by Stephen Kohn
Most states and some cities have local versions of the False Claims Act. Some are stronger than the federal law; others are weaker. The State of New York also permits whistleblowers to file a qui tam lawsuit for tax fraud under its state FCA. A number of states only cover fraud in state Medicaid programs. There is a strong trend for states to enact FCAs, so it is important to check your specific state to determine if a local FCA exists.
The following states and major cities currently have FCAs: California; the City of Chicago; Colorado; Connecticut; Delaware; District of Columbia; Florida; Georgia; Hawaii; Illinois; Indiana; Iowa; Louisiana; Maryland; Massachusetts; Michigan; Minnesota; Montana; Nevada; New Hampshire; New Jersey; New Mexico; New York City; New York; North Carolina; Oklahoma; Philadelphia and Allegheny County, Pennsylvania (the Commonwealth of Pennsylvania has not yet passed an FCA); Rhode Island; Tennessee; Texas; Vermont; Virginia; and Washington.
Preemption and Preclusion
Shortly after states commenced protecting whistleblowers, corporations went on a “counterattack.” The first phase was to dispute “federal preemption.” Companies argued that federal whistleblower laws, which often were weaker than state laws, should provide an exclusive remedy. In other words, states should be “preempted” from protecting whistleblowers because those protections would somehow interfere with the implementation of the federal whistleblower laws.
This issue came to a head in cases decided under the Energy Reorganization Act’s nuclear whistleblower protection law. Corporations aggressively argued that nuclear whistleblowers could only file claims under the federal law. They asserted that because federal nuclear safety laws preempted state nuclear safety laws, whistleblowers who raised nuclear safety concerns were forced to file federally. However, the real reason corporations pushed this argument was not because they were interested in safety—far from it. Instead, before the law was amended in 1992, the federal nuclear whistleblower law had a thirty-day statute of limitations. Many whistleblowers, such as Vera English, who sought protection under state laws, had failed to file claims under the ridiculously short federal statutory deadline.
English worked for the General Electric Company at its Chemet Laboratory near Wilmington, North Carolina. She blew the whistle on major nuclear safety violations. English originally filed a federal claim but lost because she did not meet the thirty-day statute of limitations (the statute of limitations was increased to 180 days in 1992 in large part due to failed claims such as that of English).
Vera English then filed a suit under North Carolina common law, alleging intentional infliction of emotional distress caused by her mistreatment as a whistleblower. General Electric filed a motion to dismiss, claiming that her exclusive remedy was the federal law and that state regulation of nuclear safety matters preempted state involvement. The company won before the district court and the court of appeals. The Supreme Court unanimously reversed the decisions of both courts. The Court held that federal whistleblower laws did not prevent private-sector employees from also seeking relief under state law. After English was decided, the federal preemption doctrine was all but dead in whistleblower cases.
One pitfall that must be carefully avoided is the “preclusion” defense. A number of states do not permit employees to pursue the common law public policy exception claim if a statutory remedy exists. These courts require an employee to use a statute, if one exists, arguing that the statute somehow “precludes” the use of a common law remedy. Although this doctrine is illogical, it does have its supporters.
One way to guard against having a case thrown out under the “preclusion” doctrine is to sue under both the common law and a federal or state whistle-blower protection statute. If the common law remedy is “precluded,” the statutory remedy should prevail.
Additionally, there is a judicial policy of requiring employees to include all potential causes of action in one lawsuit. Courts discourage parties from parceling out various causes of action and filing multiple lawsuits. Indeed, the failure to include all potential causes of action in one lawsuit can result in a waiver of nonincluded claims. Thus, the best tactic is to include all potential causes of action in the one lawsuit, although there may be sound strategic reasons for filing initial claims in multiple forums. If an employee files a claim in U.S. District Court, the Federal Rules of Procedure permit the inclusion of state claims in the federal lawsuit under a doctrine known as “pendant jurisdiction.”
PRACTICE TIP
Checklist 1 provides a summary list of states that have enacted False Claims Acts.
Checklist 3 offers a state-by-state list of local protections, including citations to the leading common law “public policy” exception cases and whistleblower protection state laws.
RULE 6Get a Reward! False Claims Act/Qui Tam
“The bill offers . . .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. . . . I have based the [False Claims Act] 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.”
Sen. Jacob Howard (Statement upon sponsoring original False Claims Act in 1863)
Always ask: Is the taxpayer, directly or indirectly, on the hook for any of the costs associated with your disclosure? Do your concerns touch upon federal spending, procurement, or contracting? If you answer “yes,” you may be protected under the most effective whistleblower law in the United States: the False Claims Act (FCA).
The False Claims Act is a law that is simply too good to miss. If a whistle-blower prevails in an FCA case, the company must pay treble damages based on the contract or procurement fraud. It also has to pay a fine for each false claim, set at no less then $10,781 and no larger then $21,563. The whistle-blower reward is between 15 percent and 30 percent of the amount recovered by the government, in addition to attorney fees and costs. Employers cannot retaliate against any employee who takes any “action” under the FCA or who undertakes any effort “to stop 1 or more violations” of the act. The qui tam provision can result in large rewards for the whistleblower, and, if fired, the employee is entitled to double back pay, special damages, and fees.
What Is a False Claim?
The scope and reach of government spending is vast and consequently so is the scope for the FCA. The U.S. government is the largest landowner and is the largest employer in the United States. Billions upon billions of federal taxpayer dollars are spent on hiring contractors, allocating grants to state and local governments, buying goods and services, and handing payouts to massive government programs. Federal monies are spent on everything from highway construction to social services to our nation’s defense. Federal money is spent in every state, in nearly every nation on earth, and has even been spent on the Moon and Mars, not to mention massive government spending in the Medicare and Medicaid programs. The FCA prohibits fraud in the spending of every penny of taxpayer money.
The FCA also reaches into other programs that do not directly implicate government spending, such as the payment of royalties on government leases (such as oil and gas leases), false statements to obtain benefits from the government, false customs declarations, or statements made to avoid having to pay fines or fees to the United States.
The ways in which government money can be ripped off are as diverse as the imagination. Checklist 4 outlines numerous types of frauds covered under the FCA. Some examples include misrepresentations in grant applications, billing for services not rendered, billing for services not needed, billing for services not properly performed, selling defective merchandise, failure to ensure quality standards, kickbacks to obtain grants or sell products, failure to meet grant requirements, improperly using government property, overcharging for services, billing to the wrong accounts, underpaying on obligations or leases, improper marketing to increase the demand on goods and services paid for by the government, improper de
nial of required coverage, up coding (false diagnosis to increase payments), obtaining early payments, failure to pay mandatory penalties, fees or customs duties, violation of contracting rules, conflicts of interest, and bill padding. The list is endless and only limited by the creativity of those looking to improperly profit at the taxpayer’s expense.
In 2009 and 2010 Congress expanded the scope of the FCA, broadening the definition of claim and obligation, increasing the reach of the law’s conspiracy provisions, and ensuring that subcontractors and government-sponsored corporations or programs were covered under the act. In closing various loopholes in the law, Congress explicitly demanded that the law be interpreted to “protect all Federal funds.” Every dime is covered, regardless of who submits the bill or who commits the underlying fraud:
[FCA liability] attaches whenever a person knowingly makes a false claim to obtain money or property, any part of which is provided by the Government without regard to whether the wrongdoer deals directly with the Federal Government; with an agent acting on the Government’s behalf; or with a third party contractor. . . . The FCA reaches all false claims submitted to State-administered programs.
On the floor of the House of Representatives, California Congressman Howard Berman, one of the principal sponsors of the FCA, further explained the scope and reach of “our Nation’s most effective fraud-fighting tool, the federal False Claims Act.” As explained by Congressman Berman, the following conduct “clearly violates the False Claims Act”:
• “Charging the government for more than was provided”;
• “Seeking payment” when the applicant was “not eligible”;
• “Demanding payment for goods or services that do not conform to contractual or regulatory requirements”;
• “Attempting to pay the Government less than is owed” for “any goods, services, concession, or other benefits provided by the Government”;
• “Fraudulently seeking to obtain a Government contract”;
• “Submitting a fraudulent application for a grant of Government funds”;
• “Submitting a false application for a Government loan”;
• “Requesting payment for goods or services that are defective or of lesser quality than those for which the Government contracted”;
• “Submitting a claim that falsely certifies that the defendant has complied with a law, contact term, or regulation”;
• “Submitting a claim for payment” if the applicant was violating conditions “material” to the contract or the “conditions of participation.”
For years corporations argued for a narrow interpretation of a “false claim.” They urged courts to ignore common sense and strictly apply the terms explicitly set forth in the four corners of a contract. If a requirement was not explicitly set forth in a formal contract or a billing statement, there would be no liability.
This dispute came to a head in 2016 before the Supreme Court. The case concerned the death of Yarushka Rivera, who was being treated in a mental health facility owned by Universal Health Services, Inc. Her treatment was paid for by the taxpayers under the Medicaid program. Rivera was prescribed medication by a “doctor.” She had an adverse reaction, suffered seizures, and died. She was seventeen years old.
An employee of Universal told Rivera’s parents the truth about her treatment. The psychologist who diagnosed Rivera’s condition did not have a medical license. Instead, her “PhD” was awarded by an unaccredited Internet college, and her application for a state license had been rejected. The individual who prescribed the medication purported to be a “psychiatrist” but was actually a nurse who “lacked authority to prescribe medications.”
The case filed by Rivera’s parents alleged that Universal had ripped off taxpayers by billing for services of “unlicensed staff.” Universal argued that the billing statements did not explicitly require the persons treating Rivera to be licensed or even qualified. They argued that the FCA did not permit claims to be filed for “implied” requirements. No matter how despicable the treatment, if it was not in the contract, there could be no FCA case.
The Supreme Court, in a decision by Justice Thomas, unanimously rejected these arguments. The Court upheld the theory of “implied certification.” If a defendant “knowingly fails to disclose . . . noncompliance” with a material “statutory, regulatory, or contractual requirement,” the company can be guilty of violating the law even if that requirement is not explicitly set forth in the agreement entered into between the defendant and the government.
Government contractors or medical facilities charging health care costs to Medicare or Medicaid can be liable even if their noncompliance was “not expressly designated as conditions of payment.” A condition of payment can be implied if it was “material” to the services provided: “What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.”
The Court explained that during the Civil War, when the FCA was passed, Congress was concerned about the United States being “billed for nonexistent or worthless goods, charged exorbitant prices for goods delivered, and generally robbed in purchasing the necessities of war.” It is not the terms of a contract that are controlling, but whether the goods being sold are “worthless.”
The Court defined “materiality” as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money.” The Court warned that “minor or insubstantial” noncompliance is not “material.” But material terms do not need to be spelled out in every contract, and can be “implied.”
Rivera’s case could go forward.
How the Law Works
Unlike standard whistleblower protection laws, the False Claims Act permits whistleblowers to file claims on behalf of the United States and demand that companies, who have ripped off the taxpayer, be held fully accountable. The whistleblower can then obtain a reward for this public service. The FCA permits whistleblowers to go to court and show that the government was financially taken advantage of. If the whistleblower’s claims are proven to be correct, the whistleblower is entitled to a percentage of the monies recovered for the United States, plus all attorney fees and costs.
The amounts of these rewards can be staggering, sometimes in the multiple millions of dollars. In 2005 the General Accounting Office determined that the average whistleblower reward under the FCA was $1.7 million. In some instances the whistleblowers were able to collect well over $50 million in rewards for a single FCA case. Between 1986 and 2016 the whistleblower share of FCA recoveries reached $6.325 billion.
As explained in Figure 5, since the FCA was modernized in 1986, whistleblowers account for almost 70 percent of all civil fraud recoveries. Since 1987 taxpayers have recovered $15.14 billion from government investigations, but whistleblower recoveries under the FCA during this same period of time totaled $33.23 billion in civil penalties and fines.
In remarks given on June 9, 2016, before the American Bar Association, acting Associate Attorney General Bill Baer (who has responsibility over the federal government’s efforts to hold federal contractors accountable) confirmed what the statistics prove. The False Claims Act’s whistleblower provision “remains the government’s most effective civil tool in protecting vital government programs from fraud schemes.” The “dollars involved” are “staggering.”
The law does not only result in monetary recoveries. Defense attorney John T. Boese, who has extensively written and testified in support of corporate positions on the FCA, conceded in his 2016 paper delivered to the Health Care Compliance Association that the Justice Department uses the law to “encourage adoption” of “best practices” so companies can police themselves. This includes requiring companies to enter into “corporate integrity agreements” when they settle an FCA case.
Given the success of the FCA, over twenty-five states and major municipalities have no
w enacted local versions. Furthermore, the federal government has established incentives that strongly encourage states to enact FCAs protecting the use of state tax revenue. Every year more states sign FCAs into law, and eventually these remedies should cover local tax revenue in the same manner that federal tax revenues are protected.
Even without a local FCA, state spending is often covered under the federal law. All states and most local governments supply services and sponsor projects in whole or in part through the use of federal monies. If a contractor defrauds a state agency, but federal money is involved, the FCA applies. If a state or local government fails to properly use federal monies, the FCA applies and can be used to hold these local governments accountable.
If government monies are in any manner involved in your whistleblowing allegations, you may be protected under the federal FCA or similar state and local laws.
The FCA is complex, with many pitfalls. But in prosecuting a case under this law, always keep in mind Congress’s intent when it enacted this highly effective fraud-fighting tool. One of the first cases ever decided under the FCA contains perhaps the best statement of that original intent. Although decided in 1885 by a district court in Oregon, the decision is not outdated. This holding has been continuously cited by the key authorities, including the U.S. Supreme Court, Senator Langer during his 1943 filibuster to save the law, and in the official Judiciary Committee report accompanying the 1986 amendments, as a true reflection of the purpose behind the FCA:
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.
