This Part 4 of a six part summary explains how the federal False Claims Act works, after Congress amended it three times in 2009-2010. It also discusses similar provisions of some state False Claims Acts.
This is an update from a previously published article by whistleblower lawyer blog author Michael A. Sullivan.
III. Overview of How the Modern False Claims Act Works (with Comparisons to Some State False Claims Acts)
A. Conduct Prohibited
The federal False Claims Act imposes civil liability under several different theories, only four of which were generally used before FERA. FERA has added an additional theory of liability for retention of overpayments, which now will likely be used quite often in health care cases:
First, the Act makes liable any person who knowingly presents, or causes to be presented, a “false or fraudulent claim for payment or approval.”
Second, the Act creates liability for using a “false record or statement.” It imposes liability on any person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”
“Claim” is broadly defined, and is not limited to submissions made directly to the federal government:
(2) the term “claim”–
(A) means any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that–
(i) is presented to an officer, employee, or agent of the United States; or
(ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United States Government–
(I) provides or has provided any portion of the money or property requested or demanded; or (II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded; and
(B) does not include requests or demands for money or property that the Government has paid to an individual as compensation for Federal employment or as an income subsidy with no restrictions on that individual’s use of the money or property.
Third, since the government also can be defrauded when a private entity underpays or avoids paying an obligation to the government, the Act contains what is known as a “reverse false claim” provision. FERA has added language to this provision to establish liability for retention of overpayments. This provision of the FCA creates liability for any person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” 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. Health care providers can now also be liable for retaining identified overpayments from federal health care programs such as Medicare and Medicaid.
FERA has introduced the following definition of “obligation”:
(3) the term “obligation” means an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment; . . . .
Fifth, the False Claims Act imposes liability under a “conspiracy” provision, which FERA has broadened to cover conspiracy to violate any substantive provision of the FCA. Any person who “conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G)” is liable under this provision.
State False Claims Acts compared: Before FERA included retention of overpayments as a basis of FCA liability, several states-including Hawaii, Massachusetts, Nevada, Tennessee, and Wisconsin-had expanded the federal Act’s other four commonly-used theories of liability listed above. These state laws recognized a 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.
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.”
B. Retaliation Protection for Employees, Contractors, and Agents
As noted, the federal False Claims Act also creates a cause of action for damages for retaliation against employees, contractors, and agents who assist in the investigation and prosecution of False Claims Act cases. This cause of action belongs to the employee alone, and the government does not share in any recovery for retaliation.
As summarized above, FERA and the Dodd-Frank Financial Reform Act have modified the federal FCA retaliation provision in section 3730(h) so that it now provides as follows:
(h) Relief from retaliatory actions.
(1) In general. Any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor, or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, agent or associated others in furtherance of an action under this section or other efforts to stop 1 or more violations of this subchapter.
(2) Relief. Relief under paragraph (1) shall include reinstatement with the same seniority status that employee, contractor, or agent would have had but for the discrimination, 2 times the amount of back pay, interest on the back pay, and compensation for any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys’ fees. An action under this subsection may be brought in the appropriate district court of the United States for the relief provided in this subsection.
(3) Limitation on Bringing Civil Action. A civil action under this subsection may not be brought more than 3 years after the date when the retaliation occurred.
31 U.S.C. § 3730(h).
State False Claims Acts compared: The New Jersey False Claims Act goes further than the federal Act’s retaliation provision. It authorizes, “where appropriate, punitive damages,” and affirmatively prohibits employers from attempting to restrict employees’ abilities to report evidence of fraud to the government.
C. Broad Definition of “Knowing” and “Knowingly”
The federal 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. The Act also makes explicit that no “specific intent to defraud” need be shown to impose liability, and thus rejects this traditional “fraud” standard.
State False Claims Acts compared: The state False Claims Acts typically incorporate the same broad definitions of “knowing” and “knowingly,” and likewise makes clear that “[n]o proof of specific intent to defraud is required.” States have no leeway in this regard if they wish to qualify for the additional funds under the Deficit Reduction Act. In fact, when the Georgia bill was under consideration in 2007, Indiana’s statute had already been determined not to qualify that state for additional funds under the Deficit Reduction Act, precisely because the Indiana statute did not define “knowing” and “knowingly” as broadly as does the federal Act.
D. Damages and Penalties Under the False Claims Act
Exposure of 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.”
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 to $11,000 per violation.
State False Claims Acts: The state Acts likewise provide for treble damages and penalties that are typically $5,500 to $11,000 for each false claim submitted, although states are free to impose larger penalties. For instance, under the New York FCA enacted in 2007 and substantially amended in 2010 in light of FERA, penalties range from $6,000 to $12,000 for each false or fraudulent claim.
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 from the usual one encountered in 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. The Complaint must be filed “in camera” and “under seal,” and must remain under seal for at least 60 days. The relator must serve the government under Rule 4 of the Federal Rules of Civil Procedure with a “copy of the complaint and written disclosure of substantially all material evidence and information the person possesses.”
In reality, courts regularly extend the seal for many months (or even years) at the government’s request. The purpose is to permit the government to evaluate and investigate the case and make its decision as to whether to intervene. Thus, 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 or its employees are contacted by government agents.
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. The defendant is served once the complaint is unsealed, and has 20 days after service to respond.
If the government intervenes, it is not “bound by an act of the person bringing the action.” The government can file its own complaint and can expand or amend the allegations made. 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.
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.” 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.
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 PPACA, the Act stated 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.” The three specified places of “public disclosure” were “ in a criminal, civil, or administrative hearing,  in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or  from the news media.”
PPACA has removed this jurisdictional bar, has authorized the government to prevent dismissal on this basis if it chooses, and has relaxed the standard for relators to establish that they are an “original source” as a means of avoiding dismissal on that basis as well. In addition, PPACA limited the type of public disclosures in question to federal sources, and thus pre-empted for future violations the Supreme Court’s ruling shortly thereafter in 2010 in Graham County Soil & Water Conservation District v. United States ex rel. Wilson, 130 S. Ct. 1396 (2010)(state report created public disclosure under prior version of FCA)
State False Claims Acts compared: The state False Claims Acts establish essentially the same procedures. For example, the Georgia Act directs that the complaint and “written disclosure of substantially all material evidence and information shall be served on the Attorney General.” The complaint must be filed in camera and shall remain under seal for at least 60 days, and it is not served on the defendant while it remains under seal. The Attorney General may move to extend the time under seal in order to investigate the allegations of the complaint, all pursuant to section 49-4-168.1(c).