Part 6: The State False Claims Acts: Qui Tam Whistleblower Laws That Seek to Repeat the Successes of the Federal False Claims Act

This Part 6 is the final installment by whistleblower lawyer blog of an article explaining why the major qui tam whistleblower statutes, the federal False Claims Act, has led to a wave of new state False Claims Acts. It is part of a recently published article by whistleblower lawyer blog author Michael A. Sullivan, and this article is reprinted with the permission of the Georgia Bar Journal.

This Part 6 describes the new state whistleblower laws and how states have fared to date in recovering taxpayer money wrongfully through fraud and false claims. It also discusses some interesting new approaches that some states have taken in improving on the federal False Claims Act with their own statutes.

V. Other States’ Experiences With Their Own False Claims Acts

As noted, in 2007 Georgia, New York, and Oklahoma joined the 16 other states that have a False Claims statute, and at least a dozen other states are considering similar laws. [58] The financial incentives of the Deficit Reduction Act of 2005 have not only prompted states that had lacked False Claims statutes to enact them, but also have caused many states wishing to qualify for the additional funds to amend their existing False Claims statutes.

In essence, while states may enact “tougher” or more comprehensive laws than the federal False Claims Act, states with “weaker” or less effective laws-as judged by the standards of the Deficit Reduction Act-will not qualify for the additional funds. [59]

Seven of the first ten states whose statutes were scrutinized by the Office of Inspector General (OIG) quickly learned this lesson when OIG disapproved their state statutes. [60] These included California (which lacked a minimum penalty), Florida (which omitted “fraudulent” from its definition of claims), Indiana (which did not make defendants liable for “deliberate ignorance” and “reckless disregard”), Louisiana (which did not permit the state to intervene in cases, set too low a percentage for whistleblowers to recover, and set no minimum penalty), Michigan (which omitted penalties and liability for decreasing or avoiding an obligation to pay the government, i.e., a “reverse false claim”), Nevada (which had a statute of limitations too short and a minimum penalty too low), and Texas (which did not permit the whistleblower to litigate the case if the state did not, and which provided for lower percentage shares to whistleblowers and lower penalties). Most of these states have gone back to the drawing board to correct these deficiencies.

In sum, the Deficit Reduction Act has set minimum standards for state False Claims Acts for states wishing to receive these additional funds. In plain English, the state laws must protect at least Medicaid funds, and they must be at least as effective as the federal False Claims Act, especially in rewarding and facilitating qui tam actions for false or fraudulent claims, with damages and penalties no less than those under the federal Act. [61]

A. How Other States’ False Claims Acts Compare to the New Georgia Statute

Many state False Claims laws have been in transition in 2007. States whose laws have been “disapproved” by OIG have begun to amend their statutes to meet the requirements for obtaining the additional funds under the Deficit Reduction Act, as Florida and Texas already have done in 2007. While these laws are in flux, some significant differences from Georgia’s new State False Medicaid Claims Act are likely to remain.

First, the majority of state False Claims statutes protect the state’s funds generally, rather than protecting only state Medicaid funds, as Georgia’s new State False Medicaid Claims Act is limited. Just as the federal False Claims Act is not limited to health care fraud, but encompasses fraud against the government generally (except for Internal Revenue violations, which are now covered by the new IRS Whistleblower program), [62] many states have used these statutes to protect public funds in general from fraud. Those states include California, Delaware, Florida, Hawaii, Illinois, Indiana, Massachusetts, Montana, Nevada, Oklahoma, Virginia, and Tennessee.

In addition, several states-including Hawaii, Massachusetts, Nevada and Tennessee- have expanded on the federal Act’s four commonly-used theories of liability listed above. These state laws create a new legal theory for holding liable a person or entity who is the “beneficiary” of the “inadvertent submission” of a false or fraudulent claim, if that person or entity fails to disclose (and presumably correct) the false claim after discovering it. [63]

Moreover, Tennessee’s False Claims Act reaches beyond false or fraudulent “claims” and imposes liability for false or fraudulent “conduct” that apparently does not necessarily involve “claims” submitted to the state. This state law adds a new category of liability for “any false or fraudulent conduct, representation, or practice in order to procure anything of value directly or indirectly from the state or any political subdivision.” [64]

Because states have this leeway under the Deficit Reduction Act to pass laws that may be “tougher” or more “effective” than the federal Act, some states have set the statutory penalties higher than the federal level of $5,500 to $11,000 per claim. For instance, under the New York law enacted in 2007, penalties range from $6,000 to $12,000 for each false or fraudulent claim. [65]

Some other states authorize a higher percentage of the state’s recovery that a relator (whistleblower) may receive, instead of the percentages that the federal False Claims Act authorizes (which the Georgia statute also uses): 15-25% of the recovery in cases in which the government intervenes, and 25-30% in cases in which the government does not intervene. For example, Nevada’s percentages are 15-33% in intervened cases, and 25-50% in non-intervened cases; Tennessee’s are 25-33% in intervened cases and 35-50% in non-intervened cases; and Montana’s range from 15-50%. [66]

B. Notable Results Obtained by States Under Their False Claim Statutes

Most qui tam cases filed under the state False Claims statutes have related to health care. Many are “global” Medicaid cases that were first developed in federal courts as Medicare and Medicaid fraud cases and that concerned a nationwide fraud which had been investigated by multiple federal and state jurisdictions. [67] Each state that enacts a False Claims Act that meets the minimum requirements is in a position to join the process.

Most of the state settlements have come from “piggy backing” on federal law enforcement efforts and from joining in global settlements. [68] Experience with some of the newer state statutes is too recent to evaluate, but many states have reported the desire for more resources to develop such cases. [69]

Texas’s experience is worth special mention because the Texas Attorney General’s Office has been especially effective in pursuing cases involving false claims in health care. Texas’s statute has allowed it to recover more than $216 million in health care fraud cases since 1999.

Because the Texas Attorney General’s Office has been a leader in recovering damages for health care fraud by using the Texas statute, it was perhaps ironic that OIG initially “disapproved” the highly successful Texas law before it was amended in 2007 to comply with the Deficit Reduction Act standards. [70]

California, whose statute is not limited to health care, recovered $43.1 million in 2005 in a state False Claims action alleging fraud in the installation and monitoring of heating and cooling equipment in San Francisco schools. [71] In 2001, California recovered $31.9 million in an action alleging fraudulent billing during construction of the Los Angeles subway system. [72] Similarly, California recovered $30 million in 2000 in a matter alleging the knowing sale of defective computers to the state and political subdivisions. In 1998, California recovered $187 million in an action alleging the improper retention of unclaimed municipal bonds. [73]

We do not know with any precision the dollar amount of fraud that affects any particular state’s government spending, or how much of that fraud can be prevented through effective use of a state False Claims Act. For now, New York, Oklahoma, and Georgia have joined the list of states that will see how much of at least their Medicaid fraud losses can be recovered through the new state False Claims Acts.

Conclusion

We hope that our article on the False Claims Act and the new state False Claims Acts has been useful. If you would like, please feel free to call us to discuss any questions you may have at 800-228-9159, or email us through our website link here (or directly to msullivan@finchmccranie.com.)

Footnotes:

58 As discussed in Part 1 of this Article, as of July 2007, the states that have enacted “False Claims” statutes are California, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Mexico, New York, Oklahoma, Tennessee, Texas, Virginia and the District of Columbia. See CAL. GOV’T CODE §§ 12650-12656; DEL. CODE ANN. tit. 6, §§ 1201-1209; FLA. STAT. §§ 68.081-68.09; O.C.G.A. §§ 49-4-168 to 49-4-168.6; HAW. REV. STAT. §§ 661-21 to 661-29; 740 ILL. COMP. STAT. §§ 175/1 to 175/8; IND. CODE §§ 5-11-5.5-1 to 5-11-5.5-18; LA. REV. STAT. ANN. §§ 46:437.1-440.3; MASS. GEN. LAWS 12 §§ 5A; MICH. COMP. LAWS §§ 400.601-400.613; MONT. CODE ANN. §§ 17-8-401 to 17-8-412; NEV. REV. STAT. §§ 357.010 to 357.250; N.H. REV. STAT. ANN. §§ 167:61 to 167:61-e; N.M. STAT. §§ 27-14-1 to 27-14-15; N.Y. STATE FIN. LAW §§ 187-194 (McKinney); OKLA. STAT. tit. 63, §§ 5053-5053.7 (effective Nov. 1, 2007); TENN. CODE ANN. §§ 71-5-181 to 71-5-185; TEX. HUM. RES. CODE ANN. §§ 36.001 to 36.132; VA. CODE ANN. §§ 8.01-216.1 to 8.01-216.19; and D.C. CODE §§ 2-308.13-2.308.21. A regularly updated list of state False Claims Acts appears at www.taf.org/statefca.htm.

State False Claims Acts also have been proposed to date at least in Arkansas, Colorado, Connecticut, Iowa, Kansas, Minnesota, Mississippi, Missouri, New Jersey, North Carolina, North Dakota, Pennsylvania, and South Carolina. See John T. Boese, FraudMail Alert, http://www.friedfrank.com/wcc/pdf/fm070314.pdf.

59 Under the Deficit Reduction Act, the Office of Inspector General of HHS, in consultation with the Justice Department, must determine that the state law meets the following criteria in order to qualify for the increased share of Medicaid funds recovered:

(1) The law establishes liability to the State for false or fraudulent claims described in section 3729 of title 31, United States Code, with respect to any expenditure described in [31 U.S.C. § 1396b(d)].

(2) The law contains provisions that are at least as effective in rewarding and facilitating qui tam actions for false or fraudulent claims as those described in sections 3730 through 3732 of Title 31, United States Code.

(3) The law contains a requirement for filing an action under seal for 60 days with review by the State Attorney General.

(4) The law contains a civil penalty that is not less than the amount of the civil penalty authorized under section 3729 of Title 31, United States Code.

42 U.S.C. § 1396h(b).

60 The Office of Inspector General’s reviews of these state laws may be found at http://oig.hhs.gov/fraud/falseclaimsact.html.

61 42 U.S.C. § 1396h(b)(4).

62 The False Claims Act expressly “does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.” 31 U.S.C. § 3729(e). In December 2006, however, Congress used the False Claims Act as a model in establishing the new IRS Whistleblower Rewards Program, which provides incentives to “whistleblowers” to report violations of the Internal Revenue laws in excess of $2 million. IRS Whistleblowers may receive 15-30% of the recovery. See 26 U.S.C. § 7623(b)(1) (providing for “an award at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts)).” Information about the IRS Whistleblower program may be found at https://www.whistleblowerlawyerblog.com/irs_rewards_program_tax/.

63 See, e.g., TENN. CODE ANN. § 4-18-103 (imposing liability on a “beneficiary of an inadvertent submission of a false claim to the state or a political subdivision, [who] subsequently discovers the falsity of the claim, and fails to disclose the false claim to the state or the political subdivision within a reasonable time after discovery of the false claim”). See also HAW. REV. STAT. § 661-21 (similar provision for failing to disclose inadvertent submission of false claim after discovery of submission); MASS. GEN. LAWS 12 § 5B (similar provision); NEV. REV. STAT. § 357.040 (similar provision).

64 TENN. CODE ANN. § 4-18-103.

65 New York’s False Claims Act is at N.Y. STATE FIN. LAW § 189 (McKinney).

66 See MONT. CODE ANN. § 17-8-410; NEV. REV. STAT. § 357.210; TENN. CODE. ANN. § 4-18-104.

67 See James F. Barger, Jr., Pamela H. Bucy, Melinda M. Eubanks, and Marc S. Raspanti, States, Statutes, and Fraud: An Empirical Study of Emerging State False Claims Acts, 80 TUL. L. REV. 465 (2005) (“State False Claims Act Study“), at 483.

68 See testimony of Patrick J. O’Connell of Texas Attorney General’s Office at http://oversight.house.gov/documents/20070209123455-21529.pdf.

69 State False Claims Act Study, supra note 67, at 483.

70 Texas has used its Medicaid Fraud Prevention Act since 1995. When Texas submitted the law for federal approval in 2006, however, the statute was deemed not to satisfy the criteria of the Deficit Reduction Act because, among other things, it did not permit whistleblowers to litigate cases when the state did not intervene, and it provided for lower percentages paid to whistleblowers and lower penalties. See “Bill Analysis” at http://www.legis.state.tx.us/tlodocs/80R/analysis/html/SB00362H.HTM. As a result, in 2007 Texas passed SB 362 to amend its statute to correct address these differences from the federal False Claims Act. http://www.legis.state.tx.us/BillLookup/History.aspx?LegSess=80R&Bill=SB362

71 State False Claims Act Study, at 483.

72 Id.

73 Id.

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