PURSUING AN ACTION UNDER THE FALSE CLAIMS ACT
Introduction
Congress designed the False Claims Act to recover monies fraudulently or falsely taken from the Federal Treasury. It authorizes the United States Attorney and/ or a private citizen to file an action in the district courts of the United States to attempt to recover these funds on behalf of the United States Government. If the case is successful, the person who brought the claim to the government (called the relator) may recover a percentage of the recovery to the United States. Often these recoveries can be in the millions. However, these cases are complicated, paper intensive, and filled with procedural quirks and pitfalls. Moreover, the law is in flux and difficult to interpret. Furthermore, as a practical matter, under this law, much power is vested with the United States Attorney who is handling the case. In addition, the persons who come forward with information about false claims are sometimes scared, nervous, angry, depressed or all of the above.
A lawyer handling a False Claims case must wear many hats -lawyer, investigator, lobbyist, counselor. Plaintiff’s lawyers often fill these needs for their clients and so it is natural for the plaintiff’s bar to begin to move into handling False Claims. The ultimate defendants are usually large corporate interests that have devised a scheme - recklessly, willfully, or negligently - to deprive the government of millions of dollars. These defendants have much at stake and fight with all of their might against these claims. A large False Claims settlement or verdict could severely tarnish the reputation of the company involved, and thereby adversely affect the ability of the company to do business with the government in the future. The stakes are high.
It would be impossible for a short paper to discuss these complexities in detail. Hopefully, however, this paper will outline the parameters of the law and cause you to dig further for more information to successfully represent your clients.
- What is covered by the law?
Broadly speaking, anyone who makes a false or fraudulent claim upon federal dollars or who causes another to do so, has engaged in conduct covered by the law. In addition, anyone who falsely appropriates government property or, delivers to the government a service or product that is substandard or defective, may have made a false claim for payment for such a service. Congress drafted the statute to cover most conduct that may adversely affect the federal treasury. A person who has done any of the following acts has committed a violation:
1. knowingly presents or caused to be presented, to an officer or employee of the United States Government or member of the Armed Forces of the United States a false or fraudulent claim for payment or approval; 2. knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved....; 3. conspires to defraud the government by getting a false or fraudulent claim allowed or paid; 4. has possession, custody, or control of money used..by the government...and delivers, or causes to be delivered, less property than the amount for which the person receives a certificate or receipt; 5. authorized to make or deliver a document certifying receipt of property used...by the government and...makes or delivers the receipt without completely knowing that the information on the receipt is true; 6. knowingly buys, or receives as a pledge of an obligation or debt, public property from an officer or employee of the government..who lawfully may not sell or pledge the property; and 7. knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the government. - What are the penalties for making a False Claim or Fraudulent Claim?
A person who makes a false or fraudulent claim is liable to the United States Government for a civil penalty “of not less than $5,000.00 and not more than $10,000.00" for each false claim submitted. 31 USC § 3729 (1999). Moreover, the act requires the court to impose of penalty equal to 3 times the amount of damage sustained by the government. Id. This amount may be reduced to 2 times the damage sustained by the government if the wrongdoer quickly and fully cooperates with the government officials investigating the claim.
- How do you file a False Claim action?
Under the statute, a false claim complaint is filed on behalf of the United States Government in federal district court under seal. 31 USC § 3730 (b) (1999) At the same time the relator is required to file a written disclosure with the United States disclosing substantially all of the evidence and witnesses who support the complaint. Then, the United States Attorney has an initial 60 days to decide whether he will intervene and prosecute the case. 31USC § 3730 (b)(2) In most cases, the United States Attorney will seek an extension of time to make this determination and it is usually in the best interests of the private person called a relator to agree to these extensions.
During the period while the case is under seal, a special agent from the agency involved will be assigned to investigate the case on behalf of the agency. As counsel to the relator, this may require you to have multiple contacts with the United States Attorney and the investigating agent. As you provide information to them, it is imperative that you document the information that you submit, because when the case is concluded, your client’s share of the recovery is often determined by an examination of the client’s input. As a general proposition, to the extent that you can establish that the evidence and witnesses were provided by your client, then his share increases, and the converse is true also.
At the conclusion of the seal period, the United States will decide whether it will intervene. If it does, then, it will act as lead counsel with the relator’s assistance. 31 USC § 3730 (c)(1) (1999). If the government declines to intervene, then the relator - you and your client - have the right to proceed with the case without the government. 31USC § 3730(b)(4)(B)(1999).
- What is the relator’s share?
If the government prosecutes the claim, then the relator is entitled to receive “at least 15% but not more than 25%” of the proceeds. 31 USC § 3730 (d)(1) (1999) If the relator moves forward without the government’s assistance, then the relator shall receive “not less than 25% and not more than 30%” of the proceeds. 31 USC § 3730(d)(2) (1999).
In addition, the court is entitled to award reasonable attorney’s fees and expenses.
- Common Problems.
- Has the fraud or false claim been publicly disclosed?
Congress was concerned that citizens may try to take advantage of this law by canvassing the newspapers or the Congressional record for information that will lead them to the next big fraud case. To prohibit what have been termed as “parasitic” law suits, Congress does not permit actions to be pursued once the fraud has been “publicly disclosed.” Specifically, the statute states:
No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions 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, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information. 31USC § 3730 (4)(A) (1999).
- Is the client an original source?
An original source is one who has “direct and independent knowledge of the information on which the allegations are based and has voluntarily disclosed the information to the government before filing an action under this section.” 31USC § 3730 (4)(B) (1999). The meaning of this provision has been frequently litigated. You will note that public disclosure deprives the court of jurisdiction unless the case has been brought by the government or by an original source. Accordingly, if you assume that the government has declined to intervene and that a relator is proceeding on his own, then proving that the relator does not qualify as an original source is an absolute defense for the company charged with fraud.
Also, you should be aware that an original source has an obligation to disclose to the government before filing.
- Consider filing a false claim as opposed to a fraud claim.
Pursuant to 31 USC §3729 (a)(1), a person violates the False Claims Act if he “knowingly presents, or causes to be presented, to an officer of the United States or a member of the Armed Forces of the United States, a false or fraudulent claim for payment or approval.” The courts have wrestled with the meaning of “knowingly” and whether a violation of this statute requires specific intent. The word “knowingly” was present in both the pre-1986 law and the post 1986 law.
Prior to 1986, several courts held that the act required proof that the defendant acted with a specific intent to deceive the government. See, United States v. Davis, 809 F.2d 1509, 1512 (11th Cir. 1987); United States v. Aerodex, Inc, 469 F.2d 1003 (5th Cir. 1972); United States v. Mead, 426 F.2d 118 (9th Cir. 1970). Other courts concluded that an intent to deceive was not necessary to prove a pre-1986 act violation. See, United States v. Huges, 585 F.2d 284, 287 (7th Cir. 1978); Miller v. United States, 550 F.2d 17, 23 (Ct.Cl. 1977); United States v. Cooperative Grain and Supply Co., 476 F.2d 47, 56 (8th Cir. 1973); Flemming v. United States, 336 F.2d 475, 479 (10th Cir. 1964).
Subsequently, Congress defined knowing and knowingly as used in the False Claims Act to mean that the person:
- Has actual knowledge of the information;
- 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. 31 USC Section 3729 (b).
The District of Columbia Circuit did not take a position respecting whether intent was necessary to prove a False Claim under the pre-1986 law until after the amendments when it was looking back at a set of facts that arose at least in part prior to 1986. Interestingly, the Court concluded that specific intent was required if the government or the relator sought to prove a fraudulent claim, but not if the case was premised upon a false claim.
See, U.S. v. TDC Management Corp., Inc. 24 F.3d 292, 297 (D.C. Cir. 1994). The court concluded that “the intent to deceive is a requisite element of proof under the pre-1986 Act only if the government asserts that a defendant submitted ‘fraudulent’ as opposed to ‘false’ claims to the government.” Id. Thus, the court recognized a significant difference between the measure of proof to make out a false claim as opposed to a fraudulent claim.
In addition, the D.C. Circuit recognized that the Circuits were in conflict as to whether the defendant had actual knowledge in interpreting the pre-1986 law. The Court then concluded “that a party ‘knowingly presented false or fraudulent claims to the government if he had ‘actual knowledge’ or acted with ‘deliberate ignorance’ or ‘reckless disregard’ of the truth of falsity of his claims.” Id. Moreover, the D.C. Circuit concluded that it’s pre-1986 analysis is consistent with the law as it exists since the 1986 amendments went into effect.
Companies often argue that the government was aware of the facts surrounding the conduct and so the company did not make a false claim or the company did not intentionally present a false claim. See, United States v. Fox Lake Bank, 366 F.2d 962, 965 (7th Cir. 1966) However, after the 1986 amendments when Congress defined “knowing and knowingly” the courts have uniformly agreed that government knowledge does not negate “falsity.” See, United States ex rel Hagood v. Sonoma County Water Agency, 929 F.2d 1416, 1421 (9th Cir. 1991); United States v. Advance Tool Co., 902 F. Supp. 969 (D. Mo. 1995); United States v. Cripps, 460 F. Supp. 969 (E.D. Mich. 1978). That is, Congress made it plain that a violation of the act can be established without reference to the conduct of the government agent.
It is generally accepted that since the 1986 amendments, the government knowledge defense can only be used to rebut the subjective issue of intent. See, Hagood, supra, at 1421; United States ex rel Butler v. Hughes Helicopter Co., 71 F.3d 321, 327 (9th Cir. 1995). Indeed, all of the cases that I have seen that discuss the impact of government knowledge in a post-1986 action suggest that it may be relevant on the issue of intent.
But as noted above, intent may not be an issue in a false claim case as opposed to a fraudulent claim action. Since the recovery is the same whether you prove a false claim or a fraudulent claim, then it makes sense to pursue a false claim, where intent is not an issue. Removing intent from the case, deprives the defendant of one of its most successful defenses, government knowledge.
- Are you the first to file about this situation?
There is a time pressure associated with False Claims Act cases. That is, the first viable claim to be filed is the only claim recognized. Accordingly, let’s suppose that more than one person qualifies as an original source, it is possible that more than one person could be investigating a claim. The first one to file wins. Remember that.
- Has your client engaged in any criminal activity?
The person observing the fraud may also be a person who assisted and/or aided and abetted in the fraud or the cover up of the fraud. This means that your client may have criminal exposure. Be prepared to address this possibility by consulting with a criminal specialist. You need to know whether your client is the target of a criminal investigation.
- Can you corroborate your client’s story?
This questions is one asked by every lawyer who interviews a client. However, in False Claim Act cases, this is a critical inquiry because many relators have an axe to grind. That is, usually, a bad experience motivates them to come forward. A client reports possible fraud to his boss and the boss takes away his responsibilities and banishes him to a life a boredom in the basement office. Fed up, the client comes to you. Most of the clients that I have interviewed have had a bad experience of some kind with the company that allegedly committed. It is this experience that motivates the relator to come forward. This facts carries a number of implications with it. Primarily, this means that most clients are “tainted” and much of your job focuses on corroborating their story. In addition, many of these clients are upset and angry, and as experienced lawyers, you know that this requires special counseling skills. On the other hand, many relators are absolutely fascinating individuals with interesting careers and educational backgrounds that make them stand apart from the average client.
- Has the fraud or false claim been publicly disclosed?
United States Code 31 Section 3729 (1999).
Carefully reading these section suggests a Congressional intent to cover most behavior which cause the taxpayers to lose money.
Conclusion
Some have estimated that fraud and false claims account for a loss to the taxpayers equivalent to 1% to 10% of the annual federal budget. When you consider the budget is now approximately 3 Trillion dollars, the potential for recovery and performing a needed service to the public is great. Relators will not come forward unless they can be assured of quality representation to guide them through the False Claims Act maze. In my view, this is a natural role for the plaintiff’s attorney to assume. I encourage you all to be mindful of this law and clients who may be “relators.”