Is the False Claims Act—a civil war era law to keep contractors and suppliers from defrauding the government—in need of major reform? It depends whom you ask: Critics say it’s inflexible and overly punitive; others say it’s doing exactly what it’s supposed to do.
In a July hearing, “Oversight of the False Claims Act,” David Ogden, representing the U.S. Chamber of Commerce’s Institute for Legal Reform, stated that the Act is “less effective than it could be at reducing fraud,” and he identified several shortcomings. Among the changes Ogden recommended: encouraging whistleblowers to report within their organizations, through certified compliance programs, before filing a qui tam action. He also recommended that “for companies with certified compliance programs, a factor in considering damages would be the relative culpability of the company.”
During testimony at the hearing, Senator Chuck Grassley, (R-IA) took issue with the Chamber’s position. Discussing the effectiveness of the False Claims Act, he noted that it’s enabled the government to recover $42 billion since 1987. “That’s nothing to sneeze at where I come from,” he added.
The Senator also criticized the Chamber proposal that whistleblowers report internally before going to the government. “When whistleblowers do exactly that and get retaliated against, these large corporations change their stance in court and argue that whistleblowers only have protection if they report externally,” Grassley said.
Grassley then questioned Ogden’s description of certified compliance programs, calling it “a pie-in-the-sky idea with no specifics.” While stating his support of companies’ implementation of strong compliance programs, none are “worth the get-out-of-jail-free pass” the Chamber requested, he said.
Clearly, the False Claims Act brings out strongly held opinions. Some say it overreaches, unduly punishing companies—and by extension, employees who may have nothing to do with the actions under investigation—sometimes for minor violations, rather than actual attempts at fraud. Others say government agencies have applied it to cases it was never intended to cover, such as off-label marketing of pharmaceuticals. “The False Claims Act has become a very blunt instrument the government can use to compel monetary recoveries,” says Stephen Warnke, partner at law firm Ropes & Gray.
Proponents argue, however, that the Act is doing exactly what it’s supposed to do: deterring fraud and protecting those who bring it to light. Information from the non-profit Taxpayers Against Fraud Education Fund indicates that settlements and judgments under the False Claims Act totaled nearly $4 billion in 2013. Moreover, corporations’ complaints about the Act have an air of hypocrisy, given the amount of business many do with the government, according to Patrick Burns, co-executive director with the organization. “They’re all for big government (spending) but express concern when it comes to investigations.”
One provision of the Act that can strike fear in the companies contracting with the government is its mandatory penalties of between $5,500 and $11,000 per false claim, plus three times the government’s damages. The statutory requirement leaves the courts “no ability to fully account for mitigating circumstances and impose lesser penalties,” says Douglas Baruch, partner with Fried Frank.
If a company doing business with the government, for example, falsely certifies it complies with all labor laws, under the FCA, the government might claim that every invoice during the period of certification is a false claim. The mandatory penalties can become massive, even absent any attempt to defraud the government and even though the goods in question weren’t affected by the regulatory violation, Baruch says. The False Claims Act should be flexible enough to consider the egregiousness of the conduct and impose a penalty that fits the seriousness of the violation, he adds.
“The False Claims Act has become a very blunt instrument the government can use to compel monetary recoveries.”
Stephen Warnke, Partner, Ropes & Gray
One case in which the penalties provision is proving to be a lightning rod involves Kurt Bunk, relator for the United States, versus Gosselin World Wide Moving, N.V. (Relators are individuals who bring fraud to the government’s attention. The cases are known as “qui tam” cases.)
Bunk, a Gosselin employee, charged that his firm conspired with competitors to set and increase the costs of moving U.S. military households between the United States and Europe, as well as within Europe. According to a brief on the trial by Fried Frank, the jury found Gosselin liable under the FCA for its role. As a result, each of the more than 9,000 invoices submitted could be subject to a minimum penalty of $5,500, for a total of about $50 million. “The numbers can get high very quickly where there are multiple invoices,” Baruch points out.
In January, the Fourth Circuit Court of Appeals found for Bunk and awarded $24 million. The Court said Gosselin’s price-fixing scheme “inflated the all-inclusive through rates that the freight forwarders were induced to bid …on each of the channels between the United States and Germany.” The award, the Court also said, “would not constitute an excessive fine under the Eighth Amendment.”
In its alert, Fried Frank appeared to disagree, saying the finding had an “Alice in Wonderland quality” about it, and noting that Bunk sought no FCA damages, only penalties, and could provide no proof of economic harm to the United States. Indeed, the government’s cost for the services in question came to $3.3 million, Fried Frank noted. A sizable amount, but a fraction of the $24 million penalty.
The fact that the government is able to seek such penalties gives it significant leverage, Warnke says. “It forces organizations that might otherwise litigate to settle.”
Awards like the one in the Gosselin case often lead to calls for a cap on FCA penalties. Burns disagrees. “There’s no cap on fraud, no cap on what CEOs make, no cap on defense attorney fees.” He adds that the penalties aren’t levied unless a case goes to court and the company loses.
Standard of Proof
Another change Baruch would like to see concerns the standard of proof required in FCA cases. Currently, FCA liability can be established by the “preponderance of evidence,” standard, a lower bar than the “clear and convincing evidence standard” required in most other fraud cases. “The burden on the government and qui tam relators to establish liability in the False Claims Act should be the same as in other fraud cases, Baruch says.
Where Whistleblowers Report
Perhaps one of the most contentious points the FCA discussed at the July hearing concerned the recommendation that whistleblowers be required to report internally first, before disclosing information to the government. Ogden stated in his testimony that the FCA currently discourages internal reporting, since only the first person to file suit is eligible for a bounty. As a result, an employee may fear that reporting internally could reveal information that a coworker could use to beat him or her to the courthouse and potentially gain a bounty.
Robert Vogel, partner at law firm Vogel, Slade & Goldstsein, says the idea of requiring internal reporting before the person can file a qui tam suit is “just ridiculous.” He echoes Senator Grassley’s assertion that doing so often invites retaliation. “You don’t see companies fixing problems; you see companies trying to bolster their defense and retaliate against whistleblowers,” Vogel says.
A brief history of the FCA
Below CW reporter Karen Kroll provides some background on the False Claims Act.
Congress passed the False Claims Act (FCA) during the Civil War, concerned that companies supplying the Union Army during the Civil War were defrauding the military. It provided that any person who knowingly submitted false claims to the government would be liable for double the government’s damages plus a $2,000 penalty for each false claim. The FCA also allows private individuals (or relators) to file suit for FCA violations on behalf of the government – what are known as “qui tam” suits.
Since 1863, the False Claims Act has undergone several changes. In 1986, the penalty for each false claim rose from $2,000 to between $5,000 and $10,000, while the damages multiplier jumped from double to treble, according to the Department of Justice. The penalty range has since increased slightly, to a floor of $5,500 and a cap of $11,000 per claim. The 1986 reforms also eliminated the requirement of plaintiffs to prove an intent to defraud the government, Warnke says.
A provision within the 2005 Deficit Reduction Act required FCA education for companies doing more than $5 million in business with Medicare or Medicaid.
More recent reforms made it easier for relators to bring suit, and made the knowing retention of overpayments a category of fraud that could be actionable under the Act, Warnke says.
While acknowledging some qui tam plaintiffs bring meritless FCA cases, Vogel says the courts have done a good job of taking care of them. “It doesn’t mean the system is broken.”
How Likely Is Reform?
While the chances of FCA reforms happening any time soon appear slim, organizations can take steps to avoid violating the Act. It starts with an ethical corporate culture, Vogel says. Employees must understand that they’re not to cut corners, even if doing so could impact revenue or profits.
A strong compliance program, while not a panacea, also is important. “If you respond constructively to complaints by employees, you’re much more likely to intercept and prevent whistleblower lawsuits,” Warnke says.
Vogel adds that many companies with robust compliance programs do significant amounts of business with the government and are able to largely avoid trouble with the FCA. “They should be applauded and emulated.”
Robust accounting and computer systems also have a role to play, as companies doing significant levels of business with the government need a system that will bring to management’s attention any overpayments from the government, Warnke says. To avoid violating the FCA, the systems also should enable repayment within sixty days from the date at which the overpayment is identified. “It’s become the talisman of a compliant organization: that it voluntarily ferrets out, calculates, and repays any amount it shouldn’t have received.”