The Nuances Of California s Revisions To Its False Claims Act

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1 The Nuances Of California s Revisions To Its False Claims Act by Regina A. Verducci, Associate Watt, Tieder, Hoffar & Fitzgerald, L.L.P.* On September 27, 2012, California s Governor Brown signed Assembly Bill 2492 amending California s False Claims Act, codified at California Government Code sections through (the Act ). The September 2012 amendment ( Amendment ) took effect January 1, The Act is now more closely aligned with the federal False Claims Act ( FCA ). The combination of this alignment with the FCA, the broader applicability of the Act, and the additional protections and relief provided to qui tam plaintiffs will undoubtedly result in more false claims litigation in California. Specifically, the Amendment creates eight substantive changes to the Act. Each of these modifications and their potential affect on litigation of false claims are discussed in this article. Background Of The Act And The Amendment The California legislature first enacted the Act in 1987 to provide the State of California (the State ) and local government a statutory weapon for defending against fraud. The Act provides a civil remedy against persons who knowingly submit false or fraudulent claims for payment, misappropriate public property, or deceptively avoid obligations to pay or return funds to the State or a political subdivision of the State. The modifications to the Act, in large part, mirror the recent changes to the FCA. This legislative following occurs because the Office of the Inspector General for the U.S. Department of Health and Human Services requires certain changes of the FCA be incorporated into a state s false claims act in order for a state to qualify for federal financial incentives provided under the Social Security Act. These financial incentives are only provided to a state if the state s false claims act carries the same strength and enforceability as the FCA. These financial incentives also parallel the State s own interest in strengthening the Act to maximize its enforceability for the economic benefit of the State. Expands Definition Of Claim The Amendment expands the definition of false claim to include those claims submitted to a contractor, grantee, or other recipient, if the money, property, or service is to be spent or used on a state or any political subdivision s behalf or to advance a state or political subdivision s program or interest. (Additions denoted in italics.) The additional language broadens the scope of a claim to include money, property or services to be spent in the advancement of the State or political subdivision s interest. The prior

2 version of the statute only provided for claims made to a contractor, grantee, or other recipient, if the money, property, or service was to be spent or used on a state or any political subdivision program or interest. The addition of the phase to advance expands the definition of claim. Defines Obligation The Act sets forth eight (8) categories of actions that amount to violations of the Act. Two of the actions include reference to an obligation. Prior versions of the Act, however, did not define obligation. To address the differing judicial interpretations of obligation, the Amendment defines the term to mean an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensorlicensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment. This definition of obligation aligns the scope of the Act with the FCA. Congress amended the FCA in 2010 to include retention of overpayment as an additional act giving rise to liability. This more expansive definition is included in the Amendment. Additionally, the definition of obligation clarifies, and arguably broadens, the scope of actions that will constitute a violation of the Act. Expands Relief For Person Discriminated Against For Actions Taken In Furtherance Of The Act Any person retaliated against as a whistleblower for acts done in furtherance of the Act, such as reporting false claims to the State or a political subdivision, will find greater relief available under the Act. The Amendment eliminates the limitation for recovery by an employee, contractor, or agent who is discriminated against by its employer if that employee, contractor, or agent also participated in conduct that resulted in the submission of a false claim. As with many of the other modifications to the Act signed into law on September 27, 2012, this change broadens the scope of the Act by providing greater protection to reporting whistleblower employees, contractors, and agents. The greater protection may entice employees, contractors, and agents to come forward with information concerning false claims. The Amendment also clarifies the statute of limitations for a whistleblower to bring an action against its alleged retaliatory employer. The Act now limits the time to bring a civil action by an employee, contractor, or agent to recover for retaliation from its employer to a three year statute of limitations which begins running on the date the retaliation occurred. The prior versions of the Act did not provide a specific statute of limitations for such a situation. Filing By California Attorney General Or Prosecuting Authority Relates Back For Statute Of Limitations Purposes

3 The Amendment also modifies the statute of limitations with regard to actions taken by the California Attorney General or prosecuting authority. If an action is brought by any third party and the California Attorney General or prosecuting authority later files a pleading in the matter, the date of the California Attorney General or prosecuting authority s filing now relates back to the date of the third party s filing. This addition to the Act brings it into greater conformity with the FCA. The Amendment also provides greater opportunity for enforcement of the Act by the State because it creates a method for the California Attorney General or prosecuting authority to initiate an action under the Act after the statute of limitations would have otherwise expired. Congress initiated this modification at the federal level in the 2009 Fraud Enforcement and Recovery Act. Limits The Share Of Proceeds For A Qui Tam Plaintiff The Act has also been revised to both guarantee and limit the potential proceeds that may go to a qui tam plaintiff. A qui tam plaintiff is a private person, also referred to as a relator, who files suit on behalf of the State or political subdivision. The Amendment eliminates the provision of the Act that prevented a qui tam plaintiff who participated in the fraudulent activity from recovering proceeds from an action brought under the Act. Instead, the Amendment provides a provision that allows a court to reduce the relator s share of recovery in consideration of the relator s advancement of the litigation and the circumstances pertaining to the relator s violation of the Act. Additionally, in place of a permissive phrase allowing recovery of 33% and 50% of proceeds in varying instances of success by a qui tam plaintiff, the Amendment uses mandatory phrasing that sets a limit on the potential recovery of a qui tam plaintiff at 33% if the State or political subdivision moves forward with the action and 50% if the State of political subdivision does not move forward with the action. These percentages are higher than those allowed under the FCA. For example, the FCA allows for recovery of only between 25% and 30% of the proceeds if the federal government does not move forward with prosecution of litigation initiated by a qui tam plaintiff. This could reduce the recovery of a qui tam plaintiff by half if brought under the FCA instead of the Act. As a result, a qui tam action brought under the Act could be more lucrative for a qui tam plaintiff than the same action brought under the FCA. Limits The Mandatory Dismissal Of Certain Actions The prior version of the Act precluded any court from maintaining jurisdiction over an action brought under the Act based upon allegations or transactions previously disclosed in any of a number of public forums. The Amendment to the Act allows the California Attorney General or prosecuting authority to oppose the mandatory dismissal despite previous disclosure. The Amendment also allows a qui tam plaintiff that is an original source to maintain an action concerning an alleged violation of the Act previously disclosed in a public forum.

4 The Amendment clarifies the definition of an individual who qualifies as an original source through the addition of the requirement that an original source provide information that materially adds to the publicly disclosed allegations. As with other revisions included in the Amendment, the modification of the original source definition parallels the recent modifications to the FCA. Under the FCA, an original source is an individual who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions. This language is identical to the language included in the modified definition of original source in the Amendment. The Act previously required present and former employees of the State or a political subdivision to exhaust the internal resources of the government body. The Amendment also limits the requirements for exhausting internal procedures for reporting and seeking recovery of the falsely claimed sums to those claims relating to California s Medicaid Program. The requirement of exhausting internal procedures was not explicitly limited by the subject matter of the claim prior to the Amendment. Increases Penalties Available Under The Act Damages for a violation of the Act may be awarded at three times the damage to the State or political subdivision in addition to the mandatory penalty ranging from $5,500 to $11,000 for each violation of the Act. The Act previously provided for penalties ranging from $5,000 to $10,000 for each violation of the Act. Limits A Defendant s Recovery Of Attorney s Fees And Costs The prior version of the Act allowed a defendant under certain circumstances to recover reasonable attorney s fees and expenses against the party that proceeded with the action if the defendant prevails in the action. The Amendment provides that a defendant may recover attorney s fees from a qui tam plaintiff only if the state or political subdivision does not proceed with an action against the defendant. When the [S]tate or political subdivision proceeds with an action, the court may award the defendant its reasonable attorney s fees and expenses against the state or political subdivision that proceeded with the action. In effect, the limitation for recovery of defense fees limits the potential exposure of a qui tam plaintiff. The defendant may now recover attorney s fees and costs from a qui tam plaintiff only in those instances when the State or political subdivision did not proceed against the defendant. The result of the modifications to the Act is the creation of more opportunities and incentives for litigation of false claims in California. * Watt, Tieder, Hoffar & Fitzgerald, L.L.P Greensboro Drive, Suite 100 McLean Virginia

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