as for himself") In a qui tam action, the citizen filing suit is called a "relator". As an exception to the general legal rule of standing, courts have held that qui tam relators are "partially assigned" a portion of the government's legal injury, thereby allowing relators to proceed with their suits.

U.S. Senator Jacob M. Howard, who sponsored the legislation, justified giving rewards to whistle blowers, many of whom had engaged in unethical activities themselves. He said, "I have based the [qui tam provision] upon the old-fashioned idea of holding out a temptation, and ‘setting a rogue to catch a rogue,’ which is the safest and most expeditious way I have ever discovered of bringing rogues to justice."

In the massive military spending leading up to and during World War II, the US Attorney General relied on criminal provisions of the law to deal with fraud, rather than using the FCA. As a result, attorneys would wait for the Department of Justice to file criminal cases and then immediately file civil suits under the FCA, a practice decried as "parasitic" at the time. Congress moved to abolish the FCA but at the last minute decided instead to reduce the relator's share of the recovered proceeds.

The law was again amended in 1986, again due to issues with military spending. Under President Ronald Reagan's military buildup, reports of massive fraud among military contractors had become major news, and Congress acted to strengthen the FCA.

The law has always primarily been used against defense contractors but by the late 1990s, health care fraud began to receive more focus, accounting for approximately 40% of recoveries by 2008 Franklin v. Parke-Davis, filed in 1996, was the first case to apply the FCA to fraud committed against the government, due to bills submitted for payment by Medicaid/Medicare for treatments that those programs do not pay for as they are not FDA-approved or otherwise listed on a government formulary. FCA cases in the field of health care are often related to off-label marketing of drugs by drug companies, which is illegal under a different law, the Federal Food, Drug, and Cosmetic Act; the intersection occurs when off-label marketing leads to prescriptions being filled and bills for those prescriptions being submitted to Medicare/Medicaid.

As of 2012, over 70 percent of all federal FCA actions were initiated by whistleblowers. The government recovered $38.9 billion under the False Claims Act between 1987 and 2013 and of this amount, $27.2 billion or 70% was from qui tam cases brought by relators. In 2014, whistleblowers filed over 700 False Claims Act lawsuits.

Provisions

The Act establishes liability when any person or entity improperly receives from or avoids payment to the Federal government (tax fraud is excepted). The Act prohibits:

1. Knowingly presenting, or causing to be presented a false claim for payment or approval;
2. Knowingly making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim;
3. Conspiring to commit any violation of the False Claims Act;
4. Falsely certifying the type or amount of property to be used by the Government;
5. Certifying receipt of property on a document without completely knowing that the information is true;
6. Knowingly buying Government property from an unauthorized officer of the Government, and;
7. Knowingly making, using, or causing to be made or used a false record to avoid, or decrease an obligation to pay or transmit property to the Government.

Certain claims are not actionable, including:

1. certain actions against armed forces members, members of the United States Congress, members of the judiciary, or senior executive branch officials;
2. claims, records, or statements made under the Internal Revenue Code of 1986 which would include tax fraud;

There are unique procedural requirements in False Claims Act cases. For example:

1. a complaint under the False Claims Act must be filed under seal;
2. the complaint must be served on the government but must not be served on the defendant;
3. the complaint must be buttressed by a comprehensive memorandum, not filed in court, but served on the government detailing the factual underpinnings of the complaint.

In addition, the FCA contains an anti-retaliation provision, which allows a relator to recover, in addition to his award for reporting fraud, double damages plus attorney fees for any acts of retaliation for reporting fraud against the Government. This provision specifically provides relators with a personal claim of double damages for harm suffered and reinstatement.

Under the False Claims Act, the Department of Justice is authorized to pay rewards to those who report fraud against the federal government and are not convicted of a crime related to the fraud, in an amount of between 15 and 25 (but up to 30 percent in some cases) of what it recovers based upon the whistleblower's report. The relator's share is determined based on the FCA itself, legislative history, Department of Justice guidelines released in 1997, and court decisions.

1986 changes

(False Claims Act Amendments (Pub.L. 99–562, 100 Stat. 3153, enacted October 27, 1986)

1. The elimination of the "government possession of information" bar against qui tam lawsuits;
2. The establishment of defendant liability for "deliberate ignorance" and "reckless disregard" of the truth;
3. Restoration of the "preponderance of the evidence" standard for all elements of the claim including damages;
4. Imposition of treble damages and civil fines of $5,000 to $10,000 per false claim;
5. Increased rewards for qui tam plaintiffs of between 15–30 percent of the funds recovered from the defendant;
6. Defendant payment of the successful plaintiff's expenses and attorney's fees, and;
7. Employment protection for whistleblowers including reinstatement with seniority status, special damages, and double back pay.

2009 changes

On May 20, 2009, the Fraud Enforcement and Recovery Act of 2009 (FERA) was signed into law. It includes the most significant amendments to the FCA since the 1986 amendments. FERA enacted the following changes:

1. Expanded the scope of potential FCA liability by eliminating the "presentment" requirement (effectively overruling the Supreme Court's opinion in Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008));
2. Redefined "claim" under the FCA to mean "any request or demand, whether under a contract or otherwise for money or property and whether or not the United States has title to the money or property" that is (1) presented directly to the United States, or (2) "to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government's behalf or to advance a Government program or interest" and the government provides or reimburses any portion of the requested funds;
3. Amended the FCA's intent requirement, and now requiring only that a false statement be "material to" a false claim;
4. Expanded conspiracy liability for any violation of the provisions of the FCA;
5. Amended the "reverse false claims" provisions to expand liability to "knowingly and improperly avoid[ing] or decreas[ing] an obligation to pay or transmit money or property to the Government;"
6. Increased protection for qui tam plaintiffs/relators beyond employees, to include contractors and agents;
7. Procedurally, the government's complaint will now relate back to the qui tam plaintiff/relator's filing;
8. Provided that whenever a state or local government is named as a co-plaintiff in an action, the government or the relator "shall not [be] preclude[d]... from serving the complaint, any other pleadings, or the written disclosure of substantially all material evidence;"
9. Increased the Attorney General's power to delegate authority to conduct Civil Investigative Demands prior to intervening in an FCA action.

With this revision, the FCA now prohibits knowingly (changes are in bold):

1. Submitting for payment or reimbursement a claim known to be false or fraudulent.
2. Making or using a false record or statement material to a false or fraudulent claim or to an ‘obligation’ to pay money to the government.
3. Engaging in a conspiracy to defraud by the improper submission of a false claim.
4. Concealing, improperly avoiding or decreasing an ‘obligation’ to pay money to the government.

2010 changes under the Patient Protection and Affordable Care Act

On March 23, 2010, the Patient Protection and Affordable Care Act (also referred to as the health reform bill or PPACA) was signed into law by President Barack Obama. The Affordable Care Act made further amendments to the False Claims Act, including:

1. Changes to the Public Disclosure Bar. Under the previous version of the FCA, cases filed by private individuals or "relators" could be barred if it was determined that such cases were based on a public disclosure of information arising from certain proceedings, such as civil, criminal or administrative hearings, or news media reports. As a result, defendants frequently used the public disclosure bar as a defense to a plaintiff's claims and grounds for dismissal of the same. PPACA amended the language of the FCA to allow the federal government to have the final word on whether a court may dismiss a case based on a public disclosure. The language now provides that "the court shall dismiss an action unless opposed by the Government, if substantially the same allegations or transaction alleged in the action or claim were publicly disclosed." See 31 U.S.C. 3730(e)(4)(A).
2. Original Source Requirement. A plaintiff may overcome the public disclosure bar outlined above if they qualify as an "original source," the definition of which has also been revised by PPACA. Previously, an original source must have had "direct and independent knowledge of the information on which the allegations are based." Under PPACA, an original source is now someone who has "knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions." See 31 U.S.C. 3730(e)(4)(B).
3. Overpayments. FERA redefined "obligation" under the FCA to include "retention of any overpayments." Accordingly, such language imposed FCA liability on any provider who received Medicare/Medicaid overpayments (accidentally or otherwise) and fails to return the money to the government. However, FERA also raised questions as to what exactly is involved in the "retention of overpayments" – for example, how long a provider had to return monies after discovering an overpayment. PPACA clarified the changes to the FCA made by FERA. Under PPACA, overpayments under Medicare and Medicaid must be reported and returned within 60 days of discovery, or the date a corresponding hospital report is due. Failure to timely report and return an overpayment exposes a provider to liability under the FCA.
4. Statutory Anti-Kickback Liability. The federal Anti-Kickback Statute, 42 U.S.C. 1320a-7b(b) (AKS) is a criminal statute which makes it improper for anyone to solicit, receive, offer or pay remuneration (monetary or otherwise) in exchange for referring patients to receive certain services that are paid for by the government. Previously, many courts had interpreted the FCA to mean that claims submitted as a result of AKS violations were false claims and therefore gave rise to FCA liability (in addition to AKS penalties). However, although this was the "majority rule" among courts, there were always opportunities for courts to hold otherwise. Importantly, PPACA changed the language of the AKS to provide that claims submitted in violation of the AKS automatically constitute false claims for purposes of the FCA. Further, the new language of the AKS provides that "a person need not have actual knowledge … or specific intent to commit a violation" of the AKS. Accordingly, providers will not be able to successfully argue that they did not know they were violating the FCA because they were not aware the AKS existed.

Practical application of the law

The False Claims Act has a detailed process for making a claim under the Act. Mere complaints to the government agency are insufficient to bring claims under the Act. A complaint (lawsuit) must be filed in U.S. District Court (federal court) in camera (under seal). After an investigation by the Department of Justice within 60 days, or frequently several months after an extension is granted, the Department of Justice decides whether it will pursue the case.

If the case is pursued, the amount of the reward is less than if the Department of Justice decides not to pursue the case and the plaintiff/relator continues the lawsuit himself. However, the success rate is higher in cases that the Department of Justice decides to pursue.

Technically, the government has several options in handing cases. These include:

1. intervene in one or more counts of the pending qui tam action. This intervention expresses the Government's intention to participate as a plaintiff in prosecuting that count of the complaint. Fewer than 25% of filed qui tam actions result in an intervention on any count by the Department of Justice.
2. decline to intervene in one or all counts of the pending qui tam action. If the United States declines to intervene, the relator may prosecute the action on behalf of the United States, but the United States is not a party to the proceedings apart from its right to any recovery. This option is frequently used by relators and their attorneys.
3. move to dismiss the relator's complaint, either because there is no case, or the case conflicts with significant statutory or policy interests of the United States.

In practice, there are two other options for the Department of Justice:

1. settle the pending qui tam action with the defendant prior to the intervention decision. This usually, but not always, results in a simultaneous intervention and settlement with the Department of Justice (and is included in the 25% intervention rate).
2. advise the relator that the Department of Justice intends to decline intervention. This usually, but not always, results in dismissal of the qui tam action, according to the U.S. Attorneys' Office of the Eastern District of Pennsylvania.

There is case law where claims may be prejudiced if disclosure of the alleged unlawful act has been reported in the press, if complaints were filed to an agency instead of filing a lawsuit, or if the person filing a claim under the act is not the first person to do so. Individual states in the U.S. have different laws regarding whistleblowing involving state governments.

Federal income taxation of awards under FCA in the United States

The U.S. Internal Revenue Service (IRS) takes the position that, for Federal income tax purposes, qui tam payments to a relator under FCA are ordinary income and not capital gains. The IRS position was challenged by a relator in the case of Alderson v. United States and, in 2012, the U.S. Court of Appeals for the Ninth Circuit upheld the IRS' stance. As of 2013, this remained the only circuit court decision on tax treatment of these payments.

Relevant decisions by the United States Supreme Court

In a 2000 case, Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000), the United States Supreme Court held that a private individual may not bring suit in federal court on behalf of the United States against a State (or state agency) under the FCA. In Stevens, the Supreme Court also endorsed the "partial assignment" approach to qui tam relator standing to sue, which had previously been articulated by the Ninth Circuit Federal Court of Appeals and is an exception to the general legal rule for standing.

In a 2007 case, Rockwell International Corp. v. United States, the United States Supreme Court considered several issues relating to the "original source" exception to the FCA's public-disclosure bar. The Court held that (1) the original source requirement of the FCA provision setting for the original-source exception to the public-disclosure bar on federal-court jurisdiction is jurisdictional; (2) the statutory phrase "information on which the allegations are based" refers to the relator's allegations and not the publicly disclosed allegations; the terms "allegations" is not limited to the allegations in the original complaint, but includes, at a minimum, the allegations in the original complaint as amended; (3) relator's knowledge with respect to the pondcrete fell short of the direct and independent knowledge of the information on which the allegations are based required for him to qualify as an original source; and (4) the government's intervention did not provide an independent basis of jurisdiction with respect to the relator.

In a 2008 case, Allison Engine Co. v. United States ex rel. Sanders, the United States Supreme Court considered whether a false claim had to be presented directly to the Federal government, or if it merely needed to be paid with government money, such as a false claim by a subcontractor to a prime contractor. The Court found that the claim need not be presented directly to the government, but that the false statement must be made with the intention that it will be relied upon by the government in paying, or approving payment of, a claim. The Fraud Enforcement and Recovery Act of 2009 reversed the Court's decision and made the types of fraud to which the False Claims Act applies more explicit.

In a 2009 case, United States ex rel. Eisenstein v. City of New York, the United States Supreme Court considered whether, when the government declines to intervene or otherwise actively participate in a qui tam action under the False Claims Act, the United States is a "party" to the suit for purposes of Federal Rule of Appellate Procedure 4(a)(1)(A) (which requires that a notice of appeal in a federal civil action generally be filed within 30 days after entry of a judgment or order from which the appeal is taken). The Court held that when the United States has declined to intervene in a privately initiated FCA action, it is not a "party" for FRAP 4 purposes, and therefore, petitioner's appeal filed after 30 days was untimely.

State False Claims Acts and application in other jurisdictions

As of 2014, thirty states and the District of Columbia have also created false-claims statutes to protect their publicly funded programs from fraud by including qui tam provisions, which enables them to recover money at state level. Some of these state False Claims Act statutes provide similar protections to those of the federal law, while others limit recovery to claims of fraud related to the Medicaid program.

The California False Claims Act was enacted in 1987, but lay relatively dormant until the early 1990s, when public entities, frustrated by what they viewed as a barrage of unjustified and unmeritorious claims, began to employ the False Claims Act as a defensive measure.

In Australia, there have been calls since 2011 for legislation modeled on the False Claims Act and for their application to the tobacco industry and carbon pricing schemes

In October 2013, the UK Government announced that it is considering the case for financially incentivising individuals reporting fraud in economic crime cases by private sector organisations, in an approach much like the US False Claims Act. The 'Serious and Organised Crime Strategy' paper released by the UK's Secretary of State for the Home Department sets out how that government plans to take action to prevent serious and organised crime and strengthen protections against and responses to it. The paper asserts that serious and organised crime costs the UK more than £24 billion a year. In the context of anti-corruption, the paper acknowledges that there is a need to not only target serious and organised criminals but also support those who seek to help identify and disrupt serious and organised criminality. Three UK agencies, the Department for Business, Innovation & Skills, the Ministry of Justice and the Home Office have been tasked with considering the case for a US-style False Claims Act in the UK.

Rule 9(b) circuit split

Under Rule 9(b) of the Federal Rules of Civil Procedure, allegations of fraud or mistake must be pleaded with particularity. All appeals courts to have address the issue of whether Rule 9(b) pleading standards apply to qui tam actions have held that the heightened standard applies. has ruled that whistleblowers under the False Claims Act are not required to allege specific false claims to satisfy Rule 9(b), the Fifth Circuit, the Seventh Circuit, Eleventh Circuit, the Sixth Circuit, the Eighth Circuit, and the Tenth Circuit have all found that plaintiffs must allege specific false claims.

In 2010, the First Circuit decision in U.S. ex rel. Duxbury v. Ortho Biotech Prods., L.P.(2009) and the Eleventh Circuit ruling in U.S. ex rel. Hopper v. Solvay Pharms., Inc.(2009) were both appealed to the U.S. Supreme Court. The Court denied certiorari for both cases, however, declining to resolve the divergent appeals court decisions.

ACLU et al. v. Holder

In 2009, the American Civil Liberties Union (ACLU), Government Accountability Project (GAP) and OMB Watch filed suit against the Department of Justice challenging the constitutionality of the "seal provisions" of the FCA that require the whistleblower and the court to keep lawsuits confidential for at least 60 days. The plaintiffs argued that the requirements infringe the First Amendment rights of the public and the whistleblower, and that they violate the division of powers, since courts are not free to release the documents until the executive branch acts. The government moved for dismissal, and the district court granted that motion in 2009. The plaintiffs appealed, and in 2011 their appeal was denied.

Examples

In 2010, a subsidiary of Johnson & Johnson agreed to pay over $81 million in civil and criminal penalties to resolve allegations in a FCA suit filed by two whistleblowers. The suit alleged that Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI) acted improperly concerning the marketing, promotion and sale of the anti-convulsant drug Topamax. Specifically, the suit alleged that OMJPI "illegally marketed Topamax by, among other things, promoting the sale and use of Topamax for a variety of psychiatric conditions other than those for which its use was approved by the Food and Drug Administration, (i.e., "off-label" uses)." It also states that "certain of these uses were not medically accepted indications for which State Medicaid programs provided coverage" and that as a result "OMJPI knowingly caused false or fraudulent claims for Topamax to be submitted to, or caused purchase by, certain federally funded healthcare programs.

In response to a complaint from whistleblower Jerry H. Brown II, the US Government filed suit against Maersk for overcharging for shipments to US forces fighting in Iraq and Afghanistan. In a settlement announced on 3 January 2012, the company agreed to pay $31.9 million in fines and interest, but made no admission of wrongdoing. Brown was entitled to $3.6 million of the settlement.