Article


Federal False Claims Act – Qui Tam Cases

Association of Trial Lawyers of America Annual Convention
July, 2004, Boston, Massachusetts by
Brian Wojtalewicz of Wojtalewicz Law Firm, Ltd.

The Federal False Claims Act[1] is the American citizen’s most powerful legal tool against corporate abuse of the government. The citizen is empowered to bring a federal lawsuit for recovery of fraud on behalf of the government, and possibly have federal attorneys conduct the case. It also provides employee whistleblowers with much greater potential recoveries than any state or common law claim. “Qui tam” originated as an English law term for these cases, and comes from the Latin phrase “who brings the action for the king as well as for himself.”[2] The person bringing the lawsuit is formally called the “relator,” and informally has been called a “private attorney general.” A successful relator is rewarded with a percentage of the government’s recovery of both fraudulent amounts and civil penalties. These amounts can be stunning. When three individuals brought a qui tam case against SmithKline Beecham Corp., it resulted in a recovery to the United States of $333,976,266, with a 17% recovery to the three individuals of $52,049,126.[3]

Historical Background

Congress passed the original False Claims Act (FCA) during the Civil War. There were many accounts of munitions fraud, like shells filled with sawdust and boots made of cardboard.[4] As usual, some of the rich and powerful were involved in bilking the government. “Commodore” Vanderbilt, Jr. added to the family fortune when he arranged to lease unseaworthy ships to transport Union troops at ridiculous prices.[5] President Abraham Lincoln actively lobbied for the law, at one point declaring:

“Worse than traitors in arms are the men who pretend loyalty to the flag, feast and fatten on the misfortunes of the Nation, while patriotic blood is crimsoning the plains of the South and their countrymen are mouldering in the dust.”[6]

President Lincoln was not that many years away from his experience as an active litigation lawyer, and was quite cognizant of the powerful ally the government could have in the private bar.[7] The original 1863 Act gave 50% of all monies recovered to the relator, and did not allow the government to intervene.[8]

In early World War II, some individuals began literally waiting in federal courthouses for criminal indictments to be filed, and immediately filing civil qui tam actions against the same contractors. This practice actually caused significant recovery to the federal treasury that it otherwise would have missed. The federal authorities were not pursuing the FCA civil remedies. However, the practice enraged others, including Attorney General Biddel. Fortunately, Congress declined his invitation to abolish the whole False Claims Act. Instead, amendments were passed to eliminate the so-called “parasitic” lawsuits. Unfortunately, the “pendulum swung too far” with provisions that made the statute so unattractive to relators that it eliminated the Act as an effective weapon in combating fraud against the government. The biggest problem was a provision that set a jurisdictional bar preventing any qui tam action unless the government lacked all knowledge of the fraud. Federal courts interpreted the jurisdictional bar as preventing a qui tam suit even where the government’s knowledge of the fraud came from the relator![9]

With the gargantuan peacetime military buildup in the 1980′s, media reports about $400 hammers and $7,000 coffee pots enraged American citizens. It gave the impetus for the crucial 1986 amendments to the FCA. Republican Senator Charles Grassley, a leading proponent of the 1986 amendments, stated that both the Department of Defense and the Department of Justice “have chosen to satisfy their obsession with looking good, rather than deal forthrightly with a clear and growing danger.”[10] The 1986 Act was intended to eliminate prior government knowledge as a bar to qui tam suits. It also strengthened the relator’s role in the litigation in relation to the Department of Justice (DOJ), increased a successful relator’s share in the proceeds, increased the civil penalties, added new remedies for whistleblower retaliation, and clarified that clear and convincing evidence was not needed. Very importantly, in response to judicial rulings against plaintiffs, Congress made the burden of proof easier for relators on the level of perpetrator knowledge that needed to be proved.

Types of Claims

While military contracting and health care financing are the largest areas for FCA suits, viable cases can be based on a large variety of situations involving federal dollars. The Act defines a “claim” as any request or demand for money or property where the United States is to provide or reimburse any portion of the money or property.[11] The purpose of the law is “to protect funds and property of the government from fraudulent claims, regardless of the particular form or function of the government instrumentality upon which such claims were made.”[12] Thus, schools, farms, environmental programs, transportation and many other areas of our society are potential sources of FCA suits. Cases are quite possible where companies are not truthful or accurate about complying with federal rules connected to grants, contracts or financing. It is not necessary that the government actually pay or approve the claim in order for a violation to occur.[13] A false certification that does not result in payment by the United States, but does insulate the certifying party from having to reimburse the government, is also a false claim.[14] The Act can be enforced against a subcontractor who causes a prime contractor to submit false claims to the government.[15] A demand for payment that is made to a local government agency, which is in turn partially reimbursed by the United States, can also be the basis for an FCA case.[16] Administration of a federally funded program in violation of the conditions for federal funding constitutes a false claim.[17] However, the Act specifically excludes any claims relating to the Internal Revenue Code.[18]

Specific Intent or Scienter Unnecessary

The 1986 amendments to the Act provided an extremely important advantage to relators and the government by clarifying that a defendant need not have an intent to defraud. The statute lists seven different categories that provide liability, such as a defendant “knowingly” presenting a false claim, creating or using a false record, or conspiring to defraud.[19] The statute then states:

The terms “knowing” and “knowingly” mean that a person, with respect to information:

1. has actual knowledge of the information;

2. acts in deliberate ignorance of the truth or falsity of the information;

or

3. acts in reckless disregard of the truth or falsity of the information, and
no proof of specific intent to defraud is required.[20]

The Act applies to corporations, and an employer cannot defend against the Act by arguing that its employee committed fraud against the corporation as well as the government.[21] Also, an employer’s ignorance of an employee’s false statements to the government is no defense.[22] Congress specifically intended to have liability established against those who would play an ignorance game:

It is intended that persons who ignore “red flags” that the information may not be accurate or those persons who deliberately choose to remain ignorant of the process through which their company handles the claim should be held liable under the Act. This definition, therefore, enables the Government not only to effectively prosecute those persons who have actual knowledge, but also those who play “ostrich.”[23]

Burden of Proof

The 1986 amendments also clarified that the burden of proof is the traditional preponderance of the evidence standard.[24] Congress was critical of federal courts that had imposed a heavier burden.

Jurisdiction Pitfalls

Publicity about the fraud, or government investigation before a whistleblower files his or her lawsuit, can unfortunately be legally deadly for the whistleblower. In the 1986 amendments, Congress specifically sought to re-empower individuals to report fraud and bring qui tam lawsuits, by correcting some of the ridiculous jurisdiction hurdles. At the same time, it wanted to prevent true “parasites” who never really helped the government.

The resulting Section 31 USC 3730(e)(4)(A) provides:

“No court shall have jurisdiction over an action under this section 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 action is brought by the Attorney General or the person bringing the action is an original source of the information.”

Thus, if the federal government decides not to intervene and prosecute your civil qui tam case, your case may fall victim to this jurisdiction bar. It would join too many other legitimate federal fraud whistleblower efforts. This provision has spawned vast amounts of summary judgment and appellate litigation, with contrary holdings among the federal courts. It is very important for a potential relator’s lawyer to investigate whether such “public disclosure” has occurred. If so, it is equally important to investigate whether your relator(s) will meet the definition of “original source.”

The Eighth Circuit, in considering the Act’s jurisdictional bar for the first time in 1994, observed:

“The Act’s jurisdiction scheme is designed to promote private citizen involvement in exposing fraud against the government, while at the same time prevent parasitic suits by opportunistic late-comers who add nothing to the exposure of the fraud.”[25]

Yet in 2003, the Eighth Circuit slammed the jurisdiction bar down upon a true “private citizen” whistleblower named Patrick Hays. Hays was the administrator of a non-profit nursing home. He discovered that the parent corporation was committing Medicaid fraud by falsely claiming food gifts to employees and board members as food for residents. After unsuccessfully complaining to the board, he began a series of several short letters to the Minnesota Department of Human Services (DHS). It was charged with administering Medicaid and investigating fraud for the state and federal governments. When he showed the first letter to the parent corporation CEO, he was fired on the spot. His several letters to the state DHS provided cursory descriptions of the food fraud scheme, and ten other schemes. He had learned of the ten other schemes from his friend, the parent corporation’s chief financial officer. This friend refused to blow the whistle and instead left the company for another job. The DHS investigators responded with an intensive field audit that verified and fleshed out the variety of schemes that Hays had identified, along with additional wrongful billings. Hays conferred with the auditors during their investigation.

After DHS issued its audits, Hays initiated his qui tam suit, attaching the DHS audits to the formal Complaint. He also pled qui tam whistleblower and state statute whistleblower violations. The DOJ declined to intervene. After the district court rejected repeated defense summary judgment and jurisdiction attacks, the jury agreed with Hays that the defendants had committed 11 different Medicaid fraud schemes. It rejected one of the claimed schemes. It also found federal and state whistleblower statute violations. The Eighth Circuit reversed judgment on 10 of the 11 proven fraud schemes. It held that the state DHS audits were prior public disclosures. Other federal circuits had held that only federal agency investigations or audits triggered the public disclosure. The fact that it was Hays who caused the audits meant nothing to the Eighth Circuit! It also ruled that Hays was the original source for only the food fraud, which he was the first to notice. It held that he wasn’t the original source on the other ten fraud schemes that the CFO told him about. The fact that the CFO refused to risk being a whistleblower, and that it was Hays who actually told the government about the schemes, also meant nothing to the Eighth Circuit![26]

It is important to bear in mind that not all media reports about the fact situations surrounding the fraud will
constitute a “public disclosure.” The Eighth Circuit has held that the media reports must expose the transactions at issue as fraudulent.[27] Analysis of whether fraud was exposed has spawned a good deal of litigation.[28]

Still another issue in jurisdiction battles is whether relator’s lawsuit or information to the government was “based upon” the media report or prior government action. The Fourth Circuit has given a common sense, plain meaning interpretation by holding that “based upon” means “derived from.”[29] Unfortunately, other federal circuit courts take the position that a relator’s action will be considered “based upon” prior public disclosures “whenever the allegations in the suit and in the disclosure are the same, ‘regardless of where the relator obtained his information.’”[30] These circuits jurisdictionally bar an otherwise successful fraud case where the fraud information appeared in any government investigation or a media report from anywhere, even if the relator was unaware of it! These courts violate Congressional intent, placing unnecessary hurdles on the common citizen, to the benefit of thieves. The problem is exacerbated by the Supreme Court’s repeated refusal to grant certiorari on these key FCA jurisdiction issues, despite conflicts between the circuits and the need for interpretation of a federal statute.

Procedure

An FCA case proceeds quite differently from ordinary civil litigation. It is very important for a relator’s lawyer to follow the FCA requirements. It avoids the risks of a jurisdictional bar, prematurely alerting the crooks, or alienating federal attorneys or the pertinent agency.

The Complaint is filed under seal, with service only upon the United States Government and without defendant knowledge. An important FCA document, a “written disclosure of substantially all material evidence and information the person possesses. . .” is also served simultaneously only upon the federal attorneys.[31] It hopefully will not later be disclosed to the defense, pursuant to attorney-client privilege and work product doctrines.[32] The disclosure statement should have as much information as possible concerning the fraud. It aides the federal government’s investigation and decision on whether to take the case. It may also be crucial later for an “original source” jurisdiction attack, or if a dispute occurs between the relator and the federal government over the percentage amount of relator’s share. It should go beyond the information in the Complaint, and provide copies of pertinent documents and a list of potential witnesses. Obviously, in light of the Hays case and others, revealing anything to the government prior to your Complaint filing and formal disclosures could be jurisdictionally fatal.

After this written disclosure and the in camera filing of the Complaint, a conference is set for the relator with representatives of the relevant agency(s), DOJ, the local U.S. Attorney, the FBI and any involved state and federal investigative agencies. The statute contemplates that the Complaint remains under seal for at least 60 days, while the federal authorities investigate the matter.[33] It is quite common for the government to get an in camera extension of this time from the court. Before the Complaint is unsealed and served upon the defendant, the government must decide whether to proceed with the action and conduct the case.[34] The government may elect to proceed on some alternative remedy, including administrative proceedings.[35] If the government declines to take over the action or pursue other remedies, it statutorily permits the qui tam relator to pursue the case.[36] Even where the government decides not to initially intervene in the case, it may later intervene upon a good cause showing to the court.[37] Where the government elects not to proceed, its consent is still necessary for any settlement on federal money or civil penalties.

Damages

The 1986 Amendments made a defendant liable for triple the amount of actual damages suffered by the United States. However, the fraud perpetrator can sometimes only have double damages imposed, if it is fully cooperative with the government investigation upon first learning of the allegation. The defendant is also responsible for all costs incurred by the government in recovering any damages or penalties.

The court is also mandated to impose a civil penalty of $5,000 to $10,000 per false claim.[38] Disputes may easily arise over the “number of claims” in connection with this civil penalty imposition. A claim is defined as “any request or demand, whether under a contract or otherwise, for money or property.”[39] Various crooks have attempted to convince the federal courts that “claim” means a whole federal contract, or project, building, annual report, etc. The leading federal case rejecting this theory is the Supreme Court decision of United States v. Bornstein.[40] On occasion, the number of individual claims may be a tremendous figure (e.g. doctor timecards, Medicare billings). Attempting to impose thousands of civil penalties in this context, especially if the crook was convicted and paid a substantial criminal fine, could raise constitutional issues concerning double jeopardy or excessive fines.[41]

It is important to know that proof of actual damage or loss to the federal government is not an essential element of an FCA case, and the United States need not have suffered actual damages.[42] Lack of actual damages also doesn¿t preclude imposition of the civil penalties, or award of attorneys fees and costs.[43]

Relator’s Share of Recovery

If the government takes over the case, a relator is to receive not less than 15% nor more than 25% of the proceeds.[44] If the government does not conduct the case, and the relator is successful in obtaining a recovery, the relator is entitled to receive between 25% and 30% of the recovery.[45] However, if the case is based upon the public disclosure of specific information, the government prosecutes the civil case, and the relator did not make the public disclosure, the court may award any sum to the relator it deems appropriate, but not more than 10% of the recovery.[46]

Attorney Fees and Costs

In addition to the relator’s share of the recovery, the relator is also entitled to receive attorney fees and costs from the defendant.[47] These attorney fee provisions apply even in cases where the government takes over the action. On the other hand, if the government doesn’t proceed with the action, the defendant prevails in the case, and the court finds that relator’s claim was clearly frivolous, the court can award attorney fees and costs to the defendant.[48]

Whistleblower Protection

Another invaluable amendment to the FCA in 1986 was protection for whistleblowers. Relators, whistleblowers who aren’t relators, witnesses and employees of defendants who help in a qui tam suit, or even just an investigation, who suffer any retaliation, are entitled to “make whole” damages. Potential relief includes reinstatement with seniority, twice the amount of back pay owed, interest on back pay, compensation for any special damages, attorneys fees and costs.[49] For instance, Mr. Hays won the doubling of his back pay of $171,736 under the qui tam whistleblower provision, and future economic loss of $428,264 under the Minnesota whistleblower statute.[50] The protection against retaliation extends to whistleblowers whose allegations could support a qui tam case, even if such a lawsuit was never initiated.[51] The government is not entitled to any portion of the damages recovered by the whistleblower under this provision. These FCA whistleblower protections are in addition to any other state or common law protections or damages, which should be included in the lawsuit.

Statute of Limitations

The statute of limitations is generally six years from the date of the violation. However, a suit may be brought up to three years after the facts are known or should have been known by any government official charged with responsibility to act in the circumstances, up to a maximum of ten years after the date on which the violation occurred.[52]

Resources

A good text oriented toward lawyers for FCA relators is False Claims Act: Whistleblower Litigation, 3rd Edition, Jeff B. Helmer, Jr., Lexis Nexis Law Publishing. A text oriented toward the defense is Civil False Claims and Qui Tam, by John T. Boese, Aspen Law and Business. Another resource for support of qui tam relators is Taxpayers Against Fraud (TAF), the False Claims Act Legal Center, 1220 19th St., NW, Suite 501, Washington, DC 20036, Phone (202) 296-4826; internet address: www.taf.org. Among the resources of the TAF Center are sample documents, and an on-line quarterly review of FCA case decisions and settlement reports.

Conclusion

Between the crucial 1986 amendments to the FCA and 1997, $1.8 billion dollars was recovered for the U.S. Treasury by qui tam suits. Many American trial lawyers may have the opportunity to prosecute qui tam cases, fulfilling a mission established in no small measure by a brother trial lawyer, Abraham Lincoln.

[1] 31 USC 3729 et. seq. (1986)

[2] Erickson, ex rel. United States v. American Institute of Biological Sciences, 716 F. Supp. 908, 909n1 e.d. Va. 1989 (citing William Blackstone, commentaries in the law of England 160 (1768).

[3] United States ex rel. Merena v. SmithKline Beecham Corp., 1997 U.S. Dist. LEXIS 19896 *55 (E.D. Pa. 1997), aff¿d 149 F. 3d 227 (3d Cir. 1998).

[4] Cong. Globe, 37th Cong., 3rd Session 955 (1863).

[5] W. Andrews, the Vanderbilt Legend, 77-84 (1941).

[6] 89 Cong. Rec. 19847.

[7] 132 Cong. Rec. 22339-40 (1986) (remarks of Rep. Berman & Bedell).

[8] Act of March 2, 1863, Sec. 6, 12 Stat. @ 698.

[9] United States ex rel. Wisc. Dept. of Health and Social Services v. Dean, 729 F.2d 1100, 1103 (7th Cir. 1984).

[10] Hearings on S.588, 99th Cong., 1st Sess. 1-2 (1985).

[11] 31 USC 3729(c)

[12] Rainwater v. United States, 356 U.S. 590, 592 (1958).

[13] United States ex rel. Luther v. Consolidated Industries, Inc., 720 F. Supp. 919 (N.D. Ala. 1989).

[14] United States v. Eilberg, 507 F. Supp. 267 (E.D. Pa. 1980).

[15] United States v. Bornstein, 423 U.S. 303 (1976).

[16] United States v. Killough, 625 F. Supp. 1399 (M.D. Ala. 1986).

[17] United States Village of Island Park, 888 F. Supp. 419 (E.D. N.Y. 1995).

[18] 31 USC Sec. 3729(e).

[19] 31 USC 3729(a).

[20] 31 USC 3729(b).

[21] Gleason v. Seaboard Airline RR Co., 278 U.S. 349 (1929).

[22] United States v. Domestic Industries, Inc., 32 F. Supp. 2d 855 (E.D. Va. 1999); United States ex rel Trim v. McKean, 31 F. Supp. 2d 1308 (W.D. Okla. 1999)

[23] H.R. Rep. No. 660 99th Cong. 2nd Session 21 (1986).

[24] 31 USC 3731(c)

[25] U.S. ex rel Rabushka v. Crane Co., 40 F.3d 1509, 1511 (8th Cir. 1994).

[26] Hays v. Hoffman, 325 F.3d 982 (8th Cir. 2003) cert. denied, 124 S.Ct. 277 (2003).

[27] U.S. ex rel. Rabushka v. Crane Co., 40 F.3d 1509, 1512-1513 (8th Cir. 1994).

[28] See U.S. ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645 (D.C. Cir. 1994) and U.S. ex rel. v. Findley v. FPC-Boron Employees¿ Club, 105 F.3d 675 (D.C. Cir. 1997).

[29] Siller v. Beckton Dickenson & Co., 21 F.3d 1339 (4th Cir. 1994).

[30] Minnesota Association of Nurse Anesthetists v. Allina, 276 F.3d 1032 (8th Cir. 2002).

[31] 31 USC 3730(b)(2).

[32] United States ex rel. Scott v. McKenna, (S.D. Calif. 4-14-99); U.S. ex rel. Taxpayers Against Fraud v. Litton Systems, (C.D. Calif. 10-19-90); U.S. ex rel. Elliot v. Sperry Corp., (S.D. Tex. 10-24-91).

[33] 31 USC 3730(b)(1),(2).

[34] 31 USC 3730(b)(4).

[35] 31 USC 3730(c)(5).

[36] 31 USC 3730(c)(1),(3).

[37] 31 USC 3730(c)(3).

[38] 31 USC 3729(a).

[39] 31 USC 3729(c).

[40] 423 U.S. 303, 96 S.Ct. 523 (1976).

[41] United States v. Halper, 490 U.S. 435 (1989).

[42] United States v. Rivera, 55 F.3d 703, 709 (1st Cir. 1995).

[43] Rabuska, Id. at 563.

[44] 31 USC 3730(d)(1).

[45] 31 USC 3730(d)(2).

[46] 31 USC 3730(d)(1).

[47] Id.

[48] 31 USC 3730(d)(4).

[49] 31 USC 3730(h).

[50] Hays v. Hoffman, File No.: 97-CV-1656, D. Minn., Honorable James Rosenbaum (8-20-01); and 325 F.3d 982 (8th Cir. 2003).

[51] U.S. ex rel. Yesudian v. Howard University, 153 F.3d 731 (D.C. 1998); Neal v. Honeywell, Inc., 33 F.3d 860 (7th Cir. 1994).

[52] 31 USC 3731(b).