On Thursday March 5, the U.S. Senate Judiciary Committee reported out legislation that, if passed by the full Senate and the House of Representatives in its current form, could significantly expand the range of conduct subject to liability under the federal civil False Claims Act (FCA) and its whistleblower or qui tam provisions, 31 U.S.C. §§ 3729, et seq. The FCA amendments reported out March 5 are contained in S. 386, the Fraud Enforcement and Recovery Act of 2009, or “FERA.” Senator Chuck Grassley (R-IA), Judiciary Committee Chairman Patrick Leahy (D-VT), and Senator Ted Kaufman (D-DE) introduced S. 386 on February 5. While included in legislation targeting mortgage fraud, the amendments to the FCA will likely broaden the scope of liability for a wide range of programs and activities where federal funds are disbursed by others to advance a “Government purpose or interest,” including health care, construction, manufacturing, research, energy and education.
The FCA is a civil statute under which the government can pursue treble damages and a civil penalty of $5,500 to $11,000 for each false claim, and each false statement used to get a false claim paid. The FCA is unusual because it permits private citizens, i.e., “whistleblowers,” to bring suit in the name of the government and their own name and to receive a bounty of 15-30 percent of any recovery, plus attorneys’ fees and costs.
The bill now moving through the Senate would amend Section 3729 to:
- Eliminate the limitation that liability attach only to false claims presented directly to the government.
- Replace the limitation that liability only attaches to a false claim or statement used “to get” a false claim paid by the federal government with the requirement that it be “material” to payment of a false claim.
- Create new liability for concealing, avoiding, or decreasing an obligation to pay money to the government, including the “retention of any overpayment.”
- Expand the universe of false claims covered by the FCA beyond those submitted to the federal government or its agents for federal funds.
- Apply retroactively in many key respects to conduct predating its enactment.
S. 386 is one of two FCA-related bills Senator Grassley introduced during his “Accountability in Government Week.” The second bill, S. 458, the False Claims Act Clarification Act of 2009, would revive debate from the last Congress over a series of amendments aimed at strengthening the hand of whistleblowers who sue under the FCA on behalf of the United States. S. 458 was introduced February 24 and co-sponsored by Senators Richard Durbin (D-IL), Chairman Patrick Leahy (D-VT), Arlen Specter (R-PA), and Sheldon Whitehouse (D-RI). FERA and the FCA Clarification Act would similarly amend the liability provisions of the FCA. Among other things, those amendments are a reaction to a Supreme Court decision from last term perceived by some to exclude from the FCA false claims submitted by a subcontractor to a contractor. Passage of FERA would likely cause debate of the second bill to focus on proposed expansions of the whistleblower provisions.
Additional information about each bill is provided below:
S. 386 – The Fraud Enforcement and Recovery Act of 2009 (FERA)
- This bill is primarily aimed at improving the government’s ability to investigate and prosecute financial frauds such as mortgage, securities, and financial institution fraud, and other frauds related to federal assistance and relief programs (such as the Troubled Assets Relief Program or TARP), although the FCA provisions clearly have the additional purpose of covering stimulus and other funds that flow through state and foreign governments.
- The last section of the bill proposes a revision to Section 3729 of the FCA—the provision containing the FCA’s substantive liability provisions. Specifically, the bill would amend Section 3729 to:
- Eliminate the “presentment” requirement requiring that claims be presented directly to the government
- Instead, the FCA would cover claims any time the money used to pay that claim comes from or will be reimbursed by the government. This would permit suits in particular against subcontractors and against third-party brokers that purchase distressed assets with TARP money. This change would alter a key limitation on the scope of the FCA that the Supreme Court relied on last term in interpreting the FCA in Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).
- Eliminate the limitation in subsection (a)(2) that currently requires that a false claim or statement be used “to get” a false claim paid by the federal government.
- Instead, the bill only requires that a false record or statement “material”1 to a false claim be made or used. This would effectively overrule the Supreme Court’s decision in Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008). In that case, the Supreme Court held that there could be liability under subsection (a)(2) only if the defendant submitted a false claim intending that the federal government itself pay the claim. Id. at 2128.
- Add a new liability provision for concealing or improperly avoiding or decreasing an obligation to pay money to the government regardless of whether the defendant submitted a false claim to get the money or used a false statement to hide it.
- The bill specifies that the “obligation” to pay money to the government could arise from a fixed or contingent duty (including from a contract, grant, license, or statute) and “the retention of any overpayment.” The overpayment provision is particularly troubling for entities that engage in a periodic or regular process for reconciling underand overpayments with the government.
- Expand the definition of “claim” beyond claims to the federal government.
- Claims, under the bill, would include any request or demand for money or property made not only to an officer, employee, or agent of the United States, but also to any contractor, grantee, or other recipient of federal funds if the money or property is “to be spent or used on the Government’s behalf or to advance a Government program or interest” so long as the federal government has provided or will reimburse the contractor, grantee, or other recipient for any portion of the money or property requested or demanded.
- This would effectively overrule the decision in U.S. ex rel. DRC v. Custer Battles, 376 F. Supp. 2d 617 (E.D. Va. 2005), which held that the FCA did not encompass claims for non-U.S. funds held in trust by the United States, and the decision in U.S. ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004), which held that under subsections (a)(1) and (a)(2) of the FCA, the false claim must be presented to a U.S. Government official or employee and not merely to a recipient of federal funds.
- The bill specifies that most of these changes would not be applied retroactively to conduct predating its enactment. But one change would be retroactive: the requirement that a false record or statement be material to a false claim, rather than that a false statement be used to get a false claim paid or approved, would be retroactive to the date of the Supreme Court’s decision in Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008). Were the bill to pass, extensive litigation is likely to focus on whether imposing new liability for past acts would be constitutional.
After the sponsors accepted a few amendments to S. 386, the Judiciary Committee passed FERA by voice vote with no dissents. Senators Charles Schumer (D-NY) and Jon Kyl (R-AZ) both raised issues and circulated additional amendments that seem likely to require further action before the bill can be taken up by the full Senate.
S. 458 – The False Claims Act Clarification Act of 2009
- This bill is very similar to the legislation introduced last year as the “False Claims Act Correction Act of 2008.” Like S. 386, the Clarification Act seeks to overturn court decisions interpreting the FCA in ways that the FCA plaintiffs’ bar does not like, and that Senator Grassley suggests are contrary to the intent of the 1986 Amendments. Unlike the S. 386, however, this bill would broaden significantly the ability of whistleblowers to press litigation for FCA violations after the government declines to intervene by abolishing public disclosure as a defense.
- Key amendments beyond those incorporated in FERA include:
- Limit application of the public disclosure bar and remove it as a jurisdictional bar.
- The bill would reduce the circumstances in which prior disclosure of facts relevant to an FCA claim in an investigation, news media report, or legislative proceeding would bar recovery by a relator bringing an FCA action based on those facts, thus substantially narrowing the applicability of the Supreme Court’s decision in Rockwell International Corp. v. United States, 549 U.S. 457 (2007).
- The bill would not permit defendants to invoke the public disclosure bar, thereby eliminating one of the basic defenses that courts regularly rely on to terminate meritless FCA claims.
- Extend the statute of limitations to 10 years for relators, and permit the federal government to file claims even further out than that.
- The statute of limitations in the FCA currently permits a civil action to be brought within 6 years of the violation’s occurrence or within 3 years after the date “when facts material to the right of action are known or reasonably should have been known by [the Government], but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.” 31 U.S.C. § 3731(b). In cases brought by private relators, the courts have held that the FCA imposes a 6 year statute of limitations.
- The bill expands by 4 years the limitations period for relator-suits, to a 10 year period.
- The government gets to file related claims beyond the ten-year limit as long as a relator filed suit within the 10-year limitations period.
- Recognize the right of government employees to bring qui tam actions.
- While the government generally takes the position today that its own employees may not sue and recover a bounty under the qui tam provisions based on information obtained while they were “on the government payroll,” the bill creates a pathway for the filing of such suits and would permit the government to move to dismiss them only in certain limited circumstances.
- Add a reporting requirement.
- The bill would require the Department of Justice to report annually to Congress on each settlement or compromise of any claim entered into in excess of $100,000. The report would have to specify numerous details about the amount of the settlement or compromise, including inter alia, the amount of estimated actual damages, the potential minimum and maximum civil penalties, how the settlement or compromise dollar value was reached, the amount paid to each state in claims involving Medicaid, and the amount paid to any relator. The Department of Justice is expected to object strenuously to this new reporting requirement.
- Include government contractors and agents in the class of individuals protected from retaliation for bringing an FCA claim.
- Permit the government to share with the relator information discovered through preintervention civil investigation.
False Claims Act Legislation Moving in State Legislatures
In addition to working with several groups and clients to monitor the progress of the federal legislation, Hogan & Hartson attorneys have been monitoring and offering testimony on false claim and qui tam legislation pending in several state legislatures this session.
To date, 22 states and the District of Columbia have enacted qui tam statutes. Most of these state FCAs apply only to Medicaid claims. Some, like California, apply more broadly to all state programs. Legislatures in the following states are considering amendments to existing FCAs or enactment of new statutes in their current legislative sessions:
- New Jersey
- New Mexico
- South Carolina