International Association of Defense Counsel 2003 Mid-Year Meeting, February 2003 (meeting papers)
by Neil V. Getnick & Lesley Ann Skillen
Introduction
In 1995, the Department of Justice (“DOJ”) marked the recovery of its first billion dollars under the qui tam provisions of the amended 1986 False Claims Act, 31 U.S.C. §3729 et seq., with a press release. The DOJ praised the bipartisan efforts of the bill’s sponsors, Senator Grassley and Congressman Berman, as a work of “leadership and vision.” The recovery of over $1 billion, the DOJ declared, “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.”1
By the end of 2002, qui tam recoveries under the amended False Claims Act had grown to an awe-inspiring $6 billion. In its press release, the DOJ again attributed the success of the statute to “the vision of its sponsors . . . as well as the thousands of private citizens who have reported fraud by filing suit under the Act.”2
The qui tam law is now well established as the weapon of choice for federal (and an increasing number of state) prosecutors seeking to recover defrauded taxpayer funds. Since 1986, qui tam plaintiffs have been the DOJ’s partners in the recovery of more than $6 billion. In the same period, qui tam suits that the DOJ has not joined and that the qui tam plaintiff has pursued alone have realized only $250 million.3 The qui tam law has become in practice what it was intended to be in theory — a “public-private partnership” of the government and the people
In this article we first provide an overview of the statute and its recent use. In the second part of this article, we share our experience with whistleblowers in order to provide some insights into how corporations can deal with the underlying problems that give rise to qui tam lawsuit in the first place, thereby minimizing or avoiding such exposure.
False Claims Act Fundamentals
The False Claims Act, including its qui tam4 provisions, was initially enacted at the urging of President Lincoln in 1863, a few months before the Battle of Gettysburg. A response to reports of widespread fraud by Civil War profiteers,5 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. As a reward, the whistleblower received a payment amounting to 50% of the recovery of twice the government’s actual damages plus a $2,000 penalty for each false claim.6
Although the “Lincoln Law” was a wartime initiative, it was not limited to defense fraud. In 1863, private citizen enforcement was an integral part of the U.S. statutory framework. Ten of the fourteen statutes passed by the first Congress contained qui tam provisions designed to supplement government enforcement, including statutes relating to bank regulation, import duties and copyright infringement.7 As a California court noted in 1989, the qui tam laws “are firmly rooted in the American legal tradition.”8
The 1986 amendments overhauled and strengthened the Act, whose qui tam provisions had all but fallen into disuse as a result of amendments that followed a Supreme Court ruling in 1943.9 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 as a consequence of the Reagan-era military build-up.10 A revamped qui tam law was seen as the most powerful and effective means of addressing these problems. “[O]nly 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.”11
Today’s federal False Claims Act provides for treble damages and penalties of $10,000 per violation for virtually any kind of fraud against the federal government or federally funded government entities. The qui tam provisions of the statute permit a private citizen (individual or corporation) who brings suit under the Act – known as the “relator” – to receive up to 30% of the recovery, with the average share hovering around 16%.
Fourteen States12 have followed the federal lead by enacting False Claims Acts to combat fraud committed against their own programs.
The False Claims Act’s Legislative Framework
These are the key features of the current federal False Claims Act:
(1) 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. Both making, and causing to be made, false claims or statements are covered; 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.13
(2) Specific intent to defraud is not required to create civil liability under the Act. The “knowing” submission of false claims includes not just actual knowledge, but also deliberate ignorance and reckless disregard for the truth.14 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 enquiry which would reveal the existence of fraud.15
(3) False claims made under the Internal Revenue Code are expressly excluded from the Act and its qui tam provisions.16
(4) A qui tam complaint is filed under seal without service on the defendant and is delivered, together with a “disclosure statement” containing all facts material to the action, to the Department of Justice and the local United States Attorney.17 The government then has a period of time18 within which to investigate the relator’s allegations in the complaint and decide whether to “intervene in,” (or take over) the action or to allow the relator to pursue the action alone.19
(5) The relator’s share of the recovery is 15-25% if the government intervenes, and 25-30% if the relator pursues the action alone.20 In certain circumstances, the relator’s share may be limited to 0-10%.21 Courts are authorized to reduce the share of a relator who “planned and initiated” the wrongdoing, and a relator who is criminally convicted must be dismissed from the action.22
(6) In a successful suit, the relator’s attorney fees and costs are recoverable from the defendant.23 In a non-intervened case in which the defendant prevails, the court may award attorneys’ fees and costs to the defendant upon a finding that the claim was clearly frivolous, vexatious, or brought primarily for purposes of harassment.24
(7) Qui tam actions are prohibited if they are “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.”25 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.”26
The “public disclosure” bar is intended to prohibit qui tam cases in which the relator seeks to rely on information that is acquired from public sources – so-called “parasitic” claims – unless the relator is an “original source” of the information as defined in the Act. This issue has been heavily litigated and the circuits sometimes disagree on what disclosures are “public,”27 what constitutes “direct and independent” knowledge,28 and what is meant by “based on.”29 In general, the “public disclosure” bar operates to ensure that suits cannot be filed by persons who have contributed nothing substantial to uncovering and reporting the essential elements of the case.
(8) If more than one relator files essentially the same case, only the first to file survives. The statute bars any subsequent case that is based on the “facts underlying the pending action.”30 Current caselaw supports a broad construction of this phrase and the notion of a “race to the courthouse” between relators with knowledge of the same fraud.31
(9) The 1986 amendments created a federal cause of action for employees who experience retaliatory conduct by their employers because of their acts in furtherance of a qui tam action, providing for double the amount of back pay plus interest, reinstatement and compensation for special damages.32 The employee need not be a qui tam relator in order to bring an action under this section.33
The False Claims Acts in Practice
During the first six years of its operation, the revamped 1996 False Claims Act was aimed primarily at defense procurement fraud. In November 1992, the $110 million settlement and criminal plea by National Health Laboratories, one of the nation’s premier clinical testing labs, inaugurated the era of big dollar health care fraud settlements.34 Since 1996, more than half of all qui tam cases has involved health care fraud.35 The explosive growth in False Claims Act recoveries — from $70 million in 1991 to $1.6 billion in 2001 — has been largely fueled by multi-million dollar settlements arising from qui tam suits against hospital corporations36, clinical testing laboratories37, pharmaceutical companies38, nursing home operators39, insurance companies that process Medicare claims40, hospital management companies41, and other providers of specialized health care such as renal dialysis42. Although eclipsed by health care, defense procurement fraud suits have continued to result in substantial recoveries — over $100 million in 2000, for example.43
In other areas – now termed “non-traditional” – the so-called “oil and gas” cases have constituted the most high profile group. These series of cases, alleging underpayment of royalties on the production of oil, gas and minerals from public lands, recouped nearly $440 million from various oil and energy companies.44 Recent recoveries also have included over $140 million in settlements with twenty-five brokerage firms that allegedly sold open market securities with artificially low yields to municipalities refunding tax-exempt bonds, thereby reducing the municipalities’ purchase of special low-interest Treasury bonds.45
Recent substantial qui tam settlements in other areas include cases involving construction46, computers47, and environmental testing48. Prior to the Supreme Court’s ruling in Vermont Agency of Natural Resources v. U.S. ex rel. Stevens49, the qui tam law had also been used to sue state governments and agencies for fraud in federally-funded state administered programs.50 Since the Stevens, ruling, however, states may no longer be sued by qui tam relators.
The average relator statutory share of the $6 billion recovered under the qui tam law to date stands at approximately 16%. Relator shares are usually resolved by negotiation with the DOJ, which makes the successful relator an “offer” following settlement. Since the minimum statutory share, in the normal case, is 15%, it is evident that the DOJ is highly protective of qui tam recoveries, reserving offers of higher percentages for cases in which the relator has provided extraordinary assistance. The DOJ and relators have litigated relator share infrequently, but with high visibility. In two recent cases, the court awarded the relators 24%51 and 20%52 respectively.
How Companies Can Deal With The Underlying Problems Giving Rise to Qui Tam Lawsuits
All corporations would like to minimize or avoid entirely the incidence of qui tam whistleblowing activity by their employees.53 Any useful analysis of the qui tam phenomenon requires an understanding of the whistleblowers themselves.
First, however, we make some observations on whistleblower containment strategies that are not effective. Some counsel have responded to the growing significance of the qui tam law by devising various artificial measures designed to thwart whistleblowers. These after-the-fact “solutions” read like the wish-list of a disappointed defense counsel. They range from routine waivers and agreements not to bring a qui tam action in separation agreements,54 to requiring employees to sign agreements that they will donate the proceeds of any qui tam suit they file to charity, to “psychological screening” of potential job applicants to identify those with “whistleblowing tendencies.” Another such device is to question a departing employee at the exit interview specifically about whether he or she is aware of any wrongdoing, the objective being to provide some documentary basis upon which to later undermine the employee’s credibility in the event of a qui tam suit.
Such efforts entirely miss the point. To understand how ultimately to prevent qui tam lawsuits, one can best start by examining the motives of whistleblowers. In this regard, we do not attempt to provide a scientific or empirical analysis, but rather to share what we have learned in our dealings with whistleblowers.
First, perhaps surprisingly to people on the receiving end of qui tam lawsuits, we have found that relators generally are not primarily driven by greed or revenge. This is not to say that money is not an important factor in a relator’s decision to go forward. The qui tam law was designed to work that way — to provide people with an incentive to take the risks to career, security, and personal stability that becoming a whistleblower frequently entails. Likewise, some relators certainly seek vindication, and many are tenacious to the point of obsession. This is usually understandable given that many have fought long and hard to bring their concerns to the attention of corporate management through internal means, only to be ignored, spurned, marginalized, or otherwise frustrated in their efforts. Similarly, others have tried, and failed, to have enforcement authorities address their concerns by calling government reporting hotlines and reporting their concerns through official procedures established for the purpose. Often, they have been met with answer machines and/or apparent indifference.
So what is it that drives relators to pursue qui tam lawsuit? We have found that most relators are driven by some degree of moral outrage. They simply believe that what they observed is wrong, and they believe that reporting it is the right thing to do.
On balance, it is fair to say that in most cases, the qui tam relator is motivated by a combination of factors. More recently, as more corporate executives and management level employees are becoming qui tam relators, a new motive has crept into the mix. That motive is self-protection: a concern about being asked to participate in wrongdoing, or being perceived as having already done so, and the personal consequences that can flow therefrom.
The corporate executive-turned-whistleblower is now a distinct category of qui tam relator. In 2001, for example, TAP, a multinational pharmaceutical joint venture, agreed to pay $875 million to the federal government in the largest health care fraud settlement ever.55 The settlement arose from two qui tam cases, one filed by TAP’s former vice president of sales, who alleged that the company gave kickbacks to doctors and encouraged them to defraud Medicare by billing for free samples. When the vice president of sales-turned-whistleblower in that case — who was already troubled by what he saw as TAP’s “cowboy” culture — heard about the alleged kickback plan, he reportedly realized the extent of his personal exposure. “The sales force was my responsibility,” he told People magazine. “I could have been the one to get hung out to dry.”56
The number of senior managers responsible for high dollar qui tam recoveries illustrates the immense value to the government’s anti-fraud effort of these individuals, whose seniority was such that they were able to provide prosecutors with a virtual road map to the alleged wrongdoing.57
Lastly, it is important to understand that blowing the whistle often takes great courage. Despite the fact that Time Magazine saw fit last year to bestow its Person of the Year award on three whistleblowers58, it’s hard to see blowing the whistle as a career-enhancing move. In fact, qui tam relators often take tremendous risks and experience great hardship.
For example, in U.S. ex rel. Alderson v. Quorum Health Group, a Florida court awarded the relator, the former Chief Financial Officer of a Montana hospital, 24% of the $85 million recovery.59 The criteria upon which the court focused most heavily were the relator’s “extraordinary commitment” of time and energy, the “unusual length and complexity” of the legal proceedings, and “the hardship endured by Alderson and his family” during the currency of the case — some eight years.60 Alderson’s qui tam action, amongst other things, had “a disruptive and divisive effect” on Alderson and his family, “including dispiriting financial hardship and the burden of the confidentiality obligations governing the case.”61 The court observed that Alderson’s experience “illustrates vividly Judge Learned Hand’s cautionary observation that ‘as a litigant I should dread a lawsuit beyond almost anything else short of sickness and death.’”62
Whistleblowers, therefore, are more likely to be motivated by moral outrage or self-protection than greed or revenge. The key to preventing such people from ultimately taking matters into their own hands is to provide them with a meaningful opportunity to report their concerns internally, without fear of retaliatory acts and with confidence that their complaints will be adequately addressed.
A corporate compliance program grounded in integrity and transparency, honored by senior management and communicated effectively and often to employees, is the bottom line. Crucial to such a program is an effective procedure for employees to report questionable conduct in confidence and anonymously, if they wish. For example, the Department of Health and Human Services recently released Draft Compliance Program Guidance for the Pharmaceutical Industry. This states, in part, that an effective compliance program must have “a process (such as a hotline or other reporting system) to receive complaints or questions, and the adoption of procedures to protect the anonymity of complainants and to protect whistleblowers from retaliation.”63 Similarly, the Sarbanes-Oxley Act requires that Audit Committees establish procedures for the “receipt, retention and treatment of complaints” regarding accounting and auditing matters, while “maintaining the anonymity of complaints made by company employees.”64 This means that employees must be free of the following concerns: “Will I be punished or even fired if I draw attention to a practice that is making the company a lot of money? Will I be shunned by my colleagues? What can I do if senior management is part of the problem?”
Ultimately, a corporate culture in which employees, at whatever level, feel safe from retaliation if they report their concerns, and confident that those concerns will receive attention and respect, requires that employees believe in the honesty, integrity and fairness of senior management. It also requires that senior executives are truly committed to taking the kind of tough decisions that might, at times, elevate ethics over short-term gain.
Conclusion
The following remarks by a former senior DOJ official at an industry compliance forum in 2000 underscore the importance of the qui tam law is to the prosecution of fraud against the government
“It is no exaggeration to say the virtually every major case that the Department [of Justice] has brought in the past was the result in one way or another of a whistleblower complaint. It’s an extraordinarily powerful tool for the government. You have insiders who . . . know the practices, they know where documents are located, they know what executives and officials know of certain types of conduct. Sometimes they are cooperators so they can gather additional information. If you were thinking about what kind of case you’d bring if you were an Assistant United States Attorney, and you had some external report of wrongdoing, versus someone who is inside who could give you that level of insight into the alleged conduct, which case would you take?”65
Still, corporations and their lawyers need not fear the qui tam law nor see potential plaintiffs as the enemy. Demonizing qui tam whistleblowers as disgruntled, vengeful and/or greedy opportunists intent upon leveraging the treble damages might of the False Claims Act against deep-pocketed corporations is ultimately a hollow exercise and leads to a faulty analysis. In fact, in our experience real whistleblowers are rarely motivated purely or even primarily by money or revenge. Many simply want to do the right thing, and others act from a desire to protect themselves, lest the finger of blame be pointed at them some day. If there is a whistleblower archetype, it is this: the corporate insider who has been unable to have his or her concerns addressed via internal means and who, in fear or frustration, turns to the qui tam law as a last resort.
What then is the way to minimize or avoid whistleblower lawsuits? The answer is to be found in an open and ethical corporate culture and a compliance program with a reporting procedure that is effective both in preventing retaliation and satisfying employees that their concerns are addressed meaningfully. Such a compliance program will help prevent the type of fraud that a whistleblower may be inclined to allege in a qui tam suit. Further, it can help detect fraud so that corporations can get on top of any suspected wrongdoing, and, if appropriate, voluntarily disclose the wrongdoing to the government before any qui tam case if filed. Thus not only is the potential whistleblower more likely to make use of the internal reporting procedures to report his or her concerns, there will hopefully be less fraud to report.
While qui tam lawsuits only continue to grow in importance in combating fraud against the government, perhaps their greatest value will come from further convincing companies to build strong cultures of integrity and transparency, honoring and rewarding employees who help keep them on the right track.