On February 27, 2008, the Senate Judiciary Committee held hearings debating whether the civil False Claims Act, 31 U.S.C. §§ 3729-3733, should be expanded – potentially creating additional liability for companies receiving any government money, reducing the ability of any such company to defend itself against claims of fraud, and creating significant hurdles for companies in defending themselves against mere allegations of fraud by "whistleblowers" from the company and within the Government. When the Department of Justice testified before the Committee, the DOJ indicated that it did not support the legislation as currently drafted, noting that there was "no pressing need" for changes to the FCA at this time despite the fact that the proposed legislation would provide greater opportunities for the DOJ to recover allegedly fraudulent payments to contractors. The DOJ’s objections, however, which are outlined below, are limited in scope.
Background on the Proposed Legislation
On September 12, 2007, Senator Chuck Grassley (R-Iowa) introduced S. 2041, the False Claims Corrections Act of 2007. The bill (introduced with bipartisan support) is designed (in Senator Grassley’s view) "to make sure recent court decisions won’t weaken the government’s ability to recover tax dollars lost to fraud, whether its in health care, defense or [other] areas of spending." In particular, the proposed bill would:
- Remove the "presentment" requirement of 31 U.S.C. § 3729, which requires that a false claim be actually presented to a government employee in order for someone to be liable under the statute. The bill would allow the statute to reach any false claim for payment regarding "government money or property" (which is broadly defined) regardless of whether the individual making the purportedly false claim directly makes the claim to a government employee. The bill is designed to "correct" the decision in U.S. ex rel. Totten v. Bombardier Corp, 380 F.3d 488 (D.C. Cir. 2004), which held that purportedly false claims made to Amtrak or other government grantees were not "presented" to a government employee under 31 U.S.C. § 3729(a)(1), and the decision in U.S. ex rel. DRC, Inc. v. Custer Battles, LLC, 444 F. Supp.2d 678 (E.D. Va. 2006), which held that an Iraqi-reconstruction contractor was not liable under the FCA because the alleged fraud was paid using non-U.S. taxpayer funds, not funds from the U.S. Treasury. The bill would also head-off a potentially unfavorable decision by the U.S. Supreme Court in the case Allison Engine Co., Inc. v. United States ex rel. Sanders, No. 07-214, which was recently argued in February 2008 discussing the need for "presentment" to a government employee. Click here.
- Essentially eliminate the "original source" requirement of 31 U.S.C. § 3730, which prohibits parasitic lawsuits filed based upon publicly disclosed information, and which is a common defense raised by FCA defendants. The bill is designed to "correct" the recent U.S. Supreme Court decision, Rockwell Int’l Corp. et al. v. United States, 127 S.Ct. 1397 (2007), which held that the public disclosure bar requires a whistleblower to be an original source for each and every claim that is ultimately settled or upon which a verdict is rendered; if the "whistleblower" is not an original source, then he or she is barred from recovery on each such claim. Reasoning that the public disclosure bar under Rockwell improperly limits the FCA by restricting legitimate whistleblowers who may initially bring fraud to the attention of DOJ (only to have the DOJ expand the investigation and ultimately settle on other grounds), the proposed bill would eliminate the public disclosure bar as a jurisdictional defense for defendants, allowing only the DOJ to invoke the bar to dismiss truly parasitic lawsuits. The bill would also "correct" various decisions that have held that disclosures by the Government under a Freedom of Information Act request constitutes a "public disclosure" for purposes of the FCA.
- Allow government employees charged with investigating fraud to separately file an FCA action as a whistleblower. Currently, some courts have held that if a government employee is responsible for investigating an alleged fraud as part of his or her job, he or she may not use the information for their own personal benefit by filing their own FCA lawsuit. The bill would "correct" this fact, returning (according to Senator Grassley) to the "original intent" of the 1986 amendments to the FCA, which was to allow "government employees to act as qui tam relators in limited circumstances when they have reported activities up the chain of command, to the Inspector General, to the Attorney General, and only if no action was taken after 12 months."
- Expand the statute of limitations to 10 years at 31 U.S.C. § 3731 for all claims, eliminating the current shorter limitations periods. The bill would also "correct" the decision in United States v. Baylor University Medical Center, 469 F.3d 263 (2d Cir. 2006), which held that the Government must intervene in an FCA case within the statute of limitations period, regardless of whether the claims raised by the Government upon intervening "related back" to the whistleblower complaint that was originally timely filed.
- Expand employees’ rights for retaliation. Currently, 31 U.S.C. § 3730 allows a whistleblower to seek a separate cause of action for retaliation based on any action taken by the employee "in furtherance of" an FCA action (including investigating an alleged fraud, or filing a whistleblower suit). The bill would expand the whistleblower protections to include any efforts taken by an employee to prevent any alleged fraud, regardless of whether the person’s efforts were made expressly "in furtherance of" or supporting a future FCA action.
- Prohibit waivers of FCA liability as part of a severance agreement between an employee and his or her employer. Some courts have held that an employee may waive the right to bring an FCA action; the bill would "correct" these decisions by making any such agreements unenforceable and void as against public policy because such agreements may allow an alleged fraud to continue undetected.
- Provide whistleblowers and their qui tam counsel increased access to materials obtained by DOJ as part of the investigation. The bill would "correct" the disadvantage that an outsider would have in identifying the alleged fraud with sufficient particularity. However, it also ignores the fact that any true original source "whistleblower" would likely have had access to such detailed information in the first place.
Note that similar, albeit different, legislation has been introduced in the House of Representatives by Representative Howard Berman (D-California) – H.R. 4854, the False Claims Corrections Act of 2007. H.R. 4854 is even more expansive than S. 2041, eliminating the need of a plaintiff to either plead or prove fraud as has been historically required and attempting to apply the new amendments retroactively. To date, no hearings have been held on the House version of the bill.
DOJ’s Objections to the Legislation
Testifying on behalf of the Department of Justice, Michael F. Hertz, Deputy Assistant Attorney General of the Civil Division, touted the effectiveness of the FCA, which has recovered over $20 billion to date. Mr. Hertz praised the role that qui tam relators had played in "blowing the whistle" on the alleged fraud, and in maximizing recovery to the Treasury. Click here to view Mr. Hertz’s written statement. Still, Mr. Hertz stated that the DOJ "cannot support the bill in its current form." Mr. Hertz outlined a number of specific objections to the pending legislation:
- Government Employees as Whistleblowers. "Permitting government employees to serve as relators in certain circumstances … is unsound public policy as all government employees have an obligation to report fraud." Providing government employees with financial incentives to use their role in the government to pursue a private action poses severe ethical concerns and may, potentially, undermine the public trust in government oversight. Mr. Hertz characterized this move as "unsound public policy," indicating that the perceived need is belied by the fact that the process of government investigation has worked well over the last 22 years.
- Public Disclosure and First-Hand Knowledge. "Narrowing the public disclosure bar to permit those with no first-hand knowledge beyond that available in the public domain to serve as relators" is unwarranted because it "severely narrows the circumstances where the bar would apply in a way that would reward relators with no first-hand knowledge and who do not add information beyond what is in the public domain, as well as relators in a broad range of cases where the government is already taking action." DOJ’s objection is unsurprising, considering that narrowing the public disclosure bar under S. 2041 would force DOJ to share a larger portion of any FCA recovery triggered by a qui tam complaint; maintaining the status quo allows DOJ to craft a settlement to exclude the whistleblower and receive for money for itself, as happened with the Rockwell decision.
- "Wait and See" on Presentment. "Many provisions of S. 2041 deal with issues that have not yet been fully resolved by the courts," such as the "presentment" issue and the impact of the Totten decision. Mr. Hertz agreed that he thought that Totten was wrongly decided, but that enacting legislation prior to the Supreme Court’s decision in Allison Engine would be premature. Still, the DOJ nonetheless proposed alternate language on the presentment issue designed to achieve the same effect of substantially overriding the Totten and Custer Battles decisions.
While revisions to the FCA may be inevitable in this modern era where "procurement fraud" and "healthcare fraud" are common headlines in the news, Congress should be careful in expanding contractors’ liability under the FCA. Protecting the public fisc is one thing, but driving away service providers is another thing entirely.
While, as Mr. Hertz pointed out, the FCA has proven to be a highly effective tool in combating contractor fraud, it is worth noting that not every dollar recovered by the DOJ is necessarily the consequence of a fraud. Considering the "bounty" incentive provided for qui tam relators and the colossal settlements in recent years (especially in the healthcare industry), any company receiving money from the United States (or even a host of State governments, for that matter) is an obvious target for a lawsuit. Even if these companies have policies and procedures in place to ensure compliance with the law, many FCA investigations focus on simple mistakes and try to turn mole hills into mountains. Given the reduced scienter requirement under the FCA, many qui tam plaintiffs hope that a mere mistake may be conflated with "fraud" to achieve the big "pay off." Even when the contractor has done nothing wrong and has certainly not committed a fraud, it is forced to defend itself at high cost as if it was a criminal. Managing risk, most contractors opt to settle without admitting fault. But they have still incurred significant costs as a consequence of doing business with the United States.
Expanding the FCA to give the qui tam plaintiffs and the DOJ more leverage against contractors may backfire – because if doing business with the Government is too risky or too expensive, then many largely commercial companies may simply choose not to do business. For the Government, reducing competition and reducing its access to cutting-edge commercial technologies is not the type of "course correction" that would be in our nation’s best interest, regardless of the nearly $20 billion recovered by the revenue-generating divisions of the DOJ.