Overview of the False Claims Act

Grant & Eisenhofer P.A. Overview of the False Claims Act By Reuben A. Guttman, Traci Buschner and Justin Victor 1 2012 Grant & Eisenhofer P.A.

2 Overview of the False Claims Act I. Introduction In 1863 President Abraham Lincoln signed into law the first version of the False Claims Act (FCA), a law inspired by a wave of defense contractor fraud during the Civil War. The FCA, which has been amended three times, allows private citizens to file suit in the name of the government against individuals or entities that have made false or fraudulent 2 representations in order to secure government money or property. 3 An individual who does so is technically referred to as a relator, but in common parlance is called a whistleblower. Relators are entitled to receive a bounty or a partial assignment of the money recovered for the government. Bounties range from 15 25 percent of the money recovered if the government intervenes in the case and 25 30 percent of the money recovered if the government does not intervene and the relator litigates the case on his/her own. The United States Supreme Court has determined that it is the relator s entitlement to a bounty or assignment of a portion of the recovery that allows a relator to meet the U.S. Constitution Article III injury in fact standing requirements. 4 In recovering damages, the government is entitled to treble actual damages in addition to civil penalties of between $5,000 and $11,000 for each false claim. A relator is also entitled to recover attorneys fees and costs. 5 The Supreme Court has interpreted the FCA to be a broad remedial statute. 6 It has been used to seek redress from Medicare-Medicaid fraud, defense contractor fraud, misrepresentations used to secure government grants and loans, misrepresentations with regard to government contract compliance and adherence to specifications, and misrepresentations made to secure a government contract. 7 The essence of a claim involves a material false statement or certification made to secure a government benefit. The certification may even be one that is implied, meaning that, for example, when a government contractor submits a bill for goods or services, contract compliance is implied merely by the submittal. 8 The FCA also reaches conduct that causes false claims to be filed. This includes any course of conduct which causes the government to pay out monies where it would not have otherwise done so, including situations in which an individual or corporation causes another individual or corporation to submit a false claim. While the Courts sometimes refer to an FCA complaint, for pleading purposes, as a fraud complaint 9 which requires pleading the fraud scheme with specificity as required by Fed R. Civ. P. 9(b), the statute itself does not require as would a fraud case in some jurisdictions 10 proof by clear and convincing evidence. The FCA provides that the burden of proof must be only by a preponderance of the evidence. 11 In addition, by statute, FCA cases are different from fraud cases because, in contrast to a common law fraud case, reliance as that word would be used in a common law fraud case -- is not an element of the claim. To the extent a Defendant uses a false statement to get a claim paid, the statement must be material, meaning that it has a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. 12 II. Liability Under the FCA The FCA, 31 U.S.C. 3729(a)(1)(A-G), includes seven separate ways in which a Defendant may be held liable. Congress attempted to capture every potential scheme whereby the government could be cheated, including the imposition of liability on those who cause the wrongful conduct. Pursuant to 31 U.S.C. 3729(a)(1)(A) liability attaches when a person knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval. Billing for services not provided, billing for defective parts, or making false representations to the government to secure a contract or in furtherance of work under a contract are considered false claims. The statute needs to be read carefully as liability is also imposed on those who cause a false claim to be presented for payment or approval. Thus, a third party may be held liable under the FCA for causing an innocent party, who does not know of the falsity, to submit a claim to the government. In United States v. Bornstein a subcontractor provided a prime contractor tubing that was falsely marked to meet the government s requirement for quality. The defendant subcontractor was held liable for the prime contractors claim for payment. 13 Liability also extends to a person who knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim. 31 U.S.C. 3729(a)(1)(B). This provision addresses the use of misleading or fraudulent material documents provided to the government by a defendant upon which the government relies to make a decision to pay. Liability similarly extends to any person who conspires to commit a violation of the False Claims Act. 31 U.S.C. 3729(a)(1) (C). Liability under the FCA also attaches when a person has possession, custody or control of property or money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property, 14 or when a person is authorized to make or deliver a document certifying receipt of property used, or to be used, by the Government and, intending to defraud the Government, makes or delivers the receipt without completely knowing that the information on the receipt is true. 15 An individual is also liable if he or she knowingly buys, or receives as a pledge of an obligation or debt, public property from an officer or employee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge property. 16 The FCA addresses also what are known as reverse false claims which occur when an individual knowingly makes, uses, or causes to be made or used, a false record

Grant & Eisenhofer P.A. Reuben A. Guttman, Traci Buschner and Justin Victor 1 3 or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government. 17 In U.S. ex Rel Johnson v. Shell 18 this theory was used to recover $300 million in damages from the oil industry for failing to pay full royalties on oil pumped from U.S. government lands. In order to decipher the above provisions, it is critical to understand the definition of the word claim which is defined at 31 U.S.C. 3729(b)(2): (2) the term claim (A) means any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that (i) is presented to an officer, employee, or agent of the United States; or (ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government s behalf or to advance a Government program or interest, and if the United Stated Government (I) provides or has provided any portion of the money or property requested or demanded; or (II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded; and (B) does not include requests or demands for money or property that the Government has paid to an individual as compensation for Federal employment or as an income subsidy with no restrictions on that individual s use of the money or property; The essence of this provision is that any false claim made on a source of money, which in part is composed of government funds, may potentially constitute a false claim. 19 III. Standing to Bring a Case In addition to the United States Attorney General, an individual or relator -- has standing to bring suit in the name of the government, provided that the action is not barred under the terms of 31 U.S.C. 3729(e). The two biggest hurdles to standing are those found in 31 U.S.C. 3730(e)(3) and (4) which provide: (3) In no event may a person bring an action under subsection (b) which is based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the Government is already a party. (4)(A) The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed (i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party; (ii) in a congressional, Government (FN2) Accountability Office, or other Federal report, hearing, audit, or investigation; or (iii) 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. The term original source is defined at 31 U.S.C. 3730(e)(4)(B), as follows: (B) For purposes of this paragraph, original source means an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section. IV. The FCA In Practice False claims Act cases are filed under seal and remain under seal for a minimum of sixty days. While the government, i.e. the U.S. Justice Department, receives, through service, a copy of the complaint and a written disclosure of substantially all material evidence and information the relator possesses, the defendant is not served with this information. 20 The purpose of the case remaining under seal is to allow the government an opportunity to investigate the allegations absent the defendant s knowledge. Typically, the seal is extended and the government uses the seal period to interview witnesses, review documents provided by the relator and any applicable government agency, and serve civil investigative demands (CID) to collect documents. At some point, the government may move for a partial unsealing of a complaint in order to review the complaint with witnesses and even the defendant. It is not unusual for a seal to be extended for several years so that the government may conduct its investigation. The disclosure of information required to be served on the government with the complaint is often referred to as the disclosure statement. Typically, relators and their counsel make a disclosure to the government prior the filing of the complaint in order to meet the original source requirement specified at 31 U.S.C. 3730 (e)(4)(b). During the seal period, the government will also meet with the relator and may continue to review new information with the relator. As a result of information provided by the relator to the government or developed during the investigatory process, the government may also open a parallel criminal investigation. Once the government has completed its investigation, it will make a determination on whether to intervene in the case. If the government declines to intervene, the relator may still pursue the case on

4 Overview of the False Claims Act behalf of the government. In cases where the government declines, it has taken the position that it reserves the right to revisit the question of intervention if new information is developed. In some cases, the government will intervene and settle the case contemporaneous with intervention. In other instances, the intervention or decision not to intervene will come about absent a settlement. When any of these events occur, the seal is lifted, the case becomes a matter of public record, and the complaint must be served on the defendant. Endnotes 1 Reuben A. Guttman, rguttman@gelaw. com, is a partner at the law firm of Grant & Eisenhofer P.A. where he heads the firm s False Claims Litigation Group. He is an Adjunct Professor and Senior Fellow at the Emory University School of Law Center for Advocacy and Dispute Resolution and a member of the Law School Advisory Board. Mr. Guttman was lead counsel for the lead Relator in U.S. ex rel. McCoyd v. Abbott (recovery of $1.6 billion); lead counsel for Lois Graydon (one of four Relators in the government s recovery of 1.1 billion against Glaxco-Smith Kline); lead counsel for Glenn Demott (one of six Relators in the government s recovery of 2.3 billion from Pfizer); co-lead counsel in U.S. ex rel. Szymoniak v. BOA et al. (part of government 2012 $25 billion bank settlement); and co lead counsel in U.S. ex rel. Johnson v. Shell ($300 million recovered from oil industry). He is a founder of the website www. whistleblowerlaws.com.. Traci Buschner, tbuschner@gelaw.com, is a senior member of the G&E whistleblower group in the firm s Washington, DC office. Justin Victor, jvictor@ gelaw.com, (Emory Law 2010) is an associate in the G&E Wilmington, DE office and a member of the firm s whistleblower group. This Overview was originally prepared for law students at Emory Law School as part of the U.S. ex rel Rodriguez v. Hughes case file which is a false claims case used in the school s trial techniques program. The principle author of the file is Emory Professor Paul Zwier with Reuben Guttman, Mathew McCoyd, and Alex Barney as contributors.. 2 Although the word fraudulent appears in the law, the FCA is not a true fraud statute as discussed later in this memorandum. 3 The federal FCA governs cases involving federal dollars. For a complete list of the states and cities that have enacted false claims acts which provide redress where a state or municipality has been defrauded, go to www.whistleblowerlaws.com. 4 Vermont Agency of Natural Resources v. United States ex. rel Stevens, 529 U.S. 765 (2000). 5 See, 31 U.S.C. 3730 (d). 6 United States v. Niefert-White Co., 390 U.S. 228,233 (1968) (The FCA extends to all fraudulent attempts to cause the government to pay out sums of money). 7 For a more complete explanation of the statute go to www.whistleblowerlaws.com. 8 U.S. ex rel. Carpenter v. Abbott Laboratories, Inc., 723 F.Supp.2d 395, 408 (D. Mass. 2010). 9 While the term defraud does appear in 31 U.S.C. 3729, it is used alternatively with the word false in 31 U.S.C. 3729(a)(1)(A), which is used most often to impose liability. 10 See 37 Am. Jur. 2d Fraud and Deceit 493 for discussion of the split between jurisdictions on the burden of proof in fraud cases. 11 See, 31 U.S.C. 3731(d) (All elements of the claim, including damages, shall be proven by a preponderance of the evidence.) See also, U.S. v. Johnson, 2010 WL 3724200 at *2 (M.D. La. 2010); See U.S. ex rel. Roby v. Boeing, 100 F.Supp.2d 619, 625 (S.D. Ohio 2000). 12 31 U.S.C. 3729(b)(4). This is, of course, an area where the law is somewhat blurred as some courts have interpreted the question of materiality to be a matter of actual reliance. See, Boese, Civil False Claims and Qui Tam Actions, Vol. 1, page 2-264, ( Courts often merge the concepts of materiality, reliance, and causation when they decide FCA cases... ) 13 Unied States v. Bornstein, 423 U.S. 303 (1976). 14 31 U.S.C. 3729 (a)(1)(d). 15 31 U.S.C. 3729 (a)(1)(e). 16 31 U.S.C. 3729 (a)(1)(f). 17 31 U.S.C. 3729(a)(1)(G). 18 U.S. ex Rel Johnson v. Shell 3 F.Supp. 2d 528 (E.D. Tex. 1999). 19 Prior to passage of the Fraud Enforcement Recovery Act (FERA) of 2010, Senate Bill 386 signed into law on May 20, 2009, there was an issue as to whether the claim had to be presented directly to an agent of the government. See, e.g., Allison Engine Co. v. United States ex rel Sanders, 553 U.S. 662 (2008). Any issue concerning the presentment requirement was eliminated by FERA through elimination of language in 31 U.S.C. 3729 implicating that a claim had to be presented to the government. 20 31 U.S.C. 3730 (b)(2).

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