Part 3: The False Claims Act: Background & History

This is Part 3 of an updated explanation of the major qui tam whistleblower statutes, the federal False Claims Act and the new state False Claims Acts. This Part 3 explains the history of the False Claims Act and why effective whistleblower laws are important.

II. Background of the Federal 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.

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.

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.”

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.

The original Act provided for double damages, plus a $2,000 forfeiture for each claim submitted. 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.

The Act survived in substantially its original form until World War II. 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.

B. “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. 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.

In 1943 the Supreme Court in United States ex rel. Marcus v. Hess held that it was up to Congress to make any desired changes in the Act to eliminate “parasitic” lawsuits. 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.

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.

C. 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” had made the False Claims Act ineffective. Congress acted decisively in 1986 with major amendments that breathed life into the False Claims Act.

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.

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.

D. The 2009 and 2010 Amendments Remove Judicially Created Obstacles to the False Claims Act:

Responding to variety of court decisions since 1986 that had limited the FCA’s effect, Congress again acted decisively in 2009 and 2010 with amendments, in three stages:

First, the 2009 Fraud Enforcement and Recovery Act (“FERA”) legislatively overruled judicial decisions that had limited the FCA’s reach, including Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (2008); United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004), cert. denied, 544 U.S. 1032 (2005); and United States ex rel. DRC, Inc. v. Custer Battles, LLC, 376 F. Supp. 2d 617 (E.D. Va. 2005), rev’d, 562 F.3d 295 (4th Cir. 2009).

The major effects of the 2009 FERA amendments included the following:

1. The amendments expanded the definition of “claim,” and fraud directed against government contractors, grantees and other recipients is now plainly covered by the FCA.

2. Funds administered by the United States government (such as in Iraq) are now included within the FCA’s protections.

3. Retaining overpayments of money is now an explicit basis of liability, which is an important broadening of the Act from the perspective of health care providers, among others.

4. Liability for “conspiracy” to violate the FCA is far broader, and now includes conspiring to commit a violation of any substantive FCA theory of liability.

5. Protection of whistleblowers and others against “retaliation” now extends not only to “employees,” but also to “contractors” and “agents”; and persons other than “employers” potentially may be held liable for retaliation.

6. In investigating, the government now has authority to use “civil investigative
demands” more broadly to gather evidence and take testimony, and to share information more with state and local authorities and with whistleblowers/relators.

7. A standard definition of what is “material” now applies in False Claiims Act cases.

8. The statute of limitations has been clarified in qui tam cases to facilitate the government’s asserting its own claims.

Second, in the 2010 Patient Protection and Affordable Care Act (“PPACA”), Congress made other important changes to the FCA. From a relator’s perspective, perhaps most significant was eliminating language in the “public disclosure” provision (section 3730(e)(4)(a)) that sometimes deprived the court of subject matter jurisdiction. Congress rewrote that provision so that the court no longer loses subject matter jurisdiction even if a “public disclosure” has occurred. Another change to this section was to empower the government to prevent dismissals based on “public disclosure” through the following language: “the court shall dismiss an action or claim under this section, unless opposed by the Government . . . .”

From a health care entity’s perspective, the most important FCA changes in PPACA may be that it (1) clarified and extended liability for overpayments identified but retained by providers in Medicare and Medicaid claims; and (2) made explicit that claims which include items or services resulting from an Anti-Kickback Act violation constitute false claims under the FCA.

Third, in the July 2010 Dodd-Frank Financial Reform Act, Congress created a uniform three year statute of limitations for claims of “retaliation” pursuant to section 3730(h). It also corrected an apparent drafting error in FERA’s 2009 changes to the same section by restoring its intended breadth. The anti-retaliation provision now encompasses (a) not only the pre-FERA definition of “protected conduct” as “lawful acts done . . . in furtherance of [an FCA action]” (which FERA had mistakenly dropped from the statute), but also (b) FERA’s expansion of the definition of “protected conduct” to include “other efforts to stop 1 or more violations [of the FCA] . . . .” 31 U.S.C. ยง 3730(h).