Effective tomorrow, New York’s False Claims Act becomes one of the strongest state laws of its kind in the country, even exceeding the federal FCA in several respects. In addition to adopting many new amendments to the federal FCA, New York’s statute is unique in expressly providing that violations of the state’s tax code are a basis for qui tam suits, and in providing a process for qui tam plaintiffs to move to compel New York’s Department of Taxation and Finance to disclose tax records. In contrast, the federal statute expressly bars FCA suits based on the Internal Revenue Code. Other amendments to New York’s liability, damages, and qui tam enforcement provisions are also more extensive than the federal FCA. As a result, New York’s new FCA has been touted as a “false claims act on steroids.”
Liability for Tax Law Violations
New York’s FCA now extends liability―which includes treble damages and civil penalties―to false or fraudulent claims, records, or statements made under the state tax laws if
- The defendant’s net income or sales equal or exceed $1 million for the tax year, and
- Damages pled in the qui tam action exceed $350,000.
As a result, individuals and organizations that satisfy these thresholds (which would include most small businesses) now face the most punitive civil enforcement mechanism in common practice. A state FCA case based on underpayment of taxes results in a judgment of three times the tax loss, plus civil penalties of $6,000 to $12,000 per false return. The reduced intent or knowledge standard (“reckless disregard”) now applies to state tax cases brought as state FCA cases.
As with any state qui tam case, the state attorney general has the right to investigate the case and decide whether to intervene. In token appreciation of the complexity of state tax law, New York’s FCA requires the state attorney general to consult with the commissioner of the New York Department of Taxation and Finance (“the Department”) prior to intervention.
As is also true in other qui tam cases, if the attorney general declines to intervene and take over the case, the private qui tam relator can still prosecute the case. In a declined case, relators may move to compel the disclosure of tax records from the Department if they first obtain the attorney general’s approval. Apparently, these are the only impediments to private qui tam enforcement of violations of New York’s tax code. Conceivably, the private plaintiff could even assert a claim to share in the state’s recovery in another proceeding under New York’s pre-existing “alternate remedy” provision. See N.Y. State Fin. Law §190.5(c) (“If any such alternate civil remedy is pursued in another proceeding, the person initiating the action shall have the same rights in such proceeding as such person would have had if the action had continued under this section”).
The federal FCA expressly prohibits FCA actions based on violations of the Internal Revenue Code, and this prohibition is designed to allow the IRS to enforce the tax code as it sees fit. See United States ex rel. Lissack v. Sakura Global Capital Mkts., Inc., 377 F.3d 145 (2d Cir. 2004). See generally Boese, Civil False Claims and Qui Tam Actions § 2.02[I] (Wolters Kluwer Law & Business) (3d ed. & Supp. 2010-2). Although Congress amended the Internal Revenue Code in 2006 to allow whistleblowers to report persons for failing to pay taxes, both the reporting mechanism and the whistleblowers’ recovery are enforced administratively through the IRS. See I.R.C. § 7623 (2006). Some states, including Florida, do not expressly prohibit false claims actions based on tax violations, but New York is the first state to expressly authorize these suits and to set forth parameters and procedures for them in its state FCA.
Whether this is a good or bad idea remains to be determined. In 1986, when Congress was considering the amendment to the federal FCA adding “reverse false claim” liability, it was clear that the tax exclusion was essential to the passage of that provision. The IRS did not want private qui tam enforcement of federal tax laws. When Congress added the “whistleblower” provision to the Internal Revenue Code in 2006, it made clear that, if the IRS declined to prosecute the case, the whistleblower was prohibited from proceeding. Tax policy and enforcement was simply too important to delegate it to the plaintiff’s bar. New York, undoubtedly at the request of the qui tam relator’s bar, declined to follow that more prudent course, and with this new provision, now opens up private enforcement of state taxes to the trial bar. No one knows just what that means.
Amendments to Liability, Damages, and Qui Tam Provisions under the New York FCA
New York has also adopted many of the amendments recently included in the federal FCA. See FraudMail Alert No. 09-05-21 (FERA’s FCA amendments); FraudMail Alert No. 10-03-24 (PPACA’s FCA amendments); FraudMail Alert No. 10-06-29 (Wall Street Reform Act’s FCA amendments). New York’s FCA now equals or exceeds the federal law in several other respects, including:
- Imposing liability for consequential damages in addition to treble damages;
- Adopting FERA’s revisions to the FCA’s liability provisions on false statements supporting false claims, conspiracy, and reverse false claims;
- Allowing state and local governments’ complaints to relate back to the original qui tam complaint for statute of limitations purposes;
- Requiring public disclosures in government reports, hearings, audits, or investigations (“Category 2” public disclosures) to be “on the public record or disseminated broadly to the general public,” and specifying that FOIA responses are not public disclosures;
- Providing that internet posts about allegations or transactions do not publicly disclose them. (Apparently, in New York, “public” no longer means public.)
New York’s Retaliation Provision
In addition to these enhanced liability, damages, and qui tam provisions, New York’s retaliation provision specifies that “any current or former employee, contractor, or agent of any private or public employer” is protected from retaliation for “lawful acts” in furtherance of a qui tam action or other efforts to stop a violation. The definition of “lawful acts” that qualify for this protection is extremely broad:
For purposes of this section, a "lawful act" shall include, but not be limited to, obtaining or transmitting to the state, a local government, a qui tam plaintiff, or private counsel solely employed to investigate, potentially file, or file a cause of action under this article, documents, data, correspondence, electronic mail, or any other information, even though such act may violate a contract, employment term, or duty owed to the employer or contractor, so long as the possession and transmission of such documents are for the sole purpose of furthering efforts to stop one or more violations of this article. Nothing in this subdivision shall be interpreted to prevent any law enforcement authority from bringing a civil or criminal action against any person for violating any provision of law.
This extraordinary provision appears to allow the unauthorized removal of documents from the workplace by current and former employees, contractors, and agents. Because federal, state, and local governments are “public employers,” and thus are covered by this provision, one wonders whether public and private employees are now permitted to steal government documents in order to bring a private qui tam suit.