by Neil V. Getnick and Lesley Ann Skillen
Published in the New York Law Journal, October 22, 1996
October 1996 marks the 10th anniversary of the 1986 amendments to the Federal False Claims Act, 31 USC § 3729 et. seq., a century-old statute whose “whistleblower” — or qui tam — provisions have returned over $ 1 billion in defrauded funds to the federal government in the past decade by empowering citizens to become private fraud enforcers.
New York City’s Public Advocate, and the State Attorney General each have introduced legislation to follow this lead in New York.
The False Claims Act, including its qui tam provisions, was initially enacted at the urging of President Abraham Lincoln in 1863, a few months before the Battle of Gettysburg. A response to reports of widespread fraud by Civil War profiteers, the Act encouraged 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 be awarded a percentage of the recovery.
Although the “Lincoln Law” was a warime initiative, it was not limited to defense fraud and covered all types of fraud against the government. In 1863, private citizen enforcement was an integral part of the U.S. statutory framework. As a California court noted in 1989, the qui tam laws “are firmly rooted in the American legal tradition.”
Like the Congressional initiative that resulted in the original False Claims Act, the 1986 amendments were prompted by reports of pervasive fraud against federal agencies, notably defense procurement and health care fraud. A revamped and revitalized qui tam law was seen as a powerful and effective means of addressing these problems. “[Only] a coordinated effort of both the Government and the citizenry,” wrote the Senate Committee on the Judiciary, “will decrease this wave of defrauding public funds.”
Today’s Federal False Claims Act provides for treble damages and penalties of $ 5,000-10,000 per violation for almost any false claim or false statement (other than tax fraud) that involves payment or a demand for payment from the federal government, or which deprives it of revenues in some way. The “knowing” submission of false claims includes not just actual knowledge, but also deliberate ignorance and reckless disregard for the truth. The qui tam provisions of the statue permit a private citizen (individual or corporation) — known as the “relator” — with knowledge of a violation of the statue to receive up to 30 percent of the recovery, with the average share hovering around 18 percent. Courts are authorized to reduce the percentage share of a relator who “planned and initiated” the wrongdoing, and a relator who is criminally convicted must be dismissed from the action. Qui tam actions “based on” information that has been the subject of a “public disclosure” are jurisdictionally barred, unless the relator is an “original source of the information,” as defined in the statue. This prohibition on “parasitic” qui tam suits ensures that suits cannot be filed by persons who have made no substantial contribution to uncovering and reporting the essential elements of the case.
The 1986 amendments also created a federal cause of action for employment discrimination arising from acts performed in furtherance of 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.
The success of the 1986 amendments was acknowledge by the Department of Justice in October 1995, marking the $ 1 billion recovery point. The Assistant Attorney General for the Civil Division, Frank Hunger, praised the 1986 bipartisan effort of Senator Charles Grassley and Representative Howard Berman as a work of “leadership and vision . . . The recovery of over $ 1 billion demonstrates that the public-private partnership encouraged by the statue works and is an effective tool in our continuing fight against the fraudulent use of public funds.”
While defense fraud and health care fraud still account for most qui tam cases, the number of cases involving other agencies is increasing. A random sample of recent qui tam cases brought in other fields includes cases involving construction and housing, environmental compliance, scientific research, agricultural subsidies and orders, banking, securities, and telecommunications. The qui tam law has also been used to sue state governments and agencies for fraud in federally-funded state-administered programs.
The largest single recovery in a qui tam suit to date was in April 1994, when defense contractor United Technologies Corporation agreed to pay the government $ 150 million in settlement of a qui tam action commenced by an executive vice president, Douglas Keeth. The largest health care fraud recovery was $ 111 million paid by National Health Laboratories in November 1993 following a qui tam case brought by Jack Dowden, then a sales manager with a rival diagnostic testing laboratory. The government is investigating similar practices by other national laboratories and, according to press reports, mutli-million dollar settlements are imminent.
Qui tam actions have been brought by companies as well as by discontented employees. In 1995, for example, a Florida medical equipment distribution company received a share of a $ 5 million settlement following a qui tam action against Huntleigh Healthcare, a manufacturer of lymphedema pumps. The qui tam action brought by the company’s president, Ron Wells, alleged that Huntleigh had promoted one of its low-grade pumps (sold wholesale for less than $ 500) as a more sophisticated pump eligible for a Medicare reimbursement of $ 4,000. Wells’s business had suffered as sales of the pump by his competitors soared. Wells used the qui tam law to level the playing field by exposing the illegal practices of his competitors and offsetting the business losses he incurred as a result.
Four states — Florida, Tennessee, Illinois and California — have followed the federal lead by enacting False Claims Acts to combat fraud committed against their own programs. In New York State and City during the past year, two bills have been introduced to enact similar legislation.
The New York City Public Advocate’s false claims legislation for New York City was introduced into the City Council in Nov. 16, 1995. The bill is closely modeled on the Federal False Claims Acts.
State Attorney General Dennis Vacco introduced a proposed False Claims and False Information Act into the State Legislature on April 11, 1996. The bill departs in many material respects from the federal legislation. In its present form, the bill assigns a level of control of the qui tam process ot the Attorney General that is entirely absent in the federal statue and that will undercut the ability of the state law to duplicate that success. For example: certification by the Attorney General is a condition precedent to the filing of a qui tam action; the Attorney General may withdraw a certification or convert a qui tam action into an Attorney General civil enforcement action during the course of the action; and the Attorney General may remove the qui tam plaintiff from an action in his discretion if certain conditions are present. Further, the relator’s share of the recovery is determined by the Attorney General and may be as little as $ 1,000 or as much as 40 percent of the proceeds. Under the Federal Act, the relator receives a percentage of the proceeds; there are no fixed sum payments, and the relator’s share is determined by the court.
The qui tam law serves the public interest by encouraging private parties (both individuals and corporations) with knowledge of fraud against public funds to come forward and to assist the government in seeking recovery. The monetary reward provides a financial incentive to “do the right thing,” particularly for employees whose whistleblowing acts involve the risk of isolation, dismissal, demotion and/or permanent career injury. Qui tam actions can also provide compensation to corporations and business people whose market share has suffered as a result of fraudulent, anti-competitive and abusive practices in their industry.
The qui tam law also has a deterrent impact. Qui tam has raised the stakes of committing and concealing fraud by creating an army of private citizen watchdogs, by providing specific remedies for employer retaliation, and by heavily penalizing those who get caught.
The Federal False Claims Act and its state equivalents have provided governments with a more powerful and more flexible means of recovering defrauded funds than common law claims, regulatory actions and civil penalty statues. As the New York State Bar Association’s Federal and Commercial Litigation Section concluded in a report issued in May a statue applying to New York State and its political subdivisions would provide New York with a comparable level of protection from illicit profiteering at the expense of State and local taxpayers.