Following the federal government's example, states are increasingly looking to their own false claims act ("FCA") statutes to combat procurement and healthcare fraud. This trend is being driven by two main factors: (1) the huge recoveries by the Department of Justice ("DOJ") under the federal FCA – $5.7 billion in Fiscal Year 2014 alone; and (2) a federal statute that provided a financial incentive for states to mirror their own FCAs on the federal FCA with regard to healthcare fraud. This state-level activity represents a new front in the battle against procurement fraud, one that government contractors must be aware of to fully analyze and mitigate risks when contracting with state entities. 

Currently, 33 states and the District of Columbia have a false claims statute. Of these, 11 states have FCAs that are limited to healthcare fraud; the remaining statutes penalize a broad range of false claims. Many – but not all – of these state FCAs have provisions allowing for whistleblowers to file qui tam actions on behalf of the state government and to share in any recovery.

Given the enormous recoveries under the federal FCA, states see an opportunity to recover funds by expanding their own FCAs. While healthcare sector and, more recently, financial sector recoveries account for the majority of funds recovered under the federal FCA, significant liability risks exist in the government contracts space, with approximately $300 million of DOJ's recoveries in FY 2014 flowing from procurement and grant cases. Of the $5.7 billion recovered in FY 2014, cases filed by whistleblowers accounted for nearly $3 billion, with the whistleblowers receiving $435 million. 

In addition, under the Deficit Reduction Act of 2005 ("DRA") the federal government incentivized states to implement or expand their FCAs. Under the DRA, if a state's FCA is as robust as the federal FCA, particularly with respect to the whistleblower incentives and protections, then the state is authorized to keep a portion of the federal government's share of recovered Medicaid funds in addition to the state's own recoveries. Since the DRA was passed, a number of states have revised their FCAs and sought to become eligible for this incentive. The Department of Health and Human Services publishes its state FCA reviews here. Last week, Maryland, New Jersey and Vermont became the latest states to take action to either establish or expand the scope of existing FCA legislation:

  • Vermont – On February 4, legislation was proposed in Vermont that would establish a state false claims act. The proposed law in many ways mirrors the federal FCA. 
  • New Jersey – A bill was voted out of the New Jersey Assembly's Health and Senior Services Committee on February 5. If passed, the law would allow New Jersey's FCA to apply retroactively to certain civil actions for false claims made prior to March 13, 2008, the date the original statute took effect. The bill was introduced in response to an October 2011 appellate ruling that held the New Jersey FCA applies only prospectively.
  • Maryland – On February 6, a bill was introduced in Maryland that proposed to expand the scope of the state's existing false claims statute to cases beyond Medicaid and healthcare-related fraud. The current statute, enacted in 2010, is limited to healthcare. 

Some state FCA actions based on alleged procurement fraud have already resulted in large settlements. For example, on January 14, 2014, a California judge approved a $68.5 million settlement to resolve allegations that Office Depot allegedly overcharged California government agencies for office supplies in violation of the state's FCA. Office Depot settled similar overcharging allegations with Florida in 2010 for $4.5 million.

Because of the incentives provided by the DRA and the size of the recoveries under the federal FCA, we expect state legislatures to continue to expand state FCA statutes. As state prosecutors and whistleblowers become more familiar with these authorities, companies contracting with state entities will face increased risk of state FCA action. It is important that contractors understand this new legal landscape and have policies and procedures in place to adequately mitigate this risk.