Sweep of False Claims Act Only Gets Bigger

As the government ramps up its war on fraud, companies ought to prepare to do battle with more False Claims Act lawsuits.

Thanks to the passage of the Fraud Enforcement & Recovery Act earlier this year, the already broad scope of the False Claims Act, the government’s primary tool to guard against fraud, has grown even broader. That’s going to translate into more lawsuits against more companies.

“Even before FERA was enacted, the False Claims Act had very broad application,” Peter Hutt, a partner in the law firm Akin Gump, noted during an Oct. 15 Webcast on the law sponsored by Deloitte. Now that it has been expanded even further, “there are many more businesses subject to its reach and it’s critical they understand how the statute works and what kinds of risks it poses.”

And contrary to popular belief, Hutt and others warned, government contractors are not the only ones out there that should be wary of the False Claims Act’s bite.

The FCA was originally passed in 1863 to protect the federal government from fraud in Civil War defense contracts. It was rarely used until reforms in 1986 allowed private citizens to file “qui tam” motions on behalf of the government, and collect some of the proceeds in a settlement. Nearly 6,000 claims have been filed since then.

FERA, enacted in May, expands the universe of companies subject to False Claims Act liability and increases the penalties of failing to return an overpayment to the government. Most notably, it also extends whistleblower protections to non-employees and strengthens the government’s ability to use civil investigative demands, experts noted during the event.

“The new, broad language means that a lot of companies that haven’t had to worry before now need to assess whether they receive any funds that are ultimately traceable back to the U.S. [government] and take steps to mitigate the risk of liability for false claims,” Hutt said.

What’s more, FERA provides more than $500 million in additional resources during the next two years to federal enforcement agencies, including the Department of Justice and the Securities and Exchange Commission, to bolster federal financial fraud enforcement. That’s likely to mean more government investigations, more prosecutions, and more civil proceedings.

Williams

“We’re in a new age of oversight,” said Deloitte Financial Advisory Services chief executive David Williams.

“[B]illing the government for goods and services never delivered, submitting false service records, or billing for tests or work not performed can all be potential grounds for FCA liability.”

—Yvonne Craver,

Partner,

Deloitte Financial Advisory Services

FERA expands the definition of fraud beyond procurement and government contracting to include fraud related to government spending in any form: mortgage fraud, commodities fraud, or fraud related to the use of funds provided under the Troubled Asset Relief Program (which was in the news last week when one of the program’s top overseers speculated that much of TARP’s $700 billion has probably been squandered).

For example, billing the government for goods and services never delivered, submitting false service records, or billing for tests or work not performed can all be potential grounds for FCA liability, noted Yvonne Craver, a partner with Deloitte Financial Advisory Services.

Craver

Craver, Williams, and Hutt all expect more FCA lawsuits, both from the Justice Department and byqui tam plaintiffs. Hutt also expects to see more “reverse false claims” liability, which is imposed when a contractor knowingly tries to avoid fulfilling an obligation to the government.

The reverse liability provision hasn’t been used much since 1986, Hutt says, because it has been interpreted to apply only to fixed obligations. He now expects reverse liability to expand to contingent obligations, such as the potential imposition of a fine. In other words, if you end up owing money to the government and try to avoid paying up, you could face more liability under the expanded FCA.

That liability can be costly. Companies found liable for false claims are subject to treble damages (three times the government’s actual out-of-pocket losses) and penalties of $5,500 and $11,000 per false claim. For an idea of how quickly that can add up, Justice Department statistics show that the government has collected more than $21 billion under the False Claims Act since 1986, including $1.34 billion in 2008 alone.

And the Litigation Costs

Companies also face the potentially huge costs of fighting a false claims lawsuit. Craver noted that few cases go to trial, but settlement negotiations can take years, draining away corporate time and money. More than 500 new FCA matters were started in fiscal 2008, she said, and almost 70 percent of them came from qui tam plaintiffs. In addition, more than 700 FCA cases were open at the start of fiscal 2009.

Those trends aren’t expected to slow any time soon. Craver said that the combination of recession, high unemployment, and FERA putting more money and more teeth into the False Claims enforcement “is the perfect storm for qui tam cases.”

QUI TAM STATS

Below are some statistics on False Claims Act complaints filed as qui tam motions, and how often the government did or did not join the suit (through Sept. 30, 2008):

Status

Active

Settlement,Judgment

Dismissed

Unclear

Total

U.S. Intervened

138

1,000

52

0

1,190

U.S. Declined

566

219

3,348

1

4,134

Under Investigation

875

6,199

Civil Division, U.S. Department of Justice (Sept. 30, 2008).

Notably, FERA extends whistleblower protections to sub-contractors and agents, and allows government contractors and agents, not just employees, to sue for retaliation for any effort to stop a False Claims Act violation—even if an FCA fraud lawsuit itself is never filed.

The law also expands the use of Civil Investigative Demands, a tool the government can use to force companies to turn over documents and subject employees to depositions.

In the past, Hutt said, only the attorney general could issue CIDs. Now FERA allows him to delegate that authority to subordinate Justice Department officials. Moreover, the Justice Department can share that information with other federal, state, or local government agencies, and it can be used in any subsequent proceedings, including qui tam actions where the government doesn’t intervene.

Indeed, Hutt noted, the government can now take depositions of employees even before a lawsuit is served on a company. “If CID is received, it must be acted upon immediately,” he warned.

Craver also reminded those subject to Federal Acquisition Regulations (mostly government contractors) to beware of how the FCA intersects with those rules. Last December a FAR change imposed mandatory disclosure to the government of any credible evidence of any False Claims Act violations or significant over-payment.

Hutt

Finally, Hutt warned that additional amendments to the False Claims Act are possible. Legislation is pending that would eliminate or weaken two of companies’ main defenses against meritless qui tam lawsuits. One pending bill proposes to eliminate the public disclosure bar, which bans qui tam claims based on publicly disclosed information; another would weaken the provision of the statute that requires qui tam plaintiffs to plead their allegations with “particularity and specificity.”

“So, it would be wise to stay tuned,” he noted.