Published in the NY Litigator, Vol.2 No.2, November 1996

by Neil V. Getnick and Lesley Ann Skillen

This Report was prepared by the Civil Prosecution Committee of the Commercial-and Federal Litigation Section of the New York State Bar Association and adopted by the Section.  The authors of this report are Neil V. Getnick, Committee Chair, and Lesley Ann Skillen

Linda M. Mariono contributed to the editing of this Report for publication.

In October 1995, the United States Department of Justice announced that the government had recovered in excess of one billion dollars in civil fraud cases brought under the revamped “whistleblower” provisions of the False Claims Act. ^[1]   The Assistant Attorney General for the Civil Division, Frank Hunger, praised the bipartisan effort of Senator Charles Grassley (R-IA) and Representative Howard Berman (D-CA) as a work of “. . . leadership and vision. . . . The recovery of over $1 billion demonstrates that the public-private partnership encouraged by the statute works and is an effective tool in our continuing fight against the fraudulent use of public funds. ^[2]

The False Claims Act is a civil statute which enables the government to recover treble damages and penalties from those who attempt to defraud the Federal government. The broadly drafted language of the statute aims to capture all kinds of fraud against both the government and federally funded government entities. ^[3]   The “whistleblower,” or qui tam, provisions of the statute permit a private citizen (individual or corporation) known as the relator, with knowledge of fraud against the Federal government, to bring an action on behalf of the United States and to receive, if successful, a percentage of the recovery. ^[4]

Since its overhaul in 1986, the False Claims Act has proven to be a powerful means of exposing fraud against the government and recovering defrauded funds. ^[5]   This report describes the history and framework of the Act, outlines its use since 1986, and, on the basis of its success since that time, recommends the enactment of similar legislation in New York.

I .          HISTORY OF THE FEDERAL CIVIL FALSE CLAIMS ACT

The False Claims Act, including its qui tam ^[6] provisions, originated under President Lincoln in 1863 in response to the fraudulent and abusive practices of defense contractors during the American Civil War. ^[7]   While the statute was a wartime initiative aimed at punishing “any person in the land or naval forces of the United States” who attempted to defraud the government, ^[8] it also included “any person actually employed in the service of the United States. ^[9]   Additionally, the qui tam provisions of the Act allowed any person to bring the suit “for himself as well as the United States.” ^[10]   The concept was not new; by the time the “Lincoln Law” was enacted, the concept of private citizen enforcement was “firmly rooted in the American legal tradition.” ^[11]   Ten of the fourteen statutes passed by the first Congress contained qui tam provisions designed to supplement government enforcement.  These statutes pertained to such diverse fields as bank regulation, import duties, copyright infringement and vessel registration. ^[12]

The “Lincoln Laws” were virtually unchanged until Congress substantially curtailed the qui tam provision in 1943 in reaction to a Supreme Court decision. In U.S. ex rel. Marcus v. Hess, ^[13] a private citizen filed a civil suit which appeared to be based on a criminal indictment brought by the United States government. The government argued that the action should be barred because the private citizen received information not by his own investigation but from the published indictment, thereby thwarting the spirit of the Act; but the Court found that nothing in the Act prohibited such a suit. ^[14]   In order to prevent the ensuing “race to the courthouse,” Congress amended the False Claims Act to inhibit severely the qui tam provisions. ^[15]   The amendment was intended to bar “parasitic suits” – suits in which the relator relies on information acquired from public sources when the relator is not the original source of that information. However, the amendment had the effect of prohibiting qui tam actions not only where the government was. already pursuing an action based on the fraud in question, but where the government had information but was not taking steps to investigate or prosecute an action. ^[16]   The Act remained in this condition until 1986.

II .        THE FALSE CLAIMS ACT SINCE 1986

In 1986, the False Claims Act was amended substantially to provide a powerful framework for fighting fraud against the federal government through a combination of private and public enforcement. ^[17]   The Senate Report accompanying the 1986 Act described the Act’s purpose as not only providing the “Government’s law enforcers with more effective tools,” but also encouraging “any individual knowing of Government fraud to bring that information forward.” ^[18]   To further this goal, the 1986 amendments included provisions which increased the level of participation by private citizens, demonstrating the Senate’s belief that “only a coordinated effort of both the Government and the citizenry will decrease the wave of defrauding public funds.” ^[19]

The False Claims Act, as amended, provides that 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. ^[20]   The Act covers both the making of false claims or statements and the causing of false claims or statements to be made.  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. ^[21]   Violations of the Act are now punishable by treble damages and penalties of up to $10,000 per violation or double damages if the violator voluntarily discloses the fraud to the government and cooperates with its investigation. ^[22]   However, false claims made under the Internal Revenue Code are expressly excluded from the Act and its qui tam provisions. ^[23]

The 1986 amendments clarified the meaning of the “knowing” submission of false claims. The Act specifically includes not just actual knowledge but also deliberate ignorance and reckless disregard for the truth. ^[24]   No proof of specific intent to defraud is required. ^[25] Congress attempted to avoid “ostrich” situations where an individual fails to make simple inquiries which would alert him to fraudulent claims. The inquiry, however, need only be “reasonable and prudent” under the circumstances. ^[26] Thus, government contractors have a duty to ascertain that they are entitled to the public funds to which they lay claim and to prevent the conscious avoidance of an inquiry which would reveal the existence of fraud.

The 1986 amendments also address several procedural and substantive rules. They set the government’s burden at the level of preponderance of the evidence. ^[27]   They also provide that an action may be brought within six years from the date that the fraud was committed or within three years from the date the responsible government official knew or  should have known about the fraud (but in no event more than ten years after the violation occurred), whichever occurs last. ^[28]

Above all, the 1986 amendments were designed to encourage private citizens to come forward with information about fraud against the government by strengthening the qui tans provisions of the Act. ^[29]   As the Senate Report reveals, the committee’s overall intent in amending the qui tam provisions was to encourage private enforcement. ^[30]

In order to take advantage of the qui tam provisions of the Act, a relator must file a complaint under seal without service on the defendant and deliver it, together with a “disclosure statement” containing all facts material to the action, to the Department of Justice and the local United States Attorney. ^[31] The government then has 60 days within which to investigate the relator’s allegations in the complaint. ^[32]   By providing a 60-day period, the Senate committee sought to allow the government an adequate opportunity to fully evaluate the private suit and determine if the government is already investigating the matter and whether it is in the government’s best interest to intervene. ^[33]

Should the government decide to intervene, the government has “primary responsibility for prosecuting the action,” but the relator has the right to “continue as a party,” ^[34] unless the relator’s unrestricted participation in the litigation interferes with or unduly delays the government’s prosecution of the case or is repetitious, irrelevant or harassing. ^[35] If the government succeeds on its claim, the relator is entitled to 15-25% of the recovery. ^[36]

The government also may decide to dismiss or settle an action over the objection of the relator, provided that the court has afforded the relator an opportunity to be heard. ^[37]   If the government does not wish to pursue the claim, the relator may do soon behalf of the government and is entitled to 25-30% of any amounts recovered. ^[38]   In certain circumstances, such as when an action is based upon “specific information” that is publicly disclosed, the relator’s share may be limited to 0-10%. ^[39]   Courts are further authorized to reduce the share of a relator who “planned and initiated” the violation. ^[40]   A relator who is criminally convicted must be dismissed from the action and is disqualified from receiving any part of the proceeds. ^[41]

In order to address the concerns expressed by Congress in 1943 when it severely restricted qui tam actions in attempting to bar “parasitic.” claims, the 1986 amendments prohibit actions “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.” ^[42]   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. ^[43]   The issue of what disclosures are “public” ^[44] and what constitutes “direct and independent” knowledge ^[45] has been heavily litigated, and the circuit courts sometimes disagree about the proper interpretation of those terms.  The “public disclosure” bar ensures that suits cannot be filed by persons who have contributed nothing substantial to uncovering the essential elements of the case. ^[46]

In response to concerns raised by “whistleblowers,” i.e. employees who fear employer retaliation for their part in qui tam actions, the 1986 amendments created a federal cause of action to prevent such retaliatory conduct. ^[47]   An employee who succeeds on a claim based on a retaliatory firing is entitled to be reinstated with the same seniority, double back pay plus interest, and compensation for special damages, including litigation costs and reasonable attorneys’ fees. ^[48]   Furthermore, the employee need not be a qui tatn relator in order to bring an action under this section. ^[49]

III .       THE USE OF THE qui tam LAW

The qui tam law has been particularly successful as a weapon against defense procurement fraud and, increasingly, health care fraud. ^[50]   In 1995, these two categories together accounted for 84% of all qui tam cases filed (48% were defense cases and 36% were health care cases). ^[51] Additionally, recent qui tam actions brought in other fields include cases involving construction and housing, ^[52] environmental compliance, ^[53] scientific research, ^[54] agricultural subsidies and orders, ^[55] banking, ^[56] postal services, ^[57] and telecommunications. ^[58]

The largest single recovery in a qui tam suit to date was in March 1994 when defense contractor United Technologies Corporation agreed to pay the Government $150 million in settlement of a qui tam action commenced by its former Vice President of Finance. ^[59]   Allegedly, the relator had delivered a report to corporate management on alleged fraudulent billing practices by the company’s Sikorsky Aircraft Division going back to at least 1982, and management ordered that all copies of the report be destroyed. ^[60]   The relator alleged that United Technologies habitually billed for work not yet performed. ^[61] The Department of Justice found that the inflated progress payments made to United Technologies by the government constituted interest-free loans and resulted in additional debt service costs to the government. ^[62]   As a result of the settlement, however, no criminal charges were filed against United Technologies, nor was it barred from or penalized with respect to future government contract work. ^[63]

The largest health care fraud recovery in a qui turn case was the settlement reached with National Health Laboratories (“NHL”) in September 1993. ^[64]   NHUs settlement with the `tovernment for civil and criminal charges totaled $110 million. ^[65]   In the late 1980s. Jack Dowden. then a sales manager with MetWest, Inc.. a competitor of NHL, reported to MetWest executives that NHL was allegedly submitting false Medicare claims involving the “unbundling” of blood test packages that Dowden (and later, after Dowden had filed a qui tarn action, the Federal government) characterized as fraudulent. ^[66]   Instead of heeding Dowden’s warning, MetWest adopted NHL’s billing practices. ^[67]   MetWest and its parent, MetPath, Inc.. also the subject of a qui tam suit by Dowden, later reached a $39.8 million settlement with the government. ^[68]

IV 0       STATE FALSE CLAIMS ACTS

Several states have followed the federal lead by enacting False Claims Acts to combat fraud committed against their own programs. ^[69]   The Florida False Claims Act ^[70] is similar to the federal legislation, but contains a number of additional restrictions on bringing qui tam actions.  Such actions cannot be brought by attorneys for the state government; ^[71] current and former government employees when the actions are based on information they obtained in the course of their employment; ^[72] or persons who obtained their information from government employees “who [were] not acting in the course or scope of government employment.” ^[73]   Also, qui tam actions may not be brought against a local government. ^[74]

The Tennessee Medicaid False Claims Act is limited to fraud committed against the State’s health benefits program for the poor and disabled. ^[75]   The legislation substantially mirrors the federal False Claims Act. Tennessee also enacted the Health Care False Claims Act, ^[76] which applies the same provisions as the Tennessee Medicaid False Claims Act to fraud committed against health care insurers. ^[77]   Liability for fraud against health care insurers includes civil penalties and treble damages paid to the state. ^[78]

The California False Claims Act, ^[79] enacted in 1987, is also patterned after the federal legislation. However, in the California Act, the relator’s share of the recovery is between 15% and 33%. ^[80]   If the government does not join the action, the relator’s share of the recovery is between 25% and 50%. ^[81] Additionally, the legislation extends authority to bring civil false claims actions to political subdivisions within the state. ^[82]

V 0        PROPOSED FALSE CLAIMS ACTS IN NEW YORK

A bill to enact a New York State False Claims Act, ^[83] substantially the same as the federal False Claims Act, was introduced by Senator Franz Leichter (D-Bronx) on February 3, 1993.  The bill was not enacted, nor was it reintroduced in the current session.

On a local level, the New York City Public Advocate drafted false claims legislation for New York City that was introduced to the City Council on November 16, 1995. ^[84]   The stated purpose of the bill was:

To amend the administrative code of the city of New York in relation to authorizing the imposition of a civil penalty against anyone who files a false claim for payment with the city and to permit private persons to bring actions for such penalties on behalf of the city and to share in the damages awards. ^[85]

Although modeled on the federal Act, this proposed legislation differs in several respects.  Most of the differences are procedural, particularly addressing the state’s jurisdiction over the New York court system.  In addition, while the federal False Claims Act provides for the complaint to be filed with the court under seal and remain under seal until the Department of Justice has conducted its investigation, in the Public Advocate’s proposed legislation, the complaint is not filed until after the city has investigated the allegations which may take up to 120 days. The city, if it decides to join, then must file the action within 60 days of that decision.

The Public Advocate’s bill also departs from the federal Act in several substantive respects. The Public Advocate’s bill includes specific provisions relating to the circumstances in which government employees may bring qui tam actions, a question that is not addressed in the federal legislation.  Further, in the Public Advocate’s proposal a relator who is found to have planned and initiated the wrongdoing must be dismissed from the action, whereas in the federal legislation the relator’s share may simply be reduced. Percentage awards to relators in the federal statute are between 25% and 30% if the government does not join in the action; in the Public Advocate’s proposal the share in such circumstances is between 15% and 25%. ^[86]

The New York State Attorney General introduced a False Claims and False Information bill into the state legislature on April 11, 1996. ^[87]   The bill differs in many material respects from the federal legislation. The primary departures from the federal legislation are as follows:

·           the bill creates criminal liability, in addition to civil liability, and the Attorney General is given concurrent jurisdiction with the relevant district attorney to prosecute;

·           the bill prohibits the submission of false, fraudulent or misleading information, as well as the submission of false claims;

·           the victim of a violation may be a private accident and health insurance company licensed to do business in the state, as well as a state agency;

·           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, whereas the federal False Claims Act contemplates that the government must intervene in the action in order to pursue an alternate remedy; and

·           the Attorney General may remove the qui tam plaintiff from an action in his discretion if certain conditions are present.

There are no corresponding provisions in the federal False Claims Act. In addition, the proposed state legislation differs from the federal Act in the following respects:

·           the statute of limitations is four years;

·           the relator’s share of the recovery may be as little as $1,000 or as much as 40% of the proceeds, according to whether the Attorney General converts, supersedes or intervenes in the action;

·           public disclosure is not a jurisdictional bar but rather a matter taken into account by the Attorney General in determining the relator’s share of the proceeds;

·           qui tam actions may not be brought against members of the federal or state judiciary, senior federal or state executive branch officials, or members of Congress or the state judiciary, whereas the federal False Claims Act only bars qui tam actions by members of the armed forces against members of the armed forces and actions against members of the Congress, senior executive branch officials and members of the judiciary, and then, only if the information was known to the government when the action was brought;

·           the Attorney General may proceed by way of an alternate remedy (e.g., civil money penalty) even if he does not intervene in or supersede a qui tam action, whereas the Federal False Claims Act contemplates that the government must intervene in the action in order to pursue an alternate remedy; and

·           there is no provision in the proposed state legislation for civil investigative demands.

In addition to these departures from the federal False Claims Act, the bill, unlike the California legislation, does not provide for the Act to apply to political subdivisions in addition to the state.

Neither the New York City Public Advocate’s bill nor the New York State Attorney General’s bill has received legislative hearings to date.

VI 0 CONCLUSION

The federal False Claims Act’s qui tam provisions are intended to serve the public interest by encouraging private parties (both individuals and corporations) who have knowledge of fraud against public funds to come forward with their information and to assist and cooperate with the government’s investigation. ^[88]   The qui tam law provides an incentive for doing so in the form of a monetary reward. ^[89]   Often, the qui tam bounty provides the financial wherewithal by which fraud can be brought to light. Without the likelihood of compensation, most people could not afford the risks to their careers and livelihood that becoming a whistleblower frequently entails. Such persons include employees of government contractors who (notwithstanding the anti-retaliation provisions of the Act) risk isolation, dismissal, demotion and/or permanent career injury ^[90] 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. Corporations in that situation might otherwise see no choice but to participate in the practices or risk bankruptcy.

While the full extent to which public dollars are squandered and stolen cannot be accurately measured or predicted, ^[91] the magnitude of fraud and abuse against Federal Government programs continues to be documented in Congressional hearings, ^[92] government reports ^[93] and the media. The federal False Claims Act and its state equiv; lents have provided governments with a more powerfl and more flexible means designed to proscribe, deter and assist in detecting the acts of those who would seek to rc the public purse and, simultaneously, ensure that the like] hood of recovering diverted taxpayer funds is maximize. Such a statute applying to New York State and its politic subdivisions could protect New York from unscrupulous profiteering at the expense of state and local taxpayer.  This Report recommends that legislation modeled on tl federal False Claims Act be enacted for New York Sta and its political subdivisions.