WHY THERE IS A FALSE CLAIMS ACT
“There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the Government.” Benjamin Franklin.
Ben Franklin was an astute judge of human nature. The federal government has been the victim of fraud almost since its inception. Fraud became particularly acute during the civil war, and led to the passage of the False Claims Act, otherwise known as Lincoln’s Law. That Act has been amended several times since its initial passage. The purpose of the False Claims Act is to deter those who would commit fraud against the government, to punish those who do commit fraud, and to obtain restitution for the victim of that fraud, i.e., the U.S. government. What makes the False Claims Act unique is that the government does not rely solely upon itself to detect and punish fraud. The government realized that the best defense against fraud would be to offer incentives to individuals to come forward and expose the fraud. The incentives would be in the form of a monetary payment for those who exposed the fraud and obtained restitution for the government. These individuals would sue the perpetrator of the fraud in the name of themselves and the government. Thus, these suits were known as “qui tam” actions, which is a Latin phrase that translates as “who sues on behalf of the King as well as for himself.”
There is certain terminology that is associated with these lawsuits. The person who brings the action is known as the “relator.” The suit is initially filed in federal court under “seal.” This means it is not initially made public, as all other complaints are, and it is not initially served on the defendant either.
Who Sues Under the False Claims Act
Individuals who file these types of suits are usually employees or ex-employees of an employer that has perpetrated some fraud on the federal government. However, other individuals, such as patients of doctors, or a competitor to a business engaged in fraud, can file a complaint. For example, a patient who knows that his/her doctor has billed Medicare or Medicaid for services not performed can bring a False Claim Act against the doctor.
Types of False Claims
There are numerous types of false claims that may be perpetrated on the government. The most common is DoD procurement fraud and Medicare/Medicaid, but there are a variety of other fraudulent activities as well. Tax fraud is not considered actionable under the False Claims Act.
Limitations on Right to Sue
It is important that the relator be the first one to file the complaint concerning the fraudulent activity. If someone else has filed a complaint, then the second complaint cannot go forward. Furthermore, an individual who hears about a fraudulent activity from the media cannot file a complaint under the False Claims Act for that particular activity. The purpose of the False Claims Act is to encourage individuals to come forward about previously undisclosed fraudulent activity. It is not designed to allow “parasitic lawsuits” based on previously disclosed information. Lastly, a majority of courts have held that there is a six year statute of limitations that runs from the date of the violation of the Act for civil actions brought by private individuals where the government is not a party. (Where the government has brought the civil action, a different statute of limitations may apply.) If the claim involves retaliation by the employer for having blown the whistle on fraudulent activity, then the statute of limitation is three years from the date when the retaliation occurred.
The complaint filed in court will name the individual, partnership or corporation that committed the fraud, describe the fraudulent activity and demand damages. The relator has a right to a jury trial. Because the relator is suing on behalf of himself/herself and the U.S. government, the restitution that is demanded will go to both the U.S. Government and the relator. The rules of the court require that more detail be provided than is normally the case since fraud must be alleged with particularity in federal court. As stated above, the complaint is initially filed under seal in court. Unlike the usual procedure, the defendant is not initially served with a copy of the complaint. Instead, a copy of the complaint, along with a disclosure statement, which provides more details of the fraudulent activity, is provided to the U.S. Attorney and the Department of Justice. The government then has the opportunity to investigate the allegations raised in the complaint without alerting the defendant that an investigation is underway. Although the government has 60 days to complete its investigation before the complaint is unsealed, it can ask the court for an extension of time. Such extensions are frequently granted and it is not uncommon for cases to remain under seal for a period of one to two years.
Decision by the Government on Intervention
At the conclusion of the investigation, the government decides whether to intervene and join the lawsuit, or to allow the lawsuit to go forward without government intervention. If the government decides to intervene, the complaint will be unsealed and served on the defendant. The government and relator will be co-plaintiffs, although the government will primarily manage the litigation. If the government declines to intervene, the suit can go forward under the control of the relator.
The decision by the government to intervene is important for several reasons. First, if the government does intervene, the relator is entitled to a 15-25 percent share of the judgment or settlement ultimately reached in the case. If the government does not intervene, the relator is entitled to 25-30 percent of the judgment or settlement reached in the case. The remaining amount of funds recovered from the defendant in either case is returned to the government. Second, if the government does intervene, the government will pay the cost associated with the litigation, e.g., hiring of experts to testify. Third, if the government intervenes, the defendant will be more likely to settle the case because the intervention of the government communicates to the defendant that the case has merit. (However, even if the government does not intervene the case may well have merit.)
Damages and Fines
If a judgment against a defendant is rendered under the False Claims Act, the relator is generally entitled to triple damages plus a fine for each false claim submitted to the government. Triple damages means that the defendant must pay three times the losses incurred by the government as a result of the fraudulent activity. The fines range anywhere between $11,181 to $22,363 per violation. Because of these extraordinary remedies, there have been a number of cases where the fines and damages have been in the multi-million dollar range. Obviously, if a case settles before trial, the defendant usually pays less than the triple damages that could be awarded if the case goes to trial.
The Relator’s Compensation
As set forth above, a relator is entitled to anywhere between 15-30 percent of the total amount of the damages and fines awarded against a defendant in judgment or in settlement. Furthermore, the defendant must pay to the relator any attorney fees and costs incurred by the relator in prosecuting the claim. Obviously, because of the extraordinary remedy of triple damages and fines, the amount of money that a relator can recover can potentially be quite large. You do the math. If a judgment or settlement is reached for $10 million, a relator could receive up to $3 million if the government does not intervene. Even if the government intervenes, and the minimum of 15 percent is awarded, the relator would receive $1.5 million. Obviously, there is no guarantee that a False Claims Act complaint will result in any payout, or that the payout will be as large as set forth in the example.
Retaliation by the Employer
Many individuals are afraid of coming forward because they fear that their employer will retaliate against them for blowing the whistle on fraud. Such retaliation can take the form of being fired, demoted, transferred or harassed by the employer. These potential whistleblowers should know that Congress has chosen to protect them from such retaliation by making it illegal for an employer to take such retaliatory action. These protections apply even if an individual blows the whistle on fraud, but never files a False Claim Act complaint. Individuals who suffer retaliation are entitled to reinstatement with seniority, twice the amount of back pay owed, interest on back pay, compensation for any special damages sustained as a result of discriminatory treatment and attorney fees and costs. The government does not share in any of these damages awarded. These strong anti-retaliation provisions should help to alleviate concerns by an employee that the employer will retaliate for blowing the whistle.