History of the False Claims Act

This is the second part of my article explaining the False Claims Act–it addresses the history of the Act:

II. Background of the False Claims Act
While the False Claims Act may be the best known qui tam statute, it is far from being the first. Qui tam actions date back to English law in the 13th and 14th Centuries. This tradition took root in the American colonies and, by 1789, states and the new federal government had authorized qui tam actions in various contexts.7
According to one writer, “[i]n the early years of the Nation, the qui tam mechanism served a need at a time when federal and state governments were fairly small and unable to devote significant resources to law enforcement. As the role of the Government expanded, the utility of private assistance in law enforcement did not diminish. If anything, changes in the role and size of Government created a greater role for this method of law enforcement.” 8

A. Birth of the False Claims Act
The Civil War prompted Congress to enact the original False Claims Act in 1863. As government spending on war materials increased, dishonest government contractors took advantage of opportunities to defraud the United States government. “Through haste, carelessness, or criminal collusion, the state and federal officers accepted almost every offer and paid almost any price for the commodities, regardless of character, quality, or quantity.”9 The original legislative proposal would have made contractors subject to martial law. A substitute bill provided for both civil and criminal penalties, and it authorized private individuals to sue on behalf of the United States. One senator explained how the qui tam provision of the Act was intended to work:

The effect of the [qui tam provision] is simply to hold out to a confederate a strong temptation to betray his co-conspirator, and bring him to justice. The bill offers, in short, a reward to the informer who comes into court and betrays his co-conspirator, if he be such; but it is not confined that class. . . . In short, sir, I have based the [qui tam provision] upon the old fashioned idea of holding out a temptation and setting a rogue to catch a rogue, which is the safest and most expeditious way I have ever discovered of bringing rogues to justice.10
The original Act provided for civil penalties of double the amount of damages sustained by the United States as a result of the false claim, plus a $2,000 forfeiture for each claim submitted.11 In the original Act, if a private citizen used the qui tam provision to file suit, the government had no right to intervene or control the litigation. The “relator” who was successful was entitled to receive one-half the amount of the final judgment in forfeiture and damages, with the United States receiving the other half.12
The Act survived in substantially its original form until World War II.13 Although decisions construing the False Claims Act were relatively few before 1943, in a classic and oft-quoted passage, one court rejected with the argument that courts should limit the statute’s reach on the grounds that qui tam actions were poor public policy:

The statute is a remedial one. It is intended to protect the treasury against the hungry and unscrupulous host that encompasses it on every side, and should be construed accordingly. It was passed upon the theory, based on experience as old as modern civilization, that one of the least expensive and most effective means of preventing frauds on the treasury is to make the perpetrators of them liable to actions by private persons acting, if you please, under the strong stimulus of personal ill will or the hope of gain. Prosecutions conducted by such means compare with the ordinary methods as the enterprising privateer does to the slow-going public vessel.14

Until World War II, perhaps because of the relatively small amount of government spending compared to the modern era, the Act did not attract much attention.15
B. 1943: Congress “Overcorrects” the False Claims Act

World War II spawned various qui tam actions over defense procurement fraud. Some relators sought to exploit what was effectively an unintended “loophole” in the Act that permitted them to file “parasitic” lawsuits. These relators simply copied the information contained in criminal indictments, when the relator had no information to bring to the government’s attention independently.16

The Department of Justice sought to stop these parasitic actions in 1943 in United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943). The Supreme Court, however, refused to read the government’s requested limitations into the statutory language, and concluded that it was up to Congress to “correct” any such problems with the Act.17
Congress responded shortly after the Marcus v. Hess decision. At the request of the Attorney General, legislation was introduced that would have effectively eliminated private actions for damages and penalties by relators. A Senate Committee then sought to ensure that suits could continue to be brought by private citizens, so long as they were the “original source” of the information in question and had disclosed information in writing to the government before suit.18
The final version of the 1943 amendments to the False Claims Act, passed after considerable debate, 19 omitted the “original source” provision, and made other changes that rendered the Act less useful both to the government and to potential relators. The 1943 amendments eliminated jurisdiction over qui tam actions that were based on evidence or information in the government’s possession, even if the relator had provided the information to the government.20

Other changes made by the 1943 amendments were to permit the Department of Justice to intervene and litigate cases filed by relators. In addition, the 1943 amendments reduced substantially the relator’s share of recovery to a maximum of 10% of the proceeds in intervened cases, and a maximum of 25% of the proceeds in cases in which the government did not intervene.21
As discussed in the following section Congress apparently “over-corrected” the Act in 1943, when it made it difficult for what might be deemed bona fide relators to initiate qui tam actions.

C. The 1986 Amendments Establish the Modern False Claims Act

Congress acted decisively in 1986 to revitalize the “False Claims Act” through a series of amendments that created the modern False Claims Act.22 Congress noted “several restrictive court interpretations of the Act [that] have emerged which tend to thwart the effectiveness of
the statute.”23 By 1986, the Justice Department also favored amendments designed to make the Act more effective.24 A representative of a business association testified that the Amendments were “supportive of improved integrity in military contracting. The bill adds no new layers of bureaucracy, new regulations, or new Federal police powers. Instead, the bill takes the sensible approach of increasing penalties for wrongdoing, and rewarding those private individuals who take significant personal risks to bring such wrongdoing to light.”25
The 1986 Amendments increased financial and other incentives for qui tam relators to bring suits on behalf of the government. Congress increased the damages recoverable by the government from double damages to treble damages, and increased the monetary penalties to a minimum of $5,000 and a maximum of $10,000 per false claim. The 1986 Amendments also increased the qui tam relator’s share of recovery to a range of 15% to 25% in cases in which the government intervenes, and 25% to 30% in cases in which the government does not intervene, plus attorney’s fees and costs.

The 1986 Amendments also clarified the standard of proof required and made defendants liable for acting with “deliberate ignorance” or “reckless disregard” of the truth. Congress also lengthened the statute of limitations from six years to as much as ten years, modernized jurisdiction and venue provisions, and made other changes as well.26

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7 See, e.g., Marvin v. Trout, 199 U.S. 212, 225 (1905)(“Statutes providing for actions by a common informer, who himself had no interest whatever in the controversy other than that given by statute, have been in existence for hundreds of years in England, and in this country ever since the foundation of our government.”) See generally C. Sylvia, The False Claims Act: Fraud Against the Government, § 2.3, at 34-36 (West 2004).

8 C. Sylvia, supra, § 2:6, at 41.

9 C. Sylvia, supra, § 2:6, at 42 (quoting 1 Fred Albert Shannon, The Origination and Administration of the United Army, 1861-65, at 55-56, 58 (1965) (other sources quoted omitted)).

10 C. Sylvia, supra, § 2:6, at 43 (quoting Cong. Globe, 37th Cong., 3d Sess. 955-56 (1863)).

11 Legislative History, at 5273, 8.

12 Act of March 2, 1863, Ch. 67, § 6, 12 Stat. 698 (discussed in C. Sylvia, supra, § 2:6 at 44 & 18).

13 Certain amendments to the Act did occur in the early 1900s. C. Sylvia, supra, § 2.6, at 44 & n. 18. The United Supreme Court declined to limit the Act’s application in 1937 in United States v. Kapp, 302 U.S. 214 (1937). In Kapp, the Supreme Court rejected the defendant’s argument that the government must show a monetary loss and that the representations in question were not material.

14 United States v. Griswold, 24 F. 361, 365-66 (D.Or.1885).

15 See generally J. Boese, Civil False Claims and Qui Tam Actions, 1-9, 1-10 (1993).

16 Legislative History, at 11, 5276.

17 Id. at 546-47.

18 C. Sylvia, supra, § 2.8, at 49 & n. 6 (citing 89 Cong. Rec. 7570 (1943)).

19 In the congressional debate, Senator Langer of North Dakota defended the Act as necessary to adequate enforcement:

“I submit that the present statute now on the books is a most desirable one. What harm can there be if 10,000 lawyers in America [are] assisting the Attorney General of the United States in digging up war frauds? In any case, the Attorney General can protect himself by filing a (civil) lawsuit at the time when he files the indictment.”

89 Cong. Rec. 7607 (Sept. 17, 1943)(quoted in Legislative History, at 11, 5276).

20 Act of December 23, 1943, Ch. 377, 57 Stat. 608.

21 C. Sylvia, supra, § 2:8, at 51.

22 S. 1562, False Claims Reform Act, discussed in Legislative History, supra.