The New Whistleblower's Handbook

by Stephen Kohn

  The critical role qui tam laws play in stopping fraud was explained in the 2008 Senate Judiciary Committee Report on the FCA. Quoting from University of Alabama Bainbridge Professor of Law Pamela Bucy’s testimony, the committee concluded:

  Complex economic wrongdoing cannot be detected or deterred effectively without the help of those who are intimately familiar with it. Law enforcement will always be outsiders to organizations where fraud is occurring. They will not find out about such fraud until it is too late, if at all. . . . Given these facts, insiders who are willing to blow the whistle are the only effective way to learn that wrongdoing has occurred.

  Qui tam laws provide an incentive to corporate insiders who are in the best position to learn of frauds and other misconduct for which a qui tam reward may be available. They are the only whistleblower laws that both provide on-the-job protection against retaliation and incentives to encourage employees to undertake enormous personal risks.

  The False Claims Act

  The oldest qui tam law, the False Claims Act, was originally enacted in 1863 but was amended in 1943 and 1986. The law was further strengthened by three additional amendments signed into law in 2009 and 2010. Since being modernized in 1986, it has proven to be the most effective antifraud law in the United States (and perhaps the entire world).

  How do you know if your disclosures impact the FCA? Ask yourself the following question: Is the taxpayer on the hook for any of the costs that may be incurred for any employer misconduct you have identified? If government funds are involved, the worker who exposes fraud against the taxpayer may find him- or herself covered under this most powerful whistleblower law. The FCA has actually made millionaires out of ordinary workers who did the “right thing.” It provides large financial incentives to employees who demand that their companies engage in honest and ethical practices—and who turn them in when they don’t stop cheating.

  The reasoning behind the law is simple: Reward people for doing the right thing. Under the FCA’s qui tam procedures, for every dollar the government collects from contractors who abused the system, the whistleblower obtains a reward set at between 15 percent and 30 percent of the monies collected. In an age of multibillion dollar stimulus spending, bulging federal health care costs, and massive defense contracting, the reach of programs or companies obtaining taxpayer monies is staggering.

  “The False Claims Act has provided ordinary Americans with essential tools to combat fraud, to help recover damages, and to bring accountability to those who would take advantage of the United States government—and of American taxpayers.”

  Attorney General Eric Holder

  To understand the importance of the FCA, the recent experiences of the powerful drug company Eli Lilly and Company are illuminating. In January 2009 Lilly agreed to pay $1.4 billion in fines and penalties. Whistleblowers caught this company illegally marketing the drug Zyprexa. To increase sales, the company minimized health risks associated with the drug. As it turns out, the taxpayer was a big victim of Lilly’s illegal marketing schemes. Doctors were sold on writing prescriptions for Zyprexa. Patients were sold on buying Zyprexa. But the bills were sent to the taxpayer, courtesy of the gigantic Medicare and Medicaid programs. Whistleblowers who worked for Eli Lilly knew of the company’s illegal marketing scheme, knew of the problems associated with the drug, and knew of the potential adverse medical effects. They also knew that taxpayers were paying the bill for the illegal marketing scheme, while the company made billions in profits improperly selling Zyprexa.

  Under the FCA these Eli Lilly whistleblowers were empowered to directly sue the company. Their lawsuit triggered a Justice Department investigation into the company’s wrongdoing. In the Lilly case the investigation resulted in a massive settlement. The company was forced to pay $800 million to the federal and state governments to reimburse the Medicare and Medicaid programs. The company had to pay an additional $615 million in criminal penalties. The whistleblowers used the FCA as a vehicle for a systemic nationwide investigation into illegal drug-marketing practices. The company got caught, and the law forced Eli Lilly to pay the penalty. Thus the big winners were the taxpayers and the safety of all.

  Everyday workers had forced one of the world’s most powerful drug companies to pay $1.1 billion from its illegal profits back to the American taxpayer. Additionally, the workers who risked their careers to serve the public interest obtained a “whistleblower reward” of over $78.87 million. The nine whistle-blowers involved in the case were rewarded for doing the right thing, risking their jobs and careers, and serving the public interest. In the end, they were not the stereotypical whistleblower-martyr. They were the victors.

  The Eli Lilly workers followed the first rule for whistleblowers. They followed the money by tracking who profited and who paid. By following the money, they found the best law that would protect and reward their whistleblowing.

  How We Got Here: The Birth of Modern Whistleblower Protections

  The mother of all financial reward laws is the False Claims Act. To understand how the False Claims Act works, it is critical to realize that the law was 150 years in the making, from its birth in 1863, during the height of the Civil War, and sweeping amendments, the last of which was passed in 2010.

  During the Civil War President Lincoln and his supporters in Congress were disgusted with government contractors, some of whom were selling sawdust as gunpowder and profiting from the terrible costs of the war. Congressional investigations uncovered “waste and squandering” of “public funds.” Overcharging was common, and war contracts were given “without any advertising” at “exorbitant rates above market value.”

  When Congress investigated the frauds, it discovered that insider employees had blown the whistle and were subjected to retaliation. In one case the employee architect of the Benton barracks in Missouri reported that he was “cursed and abused,” “terrified,” and threatened with imprisonment for blowing the whistle on bribes paid to obtain construction contracts for the barracks.

  To encourage citizens to disclose these frauds, Senator Jacob Howard from Michigan introduced into Congress bill number S. 467, what is today referred to as the False Claims Act. As Senator Howard explained, a key provision in the law was a “qui tam clause” based on the “old-fashioned idea of holding out a temptation” for persons to step forward and turn in thieves. Howard understood that this qui tam mechanism would empower citizens to sue wrongdoers in the name of the United States government (i.e., “in the name of the king”) in order to ensure compliance with the law. Senator Howard strongly defended the qui tam provisions in the bill as, in his words, the “safest and most expeditious way I have ever discovered of bringing rogues to justice.”

  Under the law, any person who had knowledge of the fraud—referred to today as “whistleblowers”—were authorized to file a lawsuit on behalf of the United States. If frauds were proven, the wrongdoer had to pay up to twice the amount of the fraud, plus a large fine of $2,000. The whistleblower, known in the law as the “relator,” would get half the money, and the United States would collect the other half.

  On March 2, 1863, President Lincoln signed into law S. 467, a “bill to prevent and punish frauds upon the Government of the United States.” The FCA was visionary legislation. It was passed before the rise of modern industry and before the federal government became a multitrillion-dollar enterprise. Like other visionary civil rights legislation signed into law during the Civil War and Reconstruction, it was progressive, years ahead of its time; its use would remain dormant until the New Deal and the outbreak of World War II, when government procurement would reach a previously unimaginable amount.

  In the early 1940s, in the wake of large war-related federal spending, the FCA was dusted off and a handful of qui tam suits were filed. By 1943 a mere twenty-eight FCA cases were pending in all the courts in the United States. Although small in number, they targeted some of the most powerful corporations and political machines in the country, including Carnegi
e– Illinois Steel Corporation (for selling “substandard” steel to the Navy); the Anaconda Wire & Cable Company (for selling “defective wire and cable”); contracts awarded to Hague Machine (led by Frank Hague, Jersey City mayor and the co-chair of the Democratic National Committee); and corrupt contracts awarded to a company owned by Tom Prendergast, the notorious “boss” from Kansas City.

  These suits caused panic within the powerful government-contractor community. Before the law was ever really tested, Congress voted to gut the heart of the FCA. On April 1, 1943, Congressman Frances Walter took to the floor of the House of Representatives and obtained, without any real debate, “unanimous consent” to repeal the qui tam provision in the FCA. The law would have been repealed, except that William Langer, the controversial populist Republican senator from North Dakota, rose to defend the law.

  On July 8, 1943, Senator Langer commenced a filibuster. He recounted President Lincoln’s concern that “persons who were willing to make money out of the blood and sufferings of our soldiers” threatened the “very life of our Nation” and “induced” his supporters in the Civil War Congress to take action to stop the abuses. After mentioning this history, Langer concluded: “These far-seeing Senators realized that the most potent weapon to deter these plunderers of our National Treasury, was to make such cheating and defrauding unprofitable.”

  Senator Langer then warned that the effort to repeal citizen rights under the FCA (i.e., the qui tam powers) was an effort to “destroy the most formidable weapon in the hands of the Government” to fight the “fraud practices” that were “inflicted upon our nation.” The senator warned that frauds were concocted “in every way” that “human ingenuity could devise.” It was the qui tam provision of the law, “as old as the common law itself” that “provide[d] the safeguard” and the most “potent weapon to deter” the “plunderers of our National Treasury.”

  “When President Lincoln enacted this legislation—at the height of the Civil War—he correctly predicted that it would be instrumental in preventing unscrupulous companies from reaping enormous profits at the expense of the Union Army.”

  Attorney General Eric Holder

  But Senator Langer could not hold off his political foes. His filibuster did succeed in blocking the outright repeal of the FCA, but the law was radically weakened. Under the 1943 amendments, whistleblowers were stripped of their practical ability to file qui tam claims.

  After 1943, attempts by whistleblowers to use the FCA were fruitless. Qui tam relators or whistleblowers could not get around the numerous procedural or substantive roadblocks that prevented them from filing claims or collecting recoveries. Consequently, over one hundred attempts to use the law to hold contractors accountable failed in the courts. The law was down and out, but not dead.

  Resurrection and the False Claims Reform Act

  At the height of the “Reagan Revolution,” and its gargantuan increases in defense spending, a freshman senator from Iowa, Senator Chuck Grassley, led the charge to increase oversight and accountability for federal spending by resurrecting the False Claims Act. In 1985 he, along with Congressman Howard Berman, introduced the False Claims Reform Act.

  The Senate Judiciary Committee held hearings on the Reform Amendment. The record before the committee was shocking—since 1943 contractor abuses had gotten completely out of control. In fact, things were so bad that the General Accounting Office reached the following conclusion after carefully studying government fraud: “The sad truth is that crime against the Government often does pay.”

  In the middle of the Congressional debate over the Reform Amendment, new scandals rocked the contractor world. When members of Congress took to the floor and exposed that contractors had billed the taxpayers $7,622 for a coffee pot, $435 for a hammer, and $640 for a toilet seat, the media responded. These examples of contractor abuse outraged the public and generated strong support in Congress for the reforms. On October 27, 1986, the False Claims Reform Act was overwhelmingly passed by Congress and signed into law by President Ronald Reagan.

  The 1986 False Claims Act Amendments

  The False Claims Reform Act reversed the most vicious antiwhistleblower provisions of the 1943 amendments, modernized the law, restored the rights of whistleblowers to file claims, and set mandatory reward levels, regardless of the amount of money collected from the corrupt or abusive contractor.

  The 1986 amendments reestablished the rights of whistleblowers to file qui tam lawsuits. It permitted whistleblowers to directly litigate their cases against contractors, whether or not the United States joined in the action. In other words, if the United States decided not to file any claim against the contractor, the whistleblower had the right to continue the lawsuit on his or her own, conduct discovery, participate in a trial, and attempt to prove that the contractor had stolen from the taxpayer. If the United States decided to join the lawsuit, the whistleblower was still guaranteed the right to participate in the case, protect his or her rights, and present the case against the contractor.

  The 1986 amendments also set mandatory guidelines for monetarily rewarding whistleblowers. If a whistleblower filed a FCA suit and the United States used this information to collect damages from the contractor, the whistleblower was guaranteed between 15 percent and 25 percent of the total monies collected. If the government refused to hold the contractor accountable, the whistleblower could pursue the case “in the name of the United States,” even without the intervention or support of the Justice Department. If the whistleblower won the claim, he or she would be entitled to between 25 percent and 30 percent of the amount of money collected by the United States. These provisions held, and the Justice Department did not have the authority or discretion to reduce whistleblower rewards below the statutory minimums.

  Other provisions of the law were substantially improved as well. First, Congress no longer simply doubled the amount of money owed by the contractor. The law called for treble damages—the contractor would have to pay three times the amount of the fraud. Second, the amount of the per-violation fine was increased from $2,000 to between $5,000 and $10,000. In 2016 the per-violation sanction was increased to a range of $10,781 to $21,563. The contractor would have to pay the attorney fees and costs incurred by the whistleblower in pursing the claim. An antiretaliation provision was also included in the law. Companies were prohibited from firing or discriminating against employees who filed FCA lawsuits. A worker could file a multimillion-dollar claim against his company and the company was strictly prohibited from firing the employee. If fired, the employee was entitled to reinstatement and double back pay, along with traditional special damages, and attorney fees and costs.

  Furthermore, Congress made it easier to prove a fraud. As would be expected, the old law covered any person who “knowingly” filed a “false claim” with the United States or who had “actual knowledge” that information filed with the government was untrue. Despite this acknowledgement, proof of specific intent is very difficult to obtain in fraud cases. Realizing this, in 1986 Congress lowered the threshold for proving a case. The law adopted standards based on the principle that “individuals and contractors receiving public funds have some duty to make a limited inquiry so as to be reasonably certain they are entitled to the money they seek.” The standard for proving fraud was lowered, and direct evidence of intent was not necessary to prove a case. The statute specifically states that “proof” of “specific intent to defraud” is no longer required. A person “knowingly” violates the law if he or she “has actual knowledge” that the information is false, “acts in deliberate ignorance of the truth or falsity of the information,” or “acts in reckless disregard of the truth or falsity of the information.” The statute specifically states that “no proof of specific intent to defraud is required.”

  The “deliberate ignorance” standard is extremely relevant to whistleblowers because, in most cases, employees who uncover wrongdoing disclose these concerns to their supervisors or bosses. Under the 1986
amendments, the failure of a company to reasonably respond to a whistleblower’s allegations by conducting a “reasonable and prudent” “inquiry” into the disclosures can trigger liability under the law, even if the top company officials or contracting officers claim they had no specific knowledge of the false claims.

  This language was added to the statute in order to prevent companies from escaping liability based on the “ostrich” situation. If a whistleblower raised a concern, and the responsible company official “buried his head in the sand,” similar to an ostrich, the company would be held liable, even without proof of specific intent to defraud.

  The 1986 amendments also sought to ensure that all recipients of federal monies were covered under the act, not just direct contractors. According to the Senate report accompanying the amendments, this would include “frauds perpetrated on Federal grantees, including States and other recipients of Federal funds.” Congress explicitly referenced that payments made under the federal Medicare and Medicaid programs were covered, along with federal contributions for highway grants and housing subsidies.

  Employees who blew the whistle on fraud against the government also won job protections under the 1986 amendments. Even if a worker did not have a valid qui tam, employers were prohibited from firing employees who filed False Claims Act cases, or who reported frauds to the government. Claims are filed in federal court, and prevailing employees are entitled to double back pay, reinstatement, consequential damages, and attorney fees.