Part 4: The Modern False Claims Act–How It Works

This Part 4 by whistleblower lawyer blog is a continuation of a detailed article for those wishing to know the specifics of the principal qui tam whistleblower statutes, the federal False Claims Act and the new state False Claims Acts. It is taken from a recently published article by whistleblower lawyer blog author Michael A. Sullivan, and it is reprinted with the permission of the Georgia Bar Journal.

This Part 4 focuses on the “modern” False Claims Act–since the 1986 Amendments. Before considering it, please note that, in September 2007, a bipartisan group of Senators introduced the “False Claims Act Correction Act,” a bill to further “modernize” the False Claims Act with substantial improvements intended to restore the Act to Congress’ original intentions. We at whistleblower lawyer blog will provide regular updates as that bill is considered by Congress.

III. Overview of How the Modern False Claims Act Works (with Comparisons to State False Claims Acts, With the New Georgia State False Medicaid Claims Act as a Primary Example)

A. Conduct Prohibited

The federal False Claims Act imposes civil liability under several different theories, only four of which are generally used:

First, the Act makes liable any person who knowingly presents, or causes to be presented, a “false or fraudulent claim for payment or approval” to the federal government. [30] “Claim” is broadly defined to include not only submissions made directly to the federal government, but also “any request or demand . . . for money or property” made to a “contractor, grantee, or other recipient” if the federal government provides any portion of the money or property in question. [31]

Second, the Act creates liability for using a “false record or statement” to obtain payment of a false claim. It imposes liability on any person who “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government.” [32]

Third, the False Claims Act imposes liability under a “conspiracy” provision. Any person who “conspires to defraud the Government by getting a false or fraudulent claim allowed or paid” is also liable under the Act. [33]

Fourth, since the government also can be defrauded when a private entity underpays or avoids paying an obligation to the government, the modern Act contains what is known as a “reverse false claim” provision. It creates liability for any person who “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.” [34] For example, a company that is obligated to pay royalties to the government under an oil lease can be held liable if it uses false records or statements to pay less than what it owes.

Georgia Act compared: The same bases of liability are set forth in new section 49-4-168.1(a), with regard to the Georgia Medicaid program. “Claim” is also broadly defined in the Georgia statute in section 49-4-168(1). In fact, the Georgia statute’s definition of “claim” was intended by the legislature to eliminate a point of dispute about the federal statute [35] by making clear that it applies to “claims” submitted not only to the government, but also to other persons or entities, as long as the Georgia Medicaid program provides any portion of the money or property at issue.

The federal False Claims Act also creates a cause of action for damages for retaliation against employees who assist in the investigation and prosecution of False Claims Act cases. [36] This cause of action belongs to the employee alone, and the government does not share in any recovery for retaliation.

Georgia Act compared: New section 49-4-168.4 establishes a similar right to pursue a claim for retaliation in employment.

B. Broad Definition of “Knowing” and “Knowingly”

The federal Act’s “scienter” requirement of “knowingly” presenting false claims, or “knowingly” using false records or statements, is broadly defined as well. A person is liable not only when acting with “actual knowledge,” but also when acting in “deliberate ignorance” or “reckless disregard” of the truth or falsity of the information in question. [37] The Act also makes explicit that no “specific intent to defraud” need be shown to impose liability, and thus rejects this traditional “fraud” standard.

Georgia Act compared: Georgia’s new section 49-4-168(2) incorporates the same broad definitions of “knowing” and “knowingly,” and likewise makes clear that “[n]o proof of specific intent to defraud is required.” Georgia had no leeway in this regard if it wished to qualify for the additional funds under the Deficit Reduction Act. In fact, when the Georgia bill was under consideration, Indiana’s statute had already been determined not to qualify that state for additional funds under the Deficit Reduction Act, precisely because the Indiana statute did not define “knowing” and “knowingly” as broadly as does the federal Act. [38]

C. Damages and Penalties Under the False Claims Act

Liability to defendants in False Claims Act cases can be enormous. First, the Act provides for treble damages-“3 times the amount of damages which the Government sustains because of the act of that person.” [39]

Second, the Act now provides for a civil penalty of $5,000 to $10,000 for each false claim submitted, an amount that has been adjusted for inflation for more recent claims to $5,500 to $11,000 per violation. [40]

Georgia Act compared: The Georgia Act likewise provides for treble damages and penalties of $5,500 to $11,000 for each false claim submitted, under section 49-4-168.1(a).

D. Some of the Peculiar Jurisdictional and Procedural Requirements In Qui Tam Cases

The False Claims Act establishes a wholly different process for qui tam actions from the usual one encountered in civil litigation. The Act has unique jurisdictional and procedural requirements.

The qui tam relator brings the lawsuit for the relator and for the United States, in the name of the United States. [41] The Complaint must be filed “in camera and under seal,” and must remain under seal for at least 60 days. [42] The relator must serve the government under Rule 4 of the Federal Rules of Civil Procedure with a “copy of the complaint and written disclosure of substantially all material evidence and information the person possesses.” [43]

In reality, courts regularly extend the seal for many months (or even years) at the government’s request. The purpose is to permit the government to evaluate and investigate the case and make its decision as to whether to intervene. Thus, it is not uncommon for the defendant to receive no notice for more than a year that it has been sued in a qui tam action, even as the government meets with the relator and relator’s counsel to develop the case against the defendant. Nonetheless, defense counsel may infer the existence of a qui tam action when the client or its employees are contacted by government agents.

If the government elects to intervene, it assumes primary responsibility for prosecuting the case, although the relator remains a party with certain rights to participate. [44] The defendant is served once the complaint is unsealed, and has 20 days after service to respond. [45]

If the government intervenes, it is not “bound by an act of the person bringing the action.” [46] The government can file its own complaint and can expand or amend the allegations made. [47] Once it has intervened, the government also has the right to dismiss the case notwithstanding the relator’s objections, but the relator has a right to be heard on the issue. [48]

The government may petition the court before intervention for a partial lifting of the seal in order to disclose the complaint to the defendant and discuss resolution of the case, even before it decides whether to intervene.

If the government elects not to intervene, the relator has the right to “conduct the action.” [49] Although the relator must prosecute the case without the government, as stated the relator is entitled to a larger share of any recovery, 25-30%, in non-intervened cases. [50]

After intervention, the government is authorized to settle the case even if the relator objects, but the relator has a right to a “fairness” hearing on any such settlement. In actuality, a relator’s objections are highly unlikely to stop a settlement that the government, after intervention, seeks to make.

The Act states that, when there is an action “based upon the public disclosure of allegations or transactions” in one of three specified categories of places where disclosures can occur, the court shall lack jurisdiction over the action, unless “the person bringing the action is an original source of the information.” The three specified places of “public disclosure” are “[1] in a criminal, civil, or administrative hearing, [2] in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or [3] from the news media.” [51] (Much litigation has occurred over this provision, and a detailed discussion is beyond the scope of this article. The proposed amendments introduced in September 2007, the False Claims Act Correction Act, would substantially affect this provision.)

Georgia Act compared: The Georgia Act establishes essentially the same procedures. It directs that the complaint and “written disclosure of substantially all material evidence and information shall be served on the Attorney General.” The complaint must be filed in camera and shall remain under seal for at least 60 days, and it is not served on the defendant while it remains under seal. The Attorney General may move to extend the time under seal in order to investigate the allegations of the complaint, all pursuant to section 49-4-168.1(c).
The Georgia Act arguably goes further than the federal Act in expressly recognizing in section 49-4-168.2(d)(2) that the Attorney General “may dismiss the civil action, notwithstanding the objections of the person initiating the civil action, if the person has been notified by the Attorney General of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.” In the legislative hearings attended by this writer, the bill’s sponsor discussed how this provision permits the Attorney General to have a desired degree of control over actions by private citizens under the new Act, and to perform a “screening” function.

In addition, section 49-4-168.2(f) of the Georgia law expressly recognizes that the Attorney General may decline to intervene, but later reconsider and be permitted by the court to intervene for any purpose, including to seek dismissal of the action.

A substantive change from the federal Act is that, in Georgia’s new section 49-4-168.2(j), the Georgia Act prohibits “public employees” and “public officials” from bringing on action based on either “(A) [a]llegations of wrongdoing or misconduct which such person had a duty or obligation to report or investigate within the scope of his or her public employment or office; or (B) [i]nformation or records to which such person had access as a result of his or her public employment or office.” Under current federal case law, public employees may bring whistleblower actions under the federal Act.

Finally, Georgia’s new Act in section 49-4-168.2(i)(1) designates that money recovered under the new Georgia Act shall go to the “Indigent Care Trust Fund to be used for the purposes set forth in Code Section 31-8-154.”

Footnotes:

31 31 U.S.C. § 3729(c).

32 Id. § 3729(a)(2).

33 Id. § 3729(a)(3).

34 Id. § 3729(a)(7). The Act also lists three little-used bases of liability in subsections (a)(4), (5), and (6), which are omitted from this discussion.

35 See, e.g., United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004) (claim submitted to Amtrak held outside False Claims Act), cert. denied, 544 U.S. 1032 (2005).

36 31 U.S.C. § 3730(h).

37 Id. § 3729(b).

38 See http://www.oig.hhs.gov/fraud/docs/falseclaimsact/Indiana.pdf.

39 31 U.S.C. § 3729(a). In specified circumstances in which the defendant reports the fraud to the government promptly and cooperates fully, the Act provides for double damages. Id.

40 Id. For violations of the Act occurring after September 29, 1999, the penalty range has increased to $5,500 to $11,000 per violation. See 28 U.S.C. § 2461; 28 C.F.R. § 85.3(9) (2006).

41 31 U.S.C. § 3730(b)(1).

42 31 U.S.C. § 3730(b)(2).

43 Id.

44 Id. § 3730(c)(1).

45 Id. § 3730(b)(3).

46 Id. § 3730(c)(1).

47 See id.

48 Id. § 3730(c)(2)(A).

49 Id. § 3730(c)(3).

50 Even “non-intervened” cases sometimes result in substantial liabilities to defendants. For example, in United States ex rel. Franklin v. Parke Davis, No. 96-11651-PBS (D. Mass.), a relator pursued an action over the off-label marketing of Neurontin, and the government elected not to intervene. Ultimately, the defendant entered into a global settlement of $430 million, of which $152 million was to settle False Claims Act liability, and $38 million was to settle civil liabilities to the fifty states. See https://www.usdoj.gov/civil/foia/elecread/2004/Warner-Lambert%202004.pdf.

51 The “public disclosure” provision is as follows:

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.

31 U.S.C. § 3730(e)(4)(A).