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A Force to Be Reckoned With

In the Wake of Significant Legislative Changes, the Civil False Claims Act Hauls in $3 Billion in Fiscal Year 2010



March 2011

 March-SpecialtotheWeb-false-claims-file

A 123-year-old law now has new teeth to better fight today’s tricky fraudsters. Enacted in 1863, the U.S. federal False Claims Act, 31 U.S.C. §§ 3729-3733 (FCA), was designed to fight unscrupulous contractors during the Civil War. The FCA created liability for persons that knowingly submit, or cause another person or entity to submit, false claims for payment of government funds. Today, violators are liable for three times the amount of government damages as well as civil penalties of $5,500 to $11,000 per false claim.The FCA also included whistle-blower provisions (known as “qui tam” provisions), which permitted a private person called a “relator” to bring a civil action on behalf of the government to remedy a false claims violation. (The term qui tam derives from the Latin phrase meaning a plaintiff is suing “on behalf of the king as well as himself.”) And the FCA permitted a successful relator to collect a percentage of any recovery from the defendant.

 However, in 1943, Congress passed amendments that weakened the qui tam provisions, and thereafter, qui tam litigation became almost nonexistent.  

The U.S. Congress reinvigorated the FCA in 1986 when it changed the law in a number of ways. Among other things, the amendments  bolstered the act’s qui tam provisions, provided for treble damages — allowing courts to triple the amount of the actual damages to be awarded — and added an anti-retaliation provision that imposes liability on any employer who takes retaliatory actions against an employee because of the employee’s lawful acts in furtherance of a qui tam action. This ushered in a new era for the FCA because the amendments triggered an increase in the number of qui tam suits: now relators initiate the bulk of cases under the FCA. Also, the amendments shifted the FCA’s focus from fraud involving defense contractors to a wide array of industries — most notably health care. This has led to the federal government’s significant and increasing recoveries under the FCA.

In May 2009, Congress further revamped the FCA by passing the Fraud Enforcement and Recovery Act of 2009 (FERA), which included amendments to the FCA. The amendments made key procedural changes to the FCA and expanded the scope of liability (particularly as it relates to health-care providers). The  FERA also set aside $165 million to aid fraud detection and enforcement efforts.

These amendments, coupled with a handful of other legislative changes and administrative actions, are already having a material effect on how the government and private sector are combating fraud. 

BY THE NUMBERS: 2010 WAS A GOOD YEAR FOR FRAUD  

According to a Nov. 22, 2010, U.S. Department of Justice (DOJ) press release, the DOJ "secured $3 billion in civil settlements and judgments in cases involving fraud against the government in the fiscal year ending Sept. 30, 2010." Of that sum, $2.3 billion is attributable to cases initiated by whistle-blowers under the FCA relator provisions. This brings the total amount of civil recoveries since the previous major overhaul of the FCA in 1986 to more than $27 billion. This total does not take into account settlements after Sept. 30, 2010, including but not limited to $600 million in civil penalties that were part of a larger $750 settlement with GlaxoSmithKline involving the manufacture and sale of adulterated drug products and three settlements announced in December 2010: 1) $102 million in civil penalties that were part of a $203.5 million global settlement with Elan Corporation resolving off-label marketing allegations, 2) a $421 million settlement stemming from Average Wholesale Price violations by Abbott Laboratories Inc. and Roxanne Laboratories Inc. and 3) a $280 million settlement with Dey, Inc. to resolve marketing spread allegations.

Not all of this money goes back to the government. Successful relators are entitled to collect a percentage of any recovery from the defendant. The range of the relator’s potential recovery, however, depends on whether the government intervened in the qui tam action. If the government joins the suit, the private party may recover from 15 to 25 percent of the government’s recovery, but if the government declines to join the suit, the relator is entitled to 25 to 30 percent of the proceeds [according to 31 U.S.C. § 3730(d)(1-2)]. This not only encourages relators who report fraud to pursue FCA cases when those reports fall upon deaf ears, but it also compensates relators for the significant risks and stress inherently and inevitably associated with these actions. In fiscal year 2010, that translated into a combined total of $385 million dollars collected by relators, thereby bringing the total amount since the 1986 FCA amendments to $2.8 billion. Cases initiated by relators within that same period of time yielded more than $18 billion in recoveries for the federal government, according to the DOJ.

It is reasonable to assume that the annual figures will continue to rise for reasons other than the 2009 amendments.  First, the climate for whistle-blowers has changed over the last decade. Post-Enron corporate insiders with knowledge of fraudulent activity are increasingly aware of their potential liability as well as the prospective financial benefits of bringing a qui tam case. Second, the public is better educated about the public value of whistle-blowers, and the stigma against those who do blow the whistle is lessening. 

THIRD TIME'S A CHARM: 2009 LEGISLATIVE CHANGES REINVENT THE FCA, AGAIN 

The procedural changes to the FCA resulting from the FERA were extensive. Several of the key changes are summarized below:

Civil Investigative Demands (CIDs) 

This is perhaps one of the most significant changes to the FCA from an investigative standpoint. CIDs are powerful investigative tools that allow attorneys general to request documents, interrogatories and depositions when investigating fraud allegations, even before the government chooses to intervene in a pending FCA matter. Prior to the 2009 amendments, these devices, despite their force, were rarely used because only the attorney general had the authority to issue them, so thousands of pending FCA cases were stuck in a bottleneck. Under the FERA, the authority to issue CIDs became delegable as outlined in 31 U.S.C. § 3733(a)(1). Already, U.S. Attorney General Eric Holder has used this tool to delegate CID power to Assistant Attorney General Tony West on Jan. 15, 2010; he then further expanded his delegation to all U.S. attorneys on March 24, 2010. Any legitimate delegated authority who has gleaned information from a CID can now share it with relators. The FERA specifically states: "Any information obtained by the attorney general or a designee … may be shared with any qui tam relator" if deemed necessary to the investigation. This can be done whether the government intervenes or not. Defendants will complain that this information sharing allows for unfair and one-sided discovery at the earliest stages of an investigation, but it will hasten the resolution of FCA cases.

Whistle-blower Protections 

The FERA significantly expanded the types of persons who are protected by the FCA's anti-retaliation provisions under 31 U.S.C. § 3730(h). Before the FERA, the FCA protected only "employees" who experienced retaliation by an employer. That is, it only protected actual employees of the entity alleged to have defrauded the government. Now, the FERA 31 U.S.C. § 3730(h)(1) provides that "[a]ny employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor, or agent whole," including getting their job back, back pay or special damages (emphasis added). Accordingly, contractors and agents of the company alleged to have defrauded the government will enjoy the same anti-retaliation protection as employees.

Intent to Defraud the Government 

The FERA also reduces the intent required to establish liability under section 31 U.S.C. § 3729(a), which imposes liability on those who submit a false or fraudulent claim for payment to the government. Specifically, this change overturns the Supreme Court’s 2008 holding in Allison Engine Co. v. United States, 128 S. Ct. 2123 (2008). In Allison Engine, the Supreme Court held that a defendant must intend to get a false or fraudulent claim paid or approved by the government to be liable under 31 U.S.C. § 3729(a). Accordingly, if an individual intended a fraudulent claim to be paid by an entity other than the government, that person could escape liability — even if the funds were ultimately paid from the public fisc (or state treasury). To resolve this loophole, the FERA amended the FCA to impose liability even if a defendant did not intend to get a false claim paid by the government.  

Overpayments 

Before the FERA, the FCA provided a cause of action for a person who uses a false record or statement to avoid or decrease a financial obligation to the government. [31 U.S.C. § 3729(a)(7)] This was commonly referred to as reverse false claims act liability. The FERA expanded the scope of the reverse false claims provision in two key ways. First, there is no longer a requirement that there be a false record or statement. Liability can now arise under this provision if an individual "knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government." Second, reverse false claims liability was expanded to include the retention of overpayments; specifically, it expands the definition of "obligation" to include "the retention of any overpayment." This has significant implications, particularly for health-care providers. 

Sealing Does Not Preclude Information Sharing 

Qui tam complaints are filed under seal for at least 60 days. But under the FERA, government investigators and relators may now share information during the seal period with state and local entities investigating the fraud if those entities are named as co-plaintiffs in the complaint. This greatly improves the ability of state and federal authorities to communicate and coordinate fraud investigation efforts.

Conspiracy 

The conspiracy provisions of the previous FCA were confusing and failed to provide liability for conspiracy involving reverse false claims. The FERA tidied this up so that liability now clearly attaches to any conspiracy to commit a violation of the FCA liability provisions specified in 31 U.S.C. § 3729(a)(1)(A, B, D, E, F, and G), which includes reverse false claims. 

THE PATIENT PROTECTION AND AFFORDABLE CARE ACT (PPACA) 

Other recent changes have affected the FCA landscape. In March 2010, Congress passed the Patient Protection and Affordable Care Act (PPACA). The PPACA strengthened the FCA in several significant ways, and not just as it pertains to health care. Some of the key changes are summarized below:

Public Disclosure 

The public disclosure provisions of the FCA have historically limited the pool of potential relators by jurisdictionally barring cases based upon publicly disclosed information unless the relator could prove that he or she was an "original source" of that information underlying the allegations. The PPACA significantly narrows the application of the public disclosure bar by allowing federal prosecutors to oppose dismissal based upon the public disclosure bar and effectively veto that dismissal.
Original Source 

The PPACA further lowered the public disclosure bar by altering the definition of an "original source." Under the pre-PPACA statute, an original source was an individual who has "direct and independent knowledge of the information" underlying the allegations "and has voluntarily provided the information to the Government before filing [former 31 U.S.C. § 3730(d)(4).]." Now, to be an original source, the individual no longer needs to have "direct" knowledge. Under the new provision, an original source is a person who "has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or… 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 (emphasis added here and in previous sentence)."

60-Day Reporting Limit  

While the FERA expanded the FCA liability to encompass the knowing retention of overpayments, PPACA imposes time limitations on such reporting for certain health-care professionals. Section 6402 of the PPACA specifically requires any Medicare providers (including physicians) to return and report overpayments within 60 days of identifying the overpayments or when the corresponding cost report is due (whichever is later).  Providers who fail to report overpayments — now considered "obligations" under the FCA — within the 60-day period will be liable for violating the FCA and could face penalties of up to $11,000 per violation, along with treble damages.

THE SHARPEST KNIFE IN THE DRAWER: THE ENHANCED FCA IS AN IDEAL TOOL FOR INTERAGENCY TEAMS 

The FCA amendments did not happen in a vacuum. There has been an increasing number of administrative and agency efforts to enhance and create new tools to fight fraud. In May 2009, the Healthcare Fraud Prevention and Enforcement Action Team (HEAT) was created as an interagency effort between the DOJ and the Department of Health and Human Services to combat Medicare fraud (as reported by Tracy Russo in "HEAT: A Year of Tackling Healthcare Fraud" for The Justice Blog, Dec. 2010). Success in the first year led to an additional $60 million from President Obama’s FY 2011 budget to be set aside for HEAT Strike Forces, which have already charged over 465 defendants with defrauding Medicare of more than $830 million dollars.

Similarly, spurred by the financial crisis, President Obama established an interagency Financial Fraud Enforcement Task Force (including but not limited to the DOJ, FBI, the Internal  Revenue Service and U.S. Postal Inspection Service) in Nov. 2009 to improve government efforts to investigate and redress financial fraud, particularly those schemes preying upon investors. Although it has been criticized for not pursuing those most culpable for the financial crisis in the upper echelons of society, the Financial Fraud Enforcement Task Force has already brought actions against 343 criminal defendants and 189 civil defendants involved in fraud schemes that hurt more than 120,000 victims nationwide (Andrew Ross Sorkin, "Pulling Back the Curtain on Fraud Inquiries," The New York Times, Dec. 6, 2010). These interagency teams improve communication and cooperation among those charged with ferreting out fraud. Moreover, they provide much-needed funding. The FCA, armed with the new provisions, legislative changes, and administrative actions is the perfect tool for the teams. 

EXPECT MORE IN FY 2011 

In late December 2010, the DOJ trumpeted that the amounts recovered under the False Claims Act since January 2009 exceeded $6.8 billion, eclipsing any previous two-year period.  With more than 1,300 qui tam cases under investigation as of January 2011, DOJ should brace themselves for more cases filed, interventions merited and settlements reached plus more money rightfully returned to the public fisc.

Megan Moloney, J.D., CFE, is a litigation consultant in New York City. 


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