This is part 3 of my article on how the False Claims Act works:
III. Brief Overview of How the Modern False Claims Act Works
A. Conduct Prohibited
The federal False Claims Act imposes civil liability under several different theories:
First, the Act makes liable any person who knowingly presents, or causes to be presented, a “false or fraudulent claim for payment or approval” to the federal government.27 “Claim” is broadly defined to include not only submissions made directly to the federal government, but also “any request or demand . . . for money or property” made to a “contractor, grantee, or other recipient” if the federal government provides any portion of the money or property in question.28
Second, the Act creates liability for using a “false record or statement” to obtain payment of a false claim. It imposes liability on any person who “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government.”29
Third, the False Claims Act imposes liability under a “conspiracy” provision. Any person who “conspires to defraud the Government by getting a false or fraudulent claim allowed or paid” is also liable under the Act.30
Fourth, since the government also can be defrauded when a private entity underpays or avoids paying an obligation to the government, the modern Act contains what is known as a “reverse false claim” provision. It creates liability for any person who “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.”31 For example, a company that is obligated to pay royalties to the government under an oil lease can be held liable if it uses false records or statements to pay less than what it owes.
Although false statements and records to avoid paying taxes may be a common type of fraud against the government, the False Claims Act expressly excludes from its scope “claims, records, or statements made under the Internal Revenue Code.”32
The Act also creates a cause of action for damages for retaliation against employees who assist in the investigation and prosecution of False Claims Act cases.33 This cause of action belongs to the employee alone, and the government does not share any interest in any recovery.
B. Who Can Be Liable Under the False Claims Act
The Act states that a “person” can be liable, but does not define that term expressly.34 While court decisions have established that individuals and corporate entities may be considered “persons” within the meaning of the Act, the Supreme Court resolved a dispute among lower courts in 2000 and held that states and state agencies are not subject to liability under the False Claims Act.35 Three years later, the Supreme Court held that municipal corporations may be liable as defendants in False Claims Act litigation.36
C. Broad Definition of “Knowing” and “Knowingly”
The Act’s “scienter” requirement of “knowingly” presenting false claims, or “knowingly” using false records or statements, is broadly defined as well. A person is liable not only when acting with “actual knowledge,” but also when acting in “deliberate ignorance” or “reckless disregard” of the truth or falsity of the information in question.37 The Act also makes explicit that no “specific intent to defraud” need be shown to impose liability, and thus rejects this traditional “fraud” standard.
D. Damages and Penalties Under the False Claims Act
Liability to defendants in False Claims Act cases can be enormous. First, the Act provides for treble damages–”3 times the amount of damages which the Government sustains because of the act of that person.”38
Second, the Act now provides for a civil penalty of $5,000 to $10,000 for each false claim submitted, an amount that has been adjusted for inflation for more recent claims to $5,500 and $11,000 per violation.39
E. Some of the Peculiar Jurisdictional and Procedural Requirements
In Qui Tam Cases
The False Claims Act establishes a wholly different process for qui tam actions than the usual process encountered in federal civil litigation. The Act has unique jurisdictional and procedural requirements.
The qui tam relator brings the lawsuit for the relator and for the United States, in the name of the United States.40 The Complaint must be filed “in camera and under seal,” and must remain under seal for at least 60 days.41 The relator must serve the government under Rule 4, Fed. R. Civ. P., with a “copy of the complaint and written disclosure of substantially all material evidence and information the person possesses.”42
In reality, courts regularly extend the seal for many months (or even years) at the government’s request. The purpose for this arrangement is to permit the government to evaluate and investigate the case and make its decision as to whether to intervene. Thus, a defendant is provided no notice of the filing of a qui tam action against the defendant. It is not uncommon for the defendant to receive no notice for more than a year that it has been sued in a qui tam action, even as the government meets with the relator and relator’s counsel to develop the case against the defendant. Nonetheless, defense counsel may infer the existence of a qui tam action when the client receives subpoenas from the Inspector General’s Office, or when its employees are contacted by government agents for questioning.
If the government elects to intervene, it assumes primary responsibility for prosecuting the case, although the relator remains a party with certain rights to participate.43 The defendant is served once the complaint is unsealed, and has 20 days after service to respond.44
If the government intervenes, it is not “bound by an act of the person bringing the action.45 The government can file its own complaint and can expand or amend the allegations made.46 Once it has intervened, the government also has the right to dismiss the case notwithstanding the relator’s objections, but the relator has a right to be heard on the issue.47
The government may petition the court before intervention for a partial lifting of the seal in order to disclose the complaint to the defendant and discuss resolution of the case, even before it decides whether to intervene.
If the government elects not to intervene, the relator has the right to “conduct the action.”48 Although the relator must prosecute the case without the government, as stated the relator is entitled to a larger share of any recovery, 25-30%, in non-intervened cases.49
After intervention, the government is authorized to settle the case even if the relator objects, but the relator has a right to a “fairness” hearing on any such settlement. In actuality, a relator’s objections are highly unlikely to stop a settlement that the government, after intervention, seeks to make.
Before filing a qui tam action, the relator should provide the government the information on which the allegations are based. This is not only good practice, but is important because of the Act’s “public disclosure” bar that might apply in some cases to deprive the court of jurisdiction. The Act states that, when there is an action “based upon the public disclosure of allegations or transactions” in one of three specified categories of places where disclosures can occur, the court shall lack jurisdiction over the action, unless “the person bringing the action is an original source of the information.”50 While a discussion of the “public disclosure” bar and the “original source” elements of the Act is beyond the scope of this paper, the U.S. Supreme Court was scheduled to hear oral arguments in a decision addressing those issues on December 5, 2006 in Rockwell International Corp. v. United States, No. 05-1272 (S.Ct.).
23 Legislative History at 5269, 4.
24 Testimony of Jay Stephens, Associate Deputy Attorney General, Department of Justice, summarized in Legislative History at 14, 5280.
25 Legislative History at 14, 5279.
26 See section III, infra.
27 31 U.S.C. § 3729(a)(1).
28 31 U.S.C. § 3729(c).
29 31 U.S.C. § 3729(a)(2).
30 31 U.S.C. § 3729(a)(3).
31 31 U.S.C. § 3729(a)(7). The Act also lists three little-used bases of liability in subsections (a)(4), (5), and (6), which are omitted from this discussion, but which can be found in Appendix A.
32 31 U.S.C. § 3729(e).
33 31 U.S.C. § 3730(h).
34 3l U.S.C. § 3729(a).
35 Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 769 N.1 (2000), states that entities may still be liable.
36 Cook County, Illinois v. United States ex rel. Chandler, 538 U.S. 119(2003).
37 31 U.S.C. § 3729(b)
38 31 U.S.C. § 3729(a). In specified circumstances in which the defendant reported the fraud to the government promptly and cooperated fully, the Act provides for double damages. Id. (See full text of statute at Appendix A, infra.)
39 31 U.S.C. § 3729(a). For violations of the Act occurring after September 29, 1999, the penalty range has increased to $5,500 to $11,000 per violation. Federal Civil Monetary Penalties Inflation Adjustment Act of 1990, Pub.L. 101-410, 28 U.S.C. § 2461; 28 C.F.R. §85.3(9)(2006).
40 31 U.S.C. § 3730(b)(1).
41 31 U.S.C. § 3730(b)(2).
42 31 U.S.C. § 3730(b)(2).
43 31 U.S.C. § 3730(c)(1).
44 31 U.S.C. § 3730(b)(3).
45 31 U.S.C. § 3730(c)(2)(A).
46 31 U.S.C. § 3730(c)(2)(A).
47 31 U.S.C. § 3730(c to A).