Federal Qui Tam Litigation: The Governement's Watchdog
"If there has been any crime, it must be prosecuted. If there has been any property of the United States illegally transferred or leased, it must be recovered. . . . I propose to employ special counsel of high rank drawn from both political parties to bring such actions for the enforcement of the law.” Calvin Coolidge, Statement on the Teapot Dome Scandal.
A current or former employee of a corporation walks into your office with a story about fraud against the federal and state governments. This article will guide you through the process of evaluating a potential federal qui tam action, including the complex statutory issues of public disclosure and original source. It will also provide guidance into the mechanisms for proper preparation and filing, as well as some insight into the more common and successful types of qui tam actions.
II. History of the False Claims Act
The federal False Claims Act (FCA), initially passed in the Civil War-era and later updated by the 1986 amendments, provides private citizens with monetary incentives to report fraud, including Medicaid fraud, by government contractors. Once a private citizen, usually an employee of the company that is defrauding the government, blows the whistle, the Department of Justice (DOJ) will investigate the case and decide whether it wants to intervene. If any money is recovered, the whistleblower, known as a relator, receives a substantial reward. Since 1986, the federal government has recovered just over $12 billion dollars from false claim submissions, 2 and Texas alone has recovered approximately $5 million dollars. 3
III. Filing a Qui Tam Suit—The Basics
a. Preparing the Disclosure Statement
The disclosure statement is perhaps the most essential document a relator prepares when initiating a qui tam suit. Section 3430(b)(2) states that a relator must provide the government with a “written disclosure of substantially all material evidence and information” possessed.4 The primary purpose of this requirement “is to provide the United States with enough information on the alleged fraud to be able to make a well reasoned decision on whether it should participate in the filed lawsuit, or allow the relator to proceed alone.” 5 The authority on exactly what the disclosure statement should contain is relatively sparse.6 Some federal circuits hold that the disclosure should only recite the relevant facts, 7 and others hold it should also include such information as the relator’s legal theories and analysis .8 Generally speaking, it is not recommended that relators merely recite a general overview of the case. 9 The government is inundated with many promising qui tam cases, and will reject your case if there is no measurable support for your initial contentions. In that regard, unless you are in the minority, and a relator looking for the government to decline intervention, with the opportunity to proceed solo for a greater percentage of recovery, but with the attendant costs of litigation, be as thorough as possible with your disclosures. 10 Whatever you decide, do not forestall filing the disclosure statement. Although investigations should be complete, disclosure statements can always be supplemented. As will be discussed, it is important to prepare the disclosure statement as soon as possible in order to be the first to file.
b. Filing the Complaint
Procedurally, it is advantageous to expeditiously investigate the relator’s claims and file suit in federal court 11 based on the following two different jurisdictional bars: the first to file bar 12 and the public disclosure bar. 13 The complaint is filed in camera and is kept under seal for at least 60 days. 14 A relator can also proceed under one of the state qui tam statutes as a matter of pendant jurisdiction, or in the applicable state jurisdiction.
During the 60 day time period, the Department of Justice (DOJ) has the opportunity to investigate the claim and review the supporting evidence and materials. 15 In practice, it is not uncommon for investigations to proceed for one to two years before the government completes its investigation and/or the court lifts the seal. 16 While the complaint is under seal, the DOJ can exercise a number of options. It can elect to join the lawsuit, 17 decline to join the lawsuit, 18 move to dismiss the action, 19 or attempt to settle the action prior to a formal investigation.20
1. Government Intervention
Under the statute, if the government elects to join the lawsuit, it has primary responsibility for prosecuting the case and can limit the relator’s role. 21 However, if the government intervenes, the FCA allows the relator to continue participating in the litigation subject to certain enumerated conditions. 22 For example, the court may limit the number of witnesses the relator may call, the length of the witnesses’ testimony, or the length of the relator’s cross-examination. 23 All of these limitations are discretionary, and the court may impose them if the relator’s participation in the case would be repetitious, irrelevant, or harassing to the government’s prosecution. 24
The FCA also contains several additional provisions that limit the relator’s role in the litigation. For example, the FCA allows the government to intervene in the lawsuit at any time upon a showing of “good cause.” 25 The FCA also allows the DOJ to stay discovery when the relator’s actions “would interfere with the government’s investigation or prosecution of a criminal or civil matter arising out of the same facts.” 26 The government is also permitted to pursue the action through an alternative remedy such as administrative relief. 27
Even if the government decides to intervene in your case, you should still fully participate in the investigation and subsequent litigation. The FCA provides a relator’s share of at least 15 percent, even if you do nothing more than file the action in federal court and allow the government to prosecute your case. 28 However, it would be a financial mistake to idly sit back and watch potential monetary gain slip away. 29 Congress created a large award of up to 25 percent for relators who actively assist in the investigation.
2. The Government Declines Intervention
You should pursue your case vigorously, assuming from the start that the government is not going to intervene. 30 Statistically, the government intervenes in approximately 18 percent of all qui tam cases filed. 31 If the government elects not to intervene, you have the right and obligation to litigate the case. 32 The government’s role will then be limited to receiving copies of deposition transcripts and pleadings filed during the course of litigation. 33 However, in order to receive transcripts and pleadings, the government is required to request the documents and pay for their production. 34 When the government declines to intervene in your case, the DOJ will send you a standard declination letter outlining your duties and responsibilities in continuing the prosecution of your case. After you receive the declination letter and the seal is lifted, you have 120 days to serve the defendant. 35
IV. What Do You Have to Prove?
As a general rule, the FCA subjects an individual or company to liability for “knowingly” submitting or causing the submission of a false claim.3 6 The FCA covers a broad range of misconduct potentially harmful to the federal treasury. The Supreme Court held that “the [FCA] was intended to reach all types of fraud, without qualification, that might result in financial loss to the government.” 37 The Court noted that the “statute reaches beyond ‘claims’ which might be legally enforced, to all fraudulent attempts to cause the government to pay out sums of money.” 38 Most FCA cases are filed under subsections (a)(1) and (2) of section 3729. 39 Regardless of what section the case is brought under, all of the causes of action listed in section 3729(a) include three common elements that must be established to prove a violation under the FCA: (1) a “claim” must be presented to the government by the defendant, or the defendant must “cause” a third party to submit a claim; (2) the claim must be made “knowingly”; and (3) the claim must be “false” or “fraudulent.” 40
V. Typical Types of Qui Tam
a. Health Care
1. Best Price
Best Price is the lowest price the manufacturer sells a covered outpatient drug to any purchaser in the United States, inclusive of cash discounts, free goods, volume discounts and rebates. 41 The Best Price provision ensures that the government is being provided the lowest price on drugs. Federal law prescribes that drug manufacturers must pay rebates to the states to insure that the Medicaid program is receiving the best price on covered drugs. 42 Best Price schemes are a frequent type of health care fraud case. 43 two major areas of fraud involving Best Price violations are inaccurate pricing data44 and kickbacks. 45
The Federal Food and Drug Administration (FDA) must approve all prescription drugs sold in the United States, and assign particular indication(s) depending on the drug’s safety and efficacy. Drug companies will attempt to expand the market for their product by promoting off-label usages. If a governmental Medicaid or Medicare program pays for these non-approved uses, a false claim may arise. 46 Although physicians are free to prescribe a drug for an off-label use, the FDA prohibits pharmaceuticals from distributing literature urging doctors to use the drugs in non-approved ways. 47 Once the FDA approves a drug for a certain use, it must be promoted by the manufacturer for that use, not a financially preferred use. Reimbursement by Medicaid is generally prohibited unless the drug is FDA-approved or is being used for a medically accepted indication.48
3. Facility Deficiencies
Long-term health care facilities will either be too aggressive in patient treatment, or deny the essential medical care in order to increase their profits. 49 Although prescribing unnecessary treatment is prohibited, many reported schemes are also accomplished “by ordering fewer tests, using fewer supplies, employing less staff and reducing referrals to specialists.” 50 The courts have found that these tactics violate the Nursing Home Reform Act, the Social Security Act, and Medicare/Medicaid laws. 51
B. Procurement of Government Contracts
As previously noted, the FCA was first launched to combat fraud perpetuated by government contractors during the Civil War. 52 Following an intense congressional investigation, it was discovered that the federal government was “billed for nonexistent or worthless goods, charged exorbitant prices for goods delivered, and generally robbed in purchasing the necessities of war.” 53 Congress wanted to stop the plundering of the public treasury. 54 These areas continue to be of great concern for the federal government. Recent examples of how contractors have defrauded the federal government are discussed below.
1. Government Loans
In Neifert-White, the question presented to the Supreme Court was “whether the [FCA] applies to the supplying of false information in support of an application to a federal agency, the Commodity Credit Corporation (CCC), for a loan.” 55 The Supreme Court held that the term “claim,” as used in the FCA, should not be given a narrow reading, and should be read to reach all fraudulent attempts to cause the government to pay out sums of money. 56 The FCA will not apply, however, if the government is merely a guarantor and not the lender. Guarantying a loan only creates an inchoate offense, and a false claim will not result until there is a claim for payment from the government. 57
2. False Certifications
A false certification occurs when the government has conditioned payment of a claim upon the certification of compliance with, for example, a statute or regulation. The claimant submits a false or fraudulent claim, within the meaning of the FCA, when he or she falsely certifies compliance with that statute or regulation. 58 These certifications can either be express or implied, depending in which circuit the qui tam complaint is filed. 59 As stated previously, in order to be liable under the FCA, there must be a “claim,” that is made “knowingly” and that is “false.” Statutorily these are the only requirements. However, the circuits are split on whether or not there is a fourth requirement that the claim must also be “material” to the government’s decision to pay. 60 Consequently in some circuits, if the government knew about the false claim, continued making payments to the contractor, and failed to pursue a contractual remedy, then the false certification cannot give rise to a qui tam action. 61 However, generally speaking, if the contract certifies compliance and the compliance was a condition of payment, then there is a false claim. 62
3. Oil and Gas Royalties
The largest owner of land in the United States is the federal government. Since much of that land is rich in oil and gas, the United States will enter into lease agreements with various oil and gas companies. Those companies are then required to report the amount of oil and the value of the oil produced on federal and Indian leases. The FCA can be triggered when oil companies artificially manipulate the value of recovered oil in order to pay smaller royalties. 63
VI. Statutory Pitfalls
a. Public Disclosure
As mentioned earlier, the 1986 amendments to the FCA enlarged the ambit of the FCA by allowing a relator, in certain circumstances, to file a suit based on information that the government already had in its possession. 64 To ensure the broader grant of prosecutorial authority did not cause “parasitic lawsuits,” Congress created a jurisdictional bar to a relator bringing an action “based upon” information defined as “publicly disclosed,” unless the relator is the “original source” of the information. 65 To constitute public disclosure, courts have held that the disclosure must reveal allegations of fraud or the fraudulent nature of the transactions involved. 66 Mere disclosure of the general subject matter of the fraudulent conduct will be insufficient to trigger the exception. 67
In practice, the public disclosure bar is one of the most difficult concepts for practicing attorneys. The reason for this difficulty arises from the disparate treatment the section receives from the various circuit courts. In some cases, the circuits diverge in their analysis of the public disclosure bar so dramatically that they cannot even agree as to whether it is a substantive or jurisdictional concept. 68 Practitioners are urged to review the law in their respective circuits.
The statute specifically limits the types of “public disclosures” to those made in criminal, civil, or administrative hearings; in congressional, administrative, or General Accounting Office reports; or from the news media. 69 “Hearing” encompasses both civil complaints and criminal indictments. 70 Although the majority of courts have held this list to be exhaustive, 71 courts are divided as to the definition of these categories. 72 The more expansive a court interprets these types of disclosures, the more likely the public disclosure bar will apply to your case. If, however, the terms are narrowly construed, the applicability of the bar is restricted. This of course will depend on which jurisdiction your case is in and how that circuit defines the term “public disclosure.” 73
b. Original Source
Even if your suit is “based upon” prior disclosures, the relator may still recover provided he is an “original source” of the information. The FCA defines “original source” as “an individual who has direct and independent knowledge of the information on which the allegations are based, and has voluntarily provided the information to the government before filing an action under this section which is based on the information.” 74 Whether the relator has “direct and independent knowledge” will depend on the facts of your case. He will have “direct knowledge” if he can show that he had firsthand knowledge of the alleged fraud, and that he obtained this knowledge through his own unmediated efforts.
Recently, the Fifth Circuit, in Laird, completed a detailed analysis of the “original source” exception to the public disclosure bar. 75 It noted that the term “is the subject of much disagreement among the courts of appeals.” 76 The court discussed that the original source exception required the satisfaction of a two-part test. 77 First, “the relator must demonstrate . . . ‘direct and independent knowledge of the information on which the allegations are based.’” 78 Second, “the relator must demonstrate that he or she has ‘voluntarily provided the information to the Government before filing’”. . . the qui tam. 79 It found that a relator could still qualify as an “original source” without ‘“direct” and “independent” knowledge of each false claim alleged in his complaint.” 80 Instead, to qualify as an original source, the relator must have direct and independent knowledge of the information “contained in the publicly disclosed material.” 81 Next, the Laird court adopted a plain meaning definition of “direct” knowledge. “We interpret the term ‘direct’ by its plain meaning as knowledge derived from the source without interruption or gained by the relator’s own efforts rather than learned second-hand through the efforts of others.” 82 As long as Mr. Relator obtained his knowledge independently of the public disclosures and “by his own efforts,” he will be considered an “original source” of the information and the public disclosure bar will not apply. 83
Since the statutory reforms of 1986, qui tam litigation has produced record numbers of case filings and monetary recoveries. The False Claims Act has encouraged courageous whistleblowers to come forward, punished the corrupt, and resulted in a heightened quantum of accountability, both for the government and its contractors. However, because qui tam law is derived from judicial interpretations of the statute, evaluating a potential case is complex and requires a thorough investigation of the facts and law in the appropriate venue. Since many cases can be filed in multiple jurisdictions, it is important to devote a considerable amount of time analyzing each circuit’s interpretation of the FCA. Mastering the intricacies of the FCA is mandatory before embarking on an expensive investigation and litigation process.
ABOUT THE AUTHOR: Joel M. Androphy
Joel M. Androphy is a member of the Texas, Colorado and New York Bar Associations and has been a partner in Berg & Androphy since 1985.
Over the years, Androphy has tried dozens of white collar crime cases to verdict, but his practice has always included civil matters, including Qui tam banking, health care, insurance fraud, environmental violations, breach of contract, conspiracy, and personal injury.
Androphy has distinguished himself as a legal scholar. Certified in criminal law by the Texas Board of Legal Specialization, he has written a widely used 4 volume treatise, White Collar Crime (West Group), as a practical guide for both civil and criminal lawyers.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.