[Congressional Record Volume 155, Number 82 (Wednesday, June 3, 2009)]
[Extensions of Remarks]
[Pages E1295-E1300]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
FRAUD ENFORCEMENT AND RECOVERY ACT OF 2009
______
speech of
HON. HOWARD L. BERMAN
of california
in the house of representatives
Monday, May 18, 2009
Mr. BERMAN. Madam Speaker, I rise today in support of the Fraud
Enforcement & Recovery Act of 2009. I want to specifically address the
language in this bill that will strengthen the provisions of our
Nation's most effective fraud-fighting tool, the federal False Claims
Act. With our Nation spending hundreds of billions of dollars to
revitalize our faltering economy, now is the time to plug the loopholes
that have been created in the False Claims Act over the last quarter
century. Now is the time to update this law to ensure that it reaches
the modern fraud schemes that are draining our public fisc with
impunity. As one of the authors of both the 1986 False Claims Act
Amendments and the relevant language in S. 386 which we consider today,
I submit this statement to clarify the true intent of the False Claims
Act and to send a clear message that all government funds should be
protected from fraud.
I. HISTORY OF THE FALSE CLAIMS ACT
Before I get into the provisions of the bill we are considering
today, Madam Speaker, I'd like to provide some background on the False
Claims Act, how it came to be and how it has been amended in the past.
Congress enacted the False Claims Act in 1863, in response to
complaints about ``the frauds and corruptions practiced in obtaining
pay from the Government during the [Civil] War.'' Proposed by President
Lincoln, the legislation offered private citizens a reward if they
assisted the Government in combating fraud. The sponsor of the original
False Claims Act explained that the statute, ``offers, in short, a
reward to the informer who comes into court and betrays his
coconspirator, if he be such; but it is not confined to that class.''
The 1863 Act authorized private individuals, called ``qui tam
relators,'' to bring lawsuits on behalf of the United States to
prosecute fraud against the Government and to recover funds that were
wrongfully obtained. The Act provided for double damages and a $2,000
civil penalty per false claim, and private individuals who successfully
pursued claims under the Act were entitled to half of the Government's
recovery. The Act did not authorize the Government to intervene in the
private individual's case, nor did it preclude qui tam actions based
upon the source of the relator's information.
Nearly eighty years later, in the midst of World War II, Attorney
General Francis Biddle requested that Congress make changes to the
False Claims Act that would prevent parasitic lawsuits. Biddle was
concerned that qui tam complaints were being filed based solely on
information contained in criminal indictments. Biddle argued that such
cases contributed nothing new and could interfere with the Government's
criminal prosecutions. So, he urged Congress to repeal the
authorization for qui tam actions.
The Senate and House of Representatives each considered Attorney
General Biddle's request, and the House went so far as to pass a bill,
H.R. 1203, proposing repeal of the False Claims Act's qui tam
provisions. The Senate demurred. The House Judiciary Committee then
considered legislation providing that jurisdiction would be barred on
qui tam suits that were based on information in the possession of the
Government, unless the relator was an original source of that
information. Without explanation, the resulting conference report
dropped the reference to ``original sources.''
The 1943 amendments changed the False Claims Act in several ways.
Most significantly, these amendments authorized the Department of
Justice to take over cases initiated by relators. The 1943 amendments
required relators to submit all of their supporting evidence to the
Department of Justice at the time the relator filed his complaint and
gave the Department sixty days to decide whether or not to intervene
and take exclusive control of the suit. If the Government elected to
intervene, the relator would have no role in the case and no voice in
its resolution.
The 1943 amendments also included a ``government knowledge bar,''
which deprived courts of jurisdiction over qui tam actions that were
``based upon evidence or information in the possession of the United
States, or any agency, officer or employee thereof, at the time such
suit was brought.'' The 1943 amendments also significantly reduced the
amount of the relator's share of any recovery. In fact, under the 1943
amendments, relators were not assured of a minimum recovery at all. The
amendments provided that if the Government prosecuted the suit, the
court could award the informer ``fair and reasonable compensation'' not
to exceed 10-percent of the proceeds. If the Government did not
intervene, the informer's award could not exceed 25-percent of the
proceeds.
These changes put the False Claims Act into hibernation. By the
1980s, it had become evident that the False Claims Act was no longer an
effective tool against fraud. In particular, some courts, for example
in United States ex rel. State of Wis. (Dept. of Health and Social
Services) v. Dean, 729 F.2d 1100 (7th Cir. 1984), had broadly
interpreted the government knowledge bar adopted in 1943, holding that
the bar precluded all qui tam cases involving information already known
to the Government, even when the qui tam relator had been the source of
that information.
Additionally, the changes to the amount of the relator's share
undermined the Act's usefulness. Individuals with information about
fraud against the Government were far less likely to become relators
without some guarantee that they would be rewarded if they prevailed,
particularly since relators often exposed fraud by their employers and
were terminated from their jobs as a result. The 1943 amendments did
not provide relators with an adequate incentive to bring qui tam
actions. Consequently, from 1943 to 1986, fewer than
[[Page E1296]]
ten False Claims Act cases were brought each year.
As a result of the problems that arose following the 1943 amendments,
by the 1980s, fraud against the Government had grown to unprecedented
levels. A 1981 three-volume General Accounting Office report, Fraud in
Government Programs:--How Extensive is It?--How Can it Be Controlled,
concluded that fraud against the Government was ``widespread.'' The
report also noted that false or fraudulent claims against the
Government result both in monetary losses and a broad spectrum of non-
monetary losses. These include, for example, loss of confidence in
Government programs, Government benefits not going to intended
recipients, and harm to public health and safety. During this same
period, several legal scholars began discussing the merits of increased
use of the False Claims Act to address fraud against the Government.
In response to these concerns, Senators Charles Grassley, Carl Levin,
and Dennis DeConcini introduced S. 1562 in 1985. The Committee on
Administrative Practice and Procedure of the Senate Committee on the
Judiciary held hearings on S. 1562 and S. 1673, a similar bill
supported by the Reagan Administration. The House of Representatives
took up a similar bill, H.R. 3317, and the Subcommittee on
Administrative Law and Governmental Relations of the House Committee on
the Judiciary held hearings on that measure.
Both Committees heard from a range of witnesses, including
whistleblowers and the Department of Justice. The Senate Committee
heard testimony that ``45 of the 100 largest defense contractors--
including 9 of the top 10--were under investigation for multiple fraud
offenses.'' In addition, the Committee learned that, due to limited
Government resources, ``[a]llegations that perhaps could develop into
very significant cases are often left unaddressed at the outset due to
a judgment that devoting scarce resources to a questionable case may
not be efficient. And with current budgetary constraints, it is
unlikely that the Government's corps of individuals assigned to anti-
fraud enforcement will substantially increase.'' The Senate and House
bills sought to address this resource problem by constructing
legislation which would empower private citizens with knowledge of
fraud or false claims to come forward and bring the resources of
private counsel to bear on Government investigations under the Act.
In response to the problems Congress identified, as well as concerns
raised by the Department of Justice and potential defendants, Congress
adopted the False Claims Amendments Act of 1986. President Reagan
signed the bill into law on November 23, 1986. The 1986 amendments made
a number of changes to the False Claims Act. Although the amendments
did not include a provision for recovering consequential damages, they
increased the penalty provision, which had been unchanged for more than
100 years, from double damages to treble damages. In order to limit
interference with Government investigations, the amendments provided
that qui tam actions be filed under seal for sixty days and served on
the United States, but not the defendant, to provide the Government
time to determine whether to take over the action. However, while the
amendments limited the seal period to sixty days, they permitted the
Government the opportunity to request and receive an extension for good
cause. The amendments also provided the Government, for the first time,
the option of intervening later in a case, even if it had initially
declined to join, if it had ``good cause'' to do so. Furthermore, the
legislation provided that a qui tam relator would remain a fully
participating party even if the Government joined the case, but
provided that a court could, under specified circumstances, restrict
the relator's role.
Additionally, in order to incentivize individuals to report false
claims and fraud, Congress eliminated the uncertainty of purely
discretionary rewards. Rather, since 1986, rewards to qui tam relators
have been based on the relator's contributions. In most cases, relators
would be guaranteed at least a 15-percent share of the Government's
recovery. The 1986 amendments also eliminated a potent disincentive for
relators, by creating a new right of action for any employee who is
retaliated against for lawful acts in furtherance of False Claims Act
proceedings. Under the 1986 amendments, employees who suffered
retaliation would be entitled to all relief necessary to make them
whole, including double back pay and attorneys' fees. The 1986
amendments also sought to replace the government knowledge bar with a
``public disclosure bar'' that would only bar truly parasitic relators
whose complaints were ``based upon allegations or transactions in a . .
. [Government proceeding] or investigation, or from the news media,''
and were not an ``original source'' as defined under the Act. Congress
also authorized the award of attorneys' fees to a defendant prevailing
in a suit that ``the court finds . . . was clearly frivolous, clearly
vexatious, or brought primarily for purposes of harassment.''
II. THE CURRENT FALSE CLAIMS ACT
Currently, the False Claims Act permits the Government to recover
treble damages from those who knowingly present, or cause to be
presented, false claims to a United States Government officer, employee
or member of the Armed Forces; or who knowingly make, or cause to be
made, false statements to get such claims paid by the United States.
The Act also applies to those who make false statements to conceal,
avoid, or decrease an obligation to pay or transmit money or property
to the Government. It also covers certain conspiracies to violate the
Act. In addition to damages, the courts are required to award the
Government a civil penalty of $5,500 to $11,000 for each violation of
the Act. The Government is entitled to recover such forfeitures upon
any showing that a defendant violated the False Claims Act, without
needing to prove that the violation resulted in damages in the case at
hand. Thus, a defendant may be held liable for these penalties under
the False Claims Act whether or not payment was made on the tainted
claim.
The Act defines several statutory terms. The term ``person'' is
broadly defined in the law's civil investigative demand provision to
include partnerships, associations, and corporations, as well as States
and political subdivisions thereof. The statutory definition of
``claim'' is also intended to be read broadly and, indeed, is not an
exclusive list. The definition applies to any request or demand for
Government money or property, regardless of whether it is submitted to
the Government or to another entity, such as a Government contractor,
agency, instrumentality, quasi-governmental corporation, or a non-
appropriated fund. In defining the word ``claim'' so broadly, Congress
intended in 1986 to make sure that the FCA would impose liability even
if the claims or false statements were made to a party other than the
Government, if the payment thereon could potentially result in a loss
to the Government or cause the Government to wrongfully pay out money.
For example, because any fraud that reduces the effectiveness of
programs and initiatives the Government has sought to advance also
undermines the Government's purpose in supplying funding support,
Congress intended for a false claim to the recipient of a grant from
the United States or to a State under a program financed in part by the
United States, to be considered a false claim to the United States.
In sum, Congress intended the False Claims Act to protect all
Government funds and property, without qualification or limitation.
However, over the years, some courts have incorrectly grafted
limitations to the reach of the Act, leaving billions of dollars
vulnerable to fraud. Most recently, in June 2008, the Supreme Court
ruled in the Allison Engine decision that, absent the ``Government
itself'' inking the check or approving a false claim, the Act does not
impose liability for false claims on Government funds disbursed for a
Government purpose by a Government contractor or other recipient of
Government funds, even if such fraud damages the Government or its
programs. Because so many inherently governmental functions are carried
out by government contractors these days, including contracting and
program management functions, this ruling severely limits the reach of
the law. The primary impetus for the current corrective legislation is
to reverse these unacceptable limitations and restore the False Claims
Act to its original status as the protector of all Government funds or
property. While we cannot possibly predict the breadth of fraudulent
schemes that can be used to target the public fisc, I take this
opportunity to stress that, when done knowingly, the following conduct
clearly violates the False Claims Act:
Charging the Government for more than was provided.
Seeking payment pursuant to a program for which the claimant was not
eligible.
Demanding payment for goods or services that do not conform to
contractual or regulatory requirements.
Fraudulently withholding property from the Government or attempting
to pay the Government less than is owed in connection with any goods,
services, concession, or other benefits provided by the Government.
Fraudulently seeking to obtain a Government contract.
Submitting a fraudulent application for a grant of Government funds.
Submitting a false application for a Government loan.
Requesting payment for goods or services that are defective or of
lesser quality than those for which the Government contracted.
Making false statements for a loan guaranteed by the Government that
later defaults.
Requesting Government services to which one is not entitled.
Submitting a claim that falsely certifies that the defendant has
complied with a law, contract term, or regulation.
Submitting a claim by a person who has violated a statute or
regulation, the violation of which is capable of influencing the
payment decision.
[[Page E1297]]
Submitting a false application in a multi-staged grant application
process, where the second stage of the application would not have been
granted had the applicant been truthful in the first stage.
Submitting a claim for payment even though the defendant was
violating the Government-funded program's conditions of participation
or payment.
Submitting a claim that seeks payment for an estimate or opinion that
the defendant knows to be false.
Submitting claims based on an interpretation of a regulation or
contract that the defendant knows has been rejected by the Government.
Fraudulently cashing a Government check or knowingly keeping
Government funds that were initially wrongfully or mistakenly obtained.
The False Claim Act does not specify a particular method for
assessing damages. Courts, however, should liberally measure damages to
effectuate the remedial purpose of the Act, which is to afford the
Government a full and complete recovery. The Government has finite
resource. So when a fraudfeasor wrongfully obtains or retains
Government owned or administered funds, it prevents the Government from
achieving the full purposes and benefits intended to result from its
spending or from utilizing funds wasted as a result of fraud or abuse
for other purposes. Indeed, when a defendant obtains a Government
contract under false pretenses or wrongfully qualifies for a
Government-funded program, it has no right to receive payment for the
services it provides. In such a case, the Government should be awarded
damages of the entire amount paid by the Government. Finally, it has
long been the law that where the Government received legitimate value
from the defendant's work, any offset occurs after, rather than before,
trebling. This assures, for example, that defendants who know they are
not eligible to participate in a Government program or contract cannot
substantially evade and defeat the purposes of eligibility requirements
by contending that the services or products they provided under false
pretenses have similar market value to services or products that
otherwise would have been provided by persons whom the Government
intended to be eligible.
When a court calculates civil penalties under the False Claims Act,
it should consider each separate bill, voucher or other demand,
concealment of payment, or other prohibited act as a separate violation
for which a civil penalty should be imposed. This is true although many
such claims may be submitted at one time. For example, a doctor who
completes separate Medicare claims for each patient treated will be
liable for a civil penalty for each such claim, even though several
paper claims forms or electronic requests for payment may be submitted
to a Medicare contractor at one time. Likewise, each claim for payment
submitted under a contract, loan guarantee, or other agreement which
was originally obtained by means of false statements or other corrupt
or fraudulent conduct, or in violation of any statute or applicable
regulation, constitutes a false claim. For example, claims submitted
under a contract obtained through collusive bidding are false and
actionable under the Act, as are all Medicare claims submitted by or on
behalf of a physician who knows he or she is ineligible to participate
in the program.
III. PURPOSE OF THE FALSE CLAIMS ACT AMENDMENTS
Since its inception, the central purpose of the False Claims Act has
been to enlist private citizens in combating fraud against the U.S.
Treasury. Specifically, the Act's qui tam provisions were crafted to
provide a clear procedural roadmap, so as to assist and encourage
private citizens to not only report fraudulent schemes, but to actively
participate in investigating and prosecuting those who steal from the
public fisc. However, over the course of the Act's history, courts have
embraced a number of conflicting interpretations that have removed
protection for billions of federal dollars and discouraged qui tam
relators from filing suits under the Act.
The False Claims Act amendments included in S. 386, the Fraud &
Enforcement & Recovery Act of 2009, remove some of the confusion that
is currently undermining the Act's ability to fully reach those who
target the American tax dollar. S. 386 clarifies a number of key
provisions and reaffirms that the False Claims Act is intended to
protect all Government funds, without qualification or limitation, from
the predation of those who would avail themselves of taxpayer money
without the right to do so. This legislation is the first step in
correcting the erosion of the effectiveness of the False Claims Act
that has resulted from court decisions contrary to the intent of
Congress. This mounting confusion occurs at a time when the country can
least afford weakened antifraud legislation. Particularly now, at a
time of dramatically-increased reliance on private contractors to
perform what have traditionally been viewed as governmental functions,
clarity of purpose and effect must be the hallmarks of the False Claims
Act.
The False Claims Act also needs to be amended to bolster protections
for qui tam plaintiffs, the individuals who bring fraud on government
programs to the attention of the federal government and file FCA suits
on behalf of the United States. Qui tam relators have been able to
uncover vast amounts of fraud, and their efforts have resulted in the
return of billions to the Treasury. In Fiscal Year 1986, the year prior
to Congress revitalizing the False Claims Act qui tam provisions, the
Department of Justice recovered just $54 million under the Act. Since
then, there has been a steady increase in recoveries, culminating in
settlements and judgments of more than $5 billion in the past two
years. This success has been due, in large part, to qui tam relators
who ferreted out and prosecuted False Claims Act violations. Indeed, of
the $21.6 billion recovered under the False Claims Act from 1986 to
2008, $13.7 billion was the result of qui tam actions. However, with
estimates of fraud and abuse losses remaining in the range of 10% of
disbursements to contractors, much remains to be done.
In February 27, 2008, testimony before the Senate Committee on the
Judiciary, Michael F. Hertz, Deputy Assistant Attorney General, Civil
Division of the U.S. Department of Justice, whose long career as the
Government's chief False Claims Act prosecutor predates the 1986
amendments, noted the critical role played by qui tam plaintiffs:
[T]he 1986 qui tam amendments to the Act that strengthened
whistleblower provisions have allowed us to recover losses to
the federal fisc that we might not have otherwise been able
to identify.
Recent testimony heard by the House Committee on the Judiciary
underscores the critical role qui tam relators play in uncovering and
prosecuting violations of the False Claims Act. The Subcommittee on
Courts, the Internet and Intellectual Property and the Subcommittee on
Commercial and Administrative Law held a joint legislative hearing on
June 19, 2008, on H.R. 4854, the False Claims Act Corrections Act of
2007, a bill I sponsored with Mr. Sensenbrenner to address many of the
same problems that are addressed in S. 386, as amended by the House of
Representatives. At that hearing, the Subcommittees heard testimony
from Shelley R. Slade, a Washington, D.C. attorney who represents qui
tam plaintiffs and serves on the Board of Directors of Taxpayers
Against Fraud, a national nonprofit public interest organization
dedicated to fighting fraud against the federal and state governments.
Ms. Slade, who also handled FCA cases and related matters for the U.S.
Department of Justice for ten years, testified that:
Qui tam plaintiffs are key to the Government's efforts to
fight fraud, mainly for two reasons. First, as inside
witnesses, they produce evidence that can be absolutely
critical to establishing liability. Fraudulent activity by
its very nature is concealed. . . . Without the help of
insiders who brought the Government documents and other hard
evidence of the fraud, it would have been extremely difficult
for the Government to develop sufficient evidence to
establish liability in many of the successful FCA cases.
Second, it is the relentless, zealous pursuit of qui tam
litigation by qui tam plaintiffs and their counsel that has
led to many of the largest FCA cases in the last eighteen
years. A close study of the largest recoveries will reveal
that, in many instances, the qui tam plaintiff spent years
either trying to persuade the Government of the merits of the
case before finally achieving an intervention decision, or
litigating the case following a Government declination.
Over the course of the last twenty years, it has become increasingly
evident that fraud permeates a very wide range of Government programs,
ranging from welfare and food stamps benefits to multi-billion dollar
defense procurements; from crop subsidies to disaster relief programs;
and from Government-backed loan programs to health care and homeland
security.
While fraud is not limited to any one Government agency, fraud in the
health care arena has been particularly pernicious, covering nearly
every facet of this industry from hospitals and laboratory work to drug
companies, durable medical equipment makers, nursing homes, and renal
care facilities. In the health care arena, recovery in the top twenty
hospital fraud cases settled under the False Claims Act totaled more
than $3.4 billion. The largest twenty settlements against
pharmaceutical companies exceed, in total, $4.6 billion.
While qui tam relators have long increased the efficiency of the
Federal Government in identifying fraud and false claims and
understanding the mechanics and scope of particular schemes, the role
of relators has been particularly important in the health care arena
where the complexity of frauds might otherwise thwart a Government
investigation.
Of the 6,199 qui tam False Claims Act cases filed between 1986 and
2008, more than half (3,306) focused on fraud against Government health
care programs, such as Medicare and Medicaid. These cases were
responsible for recovering $10.1 billion, or more
[[Page E1298]]
than 74-percent of the total $13.7 billion recovered in qui tam cases.
Along with fraud against the health care programs, fraud against the
Department of Defense still appears to be pervasive, with about 12-
percent of recoveries, or $1.7 billion, recovered due to qui tam
actions involving DoD contracts. The cost of fraud cannot be measured
only in dollars and cents. GAO pointed out in its 1981 report, fraud
erodes public confidence in the Government's ability to efficiently and
effectively manage its programs. General Accounting Office, Fraud in
Government Programs: How Extensive is It?--How Can it Be Controlled?
(1981).
Thus, fraud continues to drain funds from the public fisc, and the
Government is increasingly relying on relators to uncover these
fraudulent schemes. However, there are mounting legal divisions and
uncertainties among the circuit courts that are jeopardizing Government
funds and discouraging potential qui tam relators from filing actions.
The bill on the floor today, S. 386, is a critical first step needed to
remove the confusion and to ensure that qui tam actions continue to
assist the Government in protecting its limited resources.
The False Claims Act amendments in S. 386 clarify the reach of the
Act's liability provisions, strengthen anti-retaliation protections,
and remove impediments to the Government's investigative powers under
the Act. Other corrections and clarifications that are needed to the
False Claims Act have not been included in S. 386 due to the particular
overall purpose of S. 386. Those additional False Claims Act
corrections and clarifications should be taken up in separate
legislation. However, I rise today to clarify the intent behind the
False Claims Act amendments that are included in S. 386.
A. Section 4(a): Liability Provisions
In Section 4(a), the legislation updates the liability provisions of
Section 3729(a) of the False Claims Act to address misreadings of the
Act by the courts, to remove ambiguities created by inconsistency of
language in the present provisions, and to clarify how the Act should
be applied when the Government implements its programs with the help of
contractors and intermediaries or administers funds on behalf of
beneficiaries such as another government or a Tribal authority.
Existing provisions of Section 3729(a) are also renumbered. I want to
go through each of the issues addressed.
1. Fraud Against Government Contractors and Grantees
In United States ex rel, Totten v. Bombardier Corp., 380 F. 3d 488
(D.C. Cir. 2005), the D.C. Court of Appeals ruled that, notwithstanding
the FCA's broad definition of the term ``claim,'' liability will not
lie under subsection (a)(1) of 31 U.S.C. Sec. 3729, which imposes
liability for knowing false claims, unless the false claims are
presented directly to the United States Government itself. According to
the D.C. Court of Appeals, when third parties disburse federal funds in
furtherance of federal contracts, they are not the same as the ``U.S.
Government'' for purposes of this liability provision. Following that
decision, a number of courts held that the False Claims Act does not
reach false claims that are (i) presented to Government grantees or
contractors and (ii) paid with Government grant or contract funds. In
Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct. 2123
(2008), the U.S. Supreme Court similarly ruled that liability will not
lie under subsection (a)(2) of 31 U.S.C. Section 3729, which imposes
liability for knowing false statements, unless the false statements are
made to get false claims paid by the United States Government itself.
Moreover, the Supreme Court held that plaintiffs must show that the
fraudfeasor ``intended'' for its false statements to cause the
``Government itself' to ``rely'' on the false statements as a
``condition of payment.''
With the Government increasingly relying on private entities to
disburse Government funds, it is a rare instance in which the
``Government itself' would be paying the claims. The implications are
considerable. The amendments clarify that liability under Section
3729(a) attaches whenever a person knowingly makes a false claim to
obtain money or property, any part of which is provided by the
Government without regard to whether the wrongdoer deals directly with
the Federal Government; with an agent acting on the Government's
behalf; or with a third party contractor, grantee, or other recipient
of such money or property. To ensure that the Act is not interpreted to
federalize fraud that threatens no harm to Government purposes or
federal program objectives, the Amendment explicitly excludes from
liability requests or demands for money or property that the Government
has paid to an individual as compensation for federal employment or as
an income subsidy, such as Social Security retirement benefits, with no
restrictions on that individual's use or the money or property at
issue.
The amendments also clarify that the False Claims Act may be used to
redress fraud on Medicare's new Part D prescription drug benefit
program and fraud on Medicare managed care. Both of these programs are
administered by Government contractors. The legislation eliminates any
argument that the False Claims Act does not reach false claims
submitted to State-administered Medicaid programs, as some have argued
under the Totten case (and as the Atkins court held).
The amendments clarify that the False Claims Act can be used to
redress false claims submitted to recipients of federal block grants
administered by state agencies or other third parties. Such claims
undermine the purpose of those grants by diverting funding away from
the objectives that the federal program sought to achieve and cause
harm to the United States. Thus, for example, if a large non-minority
owned business falsely applied for grant funds that the Government
provided a municipality to assist small, minority-owned businesses, the
business entity would be subject to False Claims Act liability.
These clarifications are consistent with what Congress intended to
achieve in 1986. By removing from Section 3729(a)(1) language that can
be narrowly read to limit liability to persons who present false claims
directly ``to an officer or employee of the Government, or to a member
of the Armed Forces,'' the amendments finish the job Congress intended
to complete in 1986, when it defined actionable ``claims'' in the
current Act to include ``any request or demand . . . for money or
property which is made to a contractor, grantee, or other recipient if
the United States Government provides any portion of the money or
property which is requested or demanded, or if the Government will
reimburse such contractor, grantee, or other recipient for any portion
of the money or property which is requested or demanded.''
2. Fraud Against Funds Administered by the United States
In a 2006 decision involving Iraq reconstruction fraud, a federal
trial court in Virginia held that the False Claims Act does not reach
false claims against funds administered, but not owned, by the U.S.
Government. This was United States ex rel. DRC, Inc. v. Custer Battles,
LLC, 376 F. Supp. 2d 617, 636-641 (E.D. Va. 2006). This result is not
consistent with what Congress intended in 1986. When the United States
Government elects to invest its resources in administering funds or
managing property belonging to another entity, it does so because use
of such investments or property for their designated purposes will
further interests of the United States. Misdirection of such money or
property as the result of false or fraudulent conduct by contractors
frequently creates funding gaps which either thwart federal interests
or require infusions of federal money to see program goals achieved.
Accordingly, false claims made against Government-administered funds
damage the interests of the United States in essentially the same way
as does misappropriation or wasting of funds owned by the United
States. Whenever money directed to address Government interests is
wasted, it becomes necessary either to redirect other funds to complete
the contemplated task at hand or to make do with diminished returns on
Government program investments. The amendments address this problem by
defining ``claim'' to include, among other things, requests or demands
for money or property that are presented to an officer, employee, or
agent of the United States ``whether or not the United States has title
to the money or property.'' See new 31 U.S.C. 3729(b)(2)(A). This
amendment to the existing statutory language clarifies that FCA
liability attaches to knowingly false requests or demands upon the
United States for money or property administered by the United States
on behalf of another person.
3. Conspiracy
Currently, Section 3729(a)(3) imposes liability on persons ``who
conspire to defraud the Government by getting a false or fraudulent
claim allowed or paid.'' This wording can be construed to apply only to
conspiracies that violate subsections 3729(a)(1), (2) or (7). Some
courts have interpreted the section to be even more limited. For
example the court in United States ex rel. Huangyan Import & Export
Corp. v. Nature's Farm Products, Inc., 370 F. Supp. 2d 993 (N.D. Cal.
2005) held that section 3729(a)(3) does not extend to conspiracies to
violate section 3729(a)(7). The current provision does not explicitly
impose liability on those who conspire to violate other provisions of
the False Claims Act, such as delivery of less Government property than
that promised the Government or making false statements to conceal an
obligation to pay money to the Government. Section 4(a) of S. 386
amends current Section 3729(a)(3) to clarify that conspiracy liability
can arise whenever a person conspires to violate any of the provisions
of Section 3729 imposing False Claims Act liability. Because this
expands conspiracy liability to other sub-sections of 3729, this
particular amendment is a substantive
[[Page E1299]]
change. The rest of the Section 4 amendments are meant to merely
clarify the existing scope of False Claims Act liability.
4. Wrongful Possession, Custody or Control of Government Property
The amendments to the False Claims Act in S. 386 also update current
Section 3729(a)(4) of the False Claims Act, which makes the
Government's ability to recover for conversion of Government assets
dependent upon issuance of an inaccurate certificate or receipt. This
language is unchanged from the original Act as drafted in 1863. This
outmoded phraseology led the court in United States ex rel. Aakhus v.
Dyncorp, Inc., 136 F.3d 676 (10th Cir. 1998), to dismiss a case on the
technical grounds that no receipt was provided. Where knowing
conversion of Government property occurs, it should make no difference
whether the person committing the offense receives an inaccurate
certificate or receipt documenting the transaction. The updated
provision eliminates reference to such documentation. It appears in the
renumbered provisions of the Act as Section 3729(a)(1)(D).
5. Wrongful Retention of Government Money or Property
Currently, Section 3729(a)(7) of the False Claims Act imposes
liability for ``reverse'' False Claims Act violations when a person
makes or uses false records or statements to conceal, avoid, or
decrease an obligation to pay or transmit money or property to the
Government. This liability provision is analogous to the liability
established under current Section 3729(a)(2) for making false records
or statements to get false or fraudulent claims paid or approved. The
Act, however, currently contains no provision that expressly imposes
liability on a person who wrongfully avoids a duty to return funds or
property to the United States by remaining silent. The amendments
address this issue by expressly imposing liability on anyone who
``knowingly conceals or knowingly and improperly avoids or decreases an
obligation to pay or transmit money or property to the United States.''
This language is intended to make clear that a person who retains an
overpayment, while avoiding a duty to disclose or return the
overpayment that arises from a statute, regulation or contract,
violates the False Claims Act. Indeed, to address any potential
confusion among the courts as to what is intended to be encompassed
within the term ``obligation'' as used in Section 3729(a)(7), the
amendments define that term in new Section 3729(b)(3) as encompassing
legal duties that arise from the retention of any overpayment.
A legal obligation to disclose or refund an overpayment can arise in
various ways. Examples include, but are not limited to: (i) Government
contracts that incorporate a rule of the Federal Acquisition
Regulations that requires disclosure of an overpayment, and (ii)
criminal statutes that penalize a party's non-disclosure of an
overpayment in order to fraudulently secure the overpayment.
Importantly, the amendments do not impose liability in situations in
which the law clearly permits the recipient of the overpayment to
retain the overpayment without disclosure pending a reconciliation
process.
Liability for all non-disclosed overpayments of the same type also
should be imposed once an organization or other person is on notice
that it has been employing a practice that has led to multiple
instances of overpayment. For example, if a corporation learns after-
the-fact that it has been violating a billing rule or a contract
requirement in its billing, and it nonetheless fails to comply with a
legal obligation to disclose the resulting overpayments, this amendment
renders the corporation liable under the Act for all overpayments
resulting from the violation of the billing rule or contract
requirement, even those not specifically identified or quantified.
We use the term ``disclose'' in this provision to mean full
disclosure of all the pertinent facts concerning the overpayment to the
appropriate Government officials with authority to determine what
actions, if any, the recipient of the overpayment should take to remedy
the situation.
The amendments also define the term ``obligation'' to include fixed
and contingent duties owed to the Government, a term intended to
encompass, among other things, ad valorem and other customs duties,
such as custom duties for mismarking country of origin on imported
products. The amendments are intended to overrule the result reached in
American Textile Manufacturers Institute, Inc., supra, as applied to ad
valorem duties imposed for import violations. Reference to that
particular custom duty is not intended to exclude other types of
customs duties or statutory obligations that are similar in effect and
purpose or that otherwise meet the definition set forth in the proposed
amendments.
B. Section 4(b): Government Complaints-in-Intervention
Section 4(b) of S. 386 deals with the Government's ability to
intervene in a relator's case. The False Claims Act does not expressly
provide that the United States may amend the qui tam plaintiff's
complaint--or, if more practical, file its own complaint upon
intervention in a qui tam case--subject to the same rules on ``relation
back'' of amended claims as would apply if it were amending its own
complaint. Federal Rule of Civil Procedure 15(c)(2) provides that a
party's amendment of a pleading will relate back to the date of its
original pleading when the claim ``asserted in the amended pleading
arose out of the conduct, transaction, or occurrence set forth or
attempted to be set forth in the original pleading.'' In United States
v. Baylor Univ. Medical Center, 469 F.3d 263 (2d Cir. 2006), the Second
Circuit suggested that the United States may not be able to avail
itself of this rule when amending a qui tam plaintiff's complaint. The
implication of this ruling is that the United States could sometimes be
forced to forgo a thorough investigation of the merits of qui tam
allegations in order to ensure that it does not lose claims due to the
running of the statute of limitations.
Section 4(b) clarifies that the Government's complaint in
intervention or amended complaint will relate back to the date of the
original qui tam complaint so long as the conditions of Federal Rule of
Civil Procedure 15(c)(2) otherwise are met. Thus, Section 4(b) adds a
new paragraph (c) to Section 3731 that expressly provides that the
United States' complaint-in-intervention or amended complaint relates
back to the date of the complaint filed by the qui tam plaintiff ``to
the extent that the claim of the Government arises out of the conduct,
transactions, or occurrences set forth, or attempted to be set forth,
in the prior complaint of that person.''
C. Section 4(c)--Civil Investigative Demands
The False Claims Act was amended in 1986 to give the Department of
Justice an effective investigative tool: civil investigative demands or
``CIDs,'' which are administrative subpoenas for documents,
interrogatory responses and sworn testimony that may be used to
investigate allegations of potential violations of the False Claims
Act. Use of this tool, provided for in Section 3733, is increasingly
necessary for effective investigation of False Claims Act allegations.
Program agencies are strapped for resources and unable to assign
investigators even to meritorious cases, let alone issue Office of
Inspector General subpoenas.
Nevertheless, as a result of restrictive language in the False Claims
Act's CID provisions, the Department of Justice very rarely uses CIDs.
The Assistant U.S. Attorneys and Main Justice trial attorneys are
disinclined to use these subpoenas because of the length of time
required to obtain review and approval by the Attorney General.
Pursuant to Section 3733, the Attorney General may not delegate his
authority to issue CIDs.
Moreover, Department attorneys are concerned that the False Claims
Act, by limiting access to CID material to Government ``custodians''
and ``false claims law investigators,'' implicitly may preclude them
from showing the documents, interrogatory responses and testimony
obtained through CIDs to fact and expert witnesses and consultants, and
the parties, in connection with their investigation or litigation of
the case or proceeding. While statutory language does permit them to
make ``official use'' of this material, they are nonetheless
disinclined to rely on this language alone because of potential
ambiguity as to its reach. Without being able to share the evidence in
this manner, they fear that they may be unable to make sense of the
documents and information produced and, accordingly, rarely employ
CIDs.
Section 4(c) of S. 386 facilitates the issuance of CIDs by amending
Section 3733 to authorize the Attorney General to delegate the
authority to issue CIDs to a designee, and clarifying that CIDs may be
issued during the investigation of qui tam allegations prior to the
Government's intervention decision. Section 4(c) also clarifies that
the Attorney General or his designee may disclose CID material to the
qui tam plaintiff when necessary to further a False Claims Act
investigation or litigation. Qui tam plaintiffs are not only parties to
the False Claims Act proceeding, they often are fact witnesses or
experts in the subject matter under investigation. Accordingly, more
often than not, it will be necessary for the Department of Justice to
show information obtained through CIDs to the relator in order to
investigate or litigate the allegations effectively. However, the
Department of Justice retains the discretion to evaluate whether
disclosure to the relator is appropriate under the circumstances of the
case, taking into account such factors as the need to protect the
integrity of its investigation.
Finally, to eliminate any ambiguity on the question of whether
Department of Justice attorneys may use and disclose the documents,
testimony and interrogatory responses obtained through CIDs in
connection with the steps that law enforcement customarily takes to
investigate, and, if required, litigate allegations of wrongdoing,
Section 4(c) of the bill clarifies Section 3733 by adding a new
definition of ``official use'' in subsection 3733(1).
[[Page E1300]]
The definition provides that ``official use'' includes ``any use that
is consistent with the law, and the regulations and policies of the
Department of Justice.'' The new definition of ``official use'' also
includes specific examples of the types of uses that fall within the
term ``official use.'' These examples are not meant to be an exhaustive
list, but rather illustrative of the ordinary, lawful uses of
subpoenaed material in a Department of Justice investigation or
litigation that we intend the Department of Justice to employ in False
Claims Act cases. Section 4(c) of the bill also removes confusing
language in Section 3733(i)(2)(B) and (C) that could be misinterpreted
by the courts to prevent the custodian of CID material from sharing the
material with other Department of Justice or program agency personnel
for these official uses in the absence of authority from regulations or
a court.
D. Section 4(d): Relief from Retaliatory Actions
Section 3730(h) of the False Claims Act imposes liability on any
employer who discriminates in the terms or conditions of employment
against an employee because of the employee's lawful acts in
furtherance of a qui tam action. This section needs to be amended so
that it is clear that it covers the following types of retaliation that
whistleblowers commonly have faced over the course of the last twenty
years: (i) retaliation against not only those who actually file a qui
tam action, but also against those who plan to file a qui tam that
never gets filed, who blow the whistle internally or externally without
the filing of a qui tam action, or who refuse to participate in the
wrongdoing; (ii) retaliation against the family members and colleagues
of those who have blown the whistle; and, (iii) retaliation against
contractors and agents of the discriminating party who have been denied
relief by some courts because they are not technically ``employees.''
To address the need to widen the scope of protected activity, Section
4(d) of S. 386 provides that Section 3730(h) protects all ``lawful acts
done'' . . . in furtherance of . . . other efforts to stop 1 or more
violations'' of the False Claims Act. This language is intended to make
clear that this subsection protects not only steps taken in furtherance
of a potential or actual qui tam action, but also steps taken to remedy
the misconduct through methods such as internal reporting to a
supervisor or company compliance department and refusals to participate
in the misconduct that leads to the false claims, whether or not such
steps are clearly in furtherance of a potential or actual qui tam
action.
To address the concern about indirect retaliation against colleagues
and family members of the person who acts to stop the violations of the
False Claims Act, Section 4(d) clarifies Section 3730(h) by adding
language expressly protecting individuals from employment retaliation
when ``associated others'' made efforts to stop False Claims Act
violations. This language is intended to deter and penalize indirect
retaliation by, for example, firing a spouse or child of the person who
blew the whistle.
To address the need to protect persons who seek to stop violations of
the Act regardless of whether the person is a salaried employee, an
employee hired as an independent contractor, or an employee hired in an
agency relationship, Section 4(d) of S. 386 amends Section 3730(h) so
that it expressly protects not just ``employees'' but also
``contractors'' and ``agents.'' Among other things, this amendment will
ensure that Section 3730(h) protects physicians from discrimination by
health care providers that employ them as independent contractors, and
government subcontractors from discrimination or other retaliation by
government prime contractors.
I should note that this amendment does not in any way require that a
qui tam plaintiff must have refused to engage in the misconduct or
tried to stop the fraud internally before he or she may avail
themselves of the incentives and protections in the False Claims Act.
As the Congress recognized when the False Claims Act's qui tam
provisions were first enacted in the nineteenth century, and as we have
repeatedly affirmed in different contexts, including the new IRS
whistleblower law, sometimes it ``takes a rogue to catch a rogue.'' An
individual who participates in the fraud, and who for whatever reason
does not challenge the misconduct within his or her organization, is
still entitled to a relator's award and the protections of Section
3730(h) unless he or she is otherwise barred by a specific provision in
the law.
E. Section 4(e): Service upon State Plaintiffs
Increasingly, qui tam plaintiffs are filing False Claims Act actions
on behalf of not only the Federal Government, but also one or more
States joined as co-plaintiffs pursuant to state False Claims Act
statutes. Such cases ordinarily allege false claims submitted to
Medicaid, which is a program funded jointly by the United States and
the states. These cases are increasing in number as many states
recently have enacted qui tam statutes, and many more are expected to
do so in light of provisions in the Deficit Reduction Act of 2005.
False Claims Act Section 3732 provides that state law claims may be
asserted in a case filed under the federal False Claims Act if the
claims arise from the same transaction or occurrence. The statute is
unclear, however, as to whether the seal imposed by the U.S. District
Court on the case pursuant to Section 3730(b) precludes the qui tam
plaintiff from complying with state requirements to serve the
complaint, or restricts the qui tam plaintiff and the Federal
Government in their ability to serve other pleadings on the States, and
disclose other materials to the States.
The amendment in Section 4(e) of S. 386 adds a new paragraph (c) to
Section 3732 that clarifies that the seal does not preclude service or
disclosure of such materials to the State officials authorized to
investigate and prosecute the allegations that the qui tam plaintiff
raises on behalf of the State. This paragraph also clarifies that State
officials and employees must respect the seal imposed on the case to
the same extent as other parties to the proceeding must respect the
seal.
F. Section 4(f). Effective Date and Application
Section 4(f) of S. 386 provides that the amendments in Section 4 take
effect upon enactment and apply to conduct on or after the date of
enactment, with the exception of the amendment of Section
3729(a)(1)(B), which shall apply to False Claims Act claims pending on
or after June 7, 2008, and the amendments set forth in Section 4(b),
(c), and (e) of the Bill, each of which shall apply to all cases
pending on the date of enactment. We intend for the definition of claim
also to apply to all False Claims Act claims pending on or after June
7, 2008, as that definition is an intrinsic part of amended Section
3729(a)(1)(B). The purpose of this amendment is to avoid the extensive
litigation over whether the amendments apply retroactively, as occurred
following the 1986 False Claims Act amendments.
However, while the amendments state that the remainder of the Section
4(a) liability provisions are not retroactive, the courts should
recognize that Section 4(a) only includes one substantive change to
existing False Claims Act liability, which is the expansion of the
conspiracy liability. All of the other Section 4(a) amendments merely
clarify the law as it currently exists under the False Claims Act. With
the exception of conspiracy liability, the courts should rely on these
amendments to clarify the existing scope of False Claims Act liability,
even if the alleged violations occurred before the enactment of these
amendments.
In other words, the clarifying amendments in Section 4(a) do not
create a new cause of action where there was none before. Moreover,
these clarifications do not remove a potential defense or alter a
defendant's potential exposure under the Act. In turn, courts should
consider and honor these clarifying amendments, for they correctly
describe the existing scope of False Claims Act liability under the
current and amended False Claims Act. The amended conspiracy provision,
on the other hand, is limited to those violations that occur after the
enactment of these amendments.
Each of the provisions in S. 386 dealing with the False Claims Act is
key to protecting taxpayer dollars, and I urge my colleagues to support
this legislation.
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