[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.

                          ____________________