Part 3: False Claims Act–Background and History

This is Part 3 by whistleblower lawyer blog of a detailed explanation of the major qui tam whistleblower statutes, the federal False Claims Act and the new state False Claims Acts. It is taken from a recently published article by whistleblower lawyer blog author Michael A. Sullivan, and is reprinted with the permisssion of the Georgia Bar Journal.

The Part 3 explains the history of the False Claims Act and why effective qui tam whistleblower laws are important.

II. Background of the False Claims Act

Although 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. [12]

According to one writer:

In 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. [13]

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.” [14]

One senator explained how the qui tam provisions of the Act were intended to work:

The effect of the [qui tam provisions] 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 to 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. [15]

The original Act provided for double damages, plus a $2,000 forfeiture for each claim submitted. [16] If a private citizen or “relator” used the qui tam provision to file suit, the government had no right to intervene or control the litigation. A successful “relator” was entitled to one-half of the government’s recovery. [17]

The Act survived in substantially its original form until World War II. [18] In a classic and oft-quoted 1885 passage, one court rejected 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. [19]

“Over-Correction” of the False Claims Act: 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. [20] World War II then 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. [21]

In 1943 the Supreme Court in United States ex rel. Marcus v. Hess [22] held that it was up to Congress to make any desired changes in the Act to eliminate “parasitic” lawsuits. [23] Congress amended the Act that same year to do so. 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. [24]

In addition, Congress in 1943 also gave the government the right to intervene and litigate cases filed by qui tam relators. The 1943 amendments also dramatically reduced incentives for qui tam suits to be filed, by reducing to 10% the maximum amount of the recovery that a relator could receive if the government intervened, with a 25% maximum award if the government did not intervene and the private citizen alone obtained a judgment or settlement. [25]

The 1986 Amendments Establish the Modern False Claims Act: By the 1980s, both the Justice Department and congressional leaders realized that the 1943 amendments and “several restrictive court interpretations” [26] had made the False Claims Act ineffective. Congress acted decisively in 1986 to revitalize the False Claims Act. [27]

A representative of a business association testified that the 1986 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. [28]

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 to as much as ten years, modernized jurisdiction and venue provisions, and made other changes as well. [29]

Footnotes:

12 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 CLAIRE M. SYLVIA, THE FALSE CLAIMS ACT: FRAUD AGAINST THE GOVERNMENT § 2.3, at 34-36 (West 2004).

13 SYLVIA, supra note 12, § 2:6, at 41.

14 Id. § 2:6, at 42 (quoting 1 FRED ALBERT SHANNON, THE ORIGINATION AND ADMINISTRATION OF THE UNION ARMY, 1861-65, at 55-56, 58 (1965) (other sources quoted omitted)).

15 Id. § 2:6, at 43 (quoting Cong. Globe, 37th Cong., 3d Sess., 955-56 (1863)).

16 Legislative History, supra note 5.

17 Act of March 2, 1863, ch. 67, § 6, 12 Stat. 698 (discussed in SYLVIA, supra note 12, § 2:6, at 44 & n.18).

18 Certain amendments to the Act did occur in the early 1900s. SYLVIA, supra note 12, § 2.6, at 44 & n.18. In addition, the United States 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. Id. at 217-18.

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

20 See generally JOHN T. BOESE, CIVIL FALSE CLAIMS AND QUI TAM ACTIONS §§ 1-9, 1-10 (1993).

21 Legislative History, supra note 5, at 11.

22 317 U.S. 537 (1943).

23 Id. at 546-47.

24 Act of December 23, 1943, ch. 377, 57 Stat. 608.

25 SYLVIA, supra note 12, § 2:8, at 51.

26 Legislative History, supra note 5.

27 S. 1562, 99th Cong., 2d Sess. (1986) (False Claims Reform Act) (discussed in Legislative History, supra note 5).

28 Legislative History, supra note 5, at 14.

29 See section III, infra, which appears in Part 4 of this article posted separately on whistleblower lawyer blog.

Copyright © 2007 by Finch McCranie, LLP