False Claims Act

Congress Broadens False Claims Act; DOJ Reaches Sizeable Whistleblower Settlements

Not only has the federal False Claims Act, a Civil War-era statute that encourages whistleblowers to report and sue over government fraud by giving them a piece of the resulting recovery, been a reliable tool to root out and prevent fraud on the government — like it or not, it happens to have the upside of generating a lot of revenue. In other words, during these austere times, the False Claims Act represents a source of new money for the government — a fact not lost on the current Congress or the Justice Department.

In fact, Congress just expanded the False Claims Act. In the midst of injecting significant federal dollars into the private sector to respond to the economic crisis, Congress passed the Fraud Enforcement and Recovery Act of 2009, which the president later signed. The new law expanded the False Claims Act in several key ways, which ought to increase the recoveries the government obtains each year.

Perhaps the most notable change to the Act, which was historically triggered by false or fraudulent claims made to federal government officials, is that it now covers claims for payments that are presented even to government contractors or grant recipients, so long as there is a nexus to government funds. Now subcontractors on federal projects and subgrantees involving federal programs are now firmly among the Act’s targets.

In addition, the amendments also broaden the scope of liability to include the knowing retention of government overpayments. This change promises to create countless legal issues for companies in a position to receive, innocently, too much government money.

Moreover, in a significant move to expand the government’s army of willing whistleblowers, Congress expanded the Act’s anti-retaliation provisions. These provisions, previously limited by statute and case law to cover only the target defendant’s employees, now benefit both contractors and agents. With this change, new classes of potential whistleblowers are now protected if they come forward, report, and sue over government fraud. In addition to a share in the recovery, they now also enjoy the statutory protections from retaliation by the company that they accuse of fraud.

Finally, the new law makes civil investigative demands much easier for government lawyers to obtain. Namely, the amendments provide that these demands no longer require approval by the attorney general. Instead, the approvals can happen at a much lower level. This change ought to accelerate investigations, and it may even broaden their scope by giving government lawyers and investigators more latitude to cover subject matter and topics beyond those that might have been covered under the old law.

In the meantime, just down the road a few blocks from the Capitol dome, the Justice Department has been busy making significant progress recently against pharmaceutical companies, military contractors, large hospital corporations, and others. In fact, in the last few years, companies in these sectors have paid billions to the Treasury Department to settle alleged False Claims Act violations. The allegations involved activities ranging from the sale of defective or untested military components and other products to routine overbilling and improper reimbursement practices. These companies frequently have pockets deep enough to make them worth pursuing — in other words, they can afford a settlement payment or a judgment large enough to justify the expenditure of time and money both by a law firm representing a whistleblower as well as by the Justice Department.

So far in 2009, five name-brand corporate players paid a collective $1 billion to settle False Claims Act cases. With these and a few others, the Justice Department is now on track to have a banner False Claims Act year and surpass the $1.34 billion recovered in fiscal year 2008. In exchange, the whistleblowers who brought these cases are collecting tens upon tens of millions of dollars in reward money. In the recent Northrop Grumman case, the whistleblower’s share exceeded $48 million. In the case of Quest Diagnostics, the whistleblower’s share was approximately $45 million. The settlement numbers in 2008 and so far in 2009 should only keep increasing with the impact of the new amendments and the recent volume of new federal dollars making their way into the private sector.

False Claims Act enforcement, settlement pressures, and legislative support are all trending toward increased opportunities for whistleblowers and a correspondingly increased risk for companies. With trying economic times, budget pressures, and layoffs of previously loyal employees now upon us — and a vibrant False Claims Act statute and enforcement regime looking for recoveries to benefit the Treasury Department — companies cannot allow their corporate culture and employee zeal for short-term rewards to generate False Claims Act exposure and risk long-term company survival.

The risk of False Claims Act liability is real, and recent developments make it clear that the risk will only increase with time. The days of passive prevention and hoping for the best are over. Companies that forge ahead with a proactive understanding of the risk — and management of it — will be well served.

For more information, please contact:
John L. Sinatra, Jr.