Accountability in Quitam Litigation Under the Civil False Claims Act

Guarding the Guardians:

Accountability in QuiTam Litigation under the Civil False Claims Act

Sean Elameto[*]

Table of Contents

I.Introduction

II.The Eruption of Qui Tam Suits

A.Public Disclosure Bar and Original Source Exception

B.Weakening of Federal Rule of Civil Procedure 9(b)’s

“Particularity” Requirement

C.Looking Ahead: An All-Purpose Anti-Fraud Statute

III.The Festering QuiTam Controversy

IV.Government Attorney Accountability......

B.Measuring Before Managing

C.Forcing the Government’s Hand

D.Guiding Prosecutorial Discretion

V.Qui Tam Plaintiff-Attorney Accountability

A.The Rise of the Qui TamBar

B.Comparison of False Claims Act Litigation with Private

Securities Litigation

C.Federal Rule of Civil Procedure 23(g) and Beyond: A Model for Qualifying Plaintiff-Attorneys

D.Amending 31 U.S.C. § 3730(d)(4) (2006) to Include Plaintiff-Attorneys

VI.Prohibiting ProSe Litigation When the U.S. Department of

Justice Declines Intervention

VII.Conclusion

I.Introduction

The Civil False Claims Act (FCA)[1] can have a devastating impact on any company that violates its provisions.[2] For example, in December 2000,Hospital Corporation of America (HCA) settled an FCA case with the Federal Government, forfeiting $745 million.[3] Only three years later, HCA paid an additional $631 million as a result of another FCA action.[4] Under similar circumstances, in 2006, Tenet Healthcare Corporation forked over a whopping $900 million to settle an FCA suit.[5] The Federal Government received $650 million from Merck & Company, Inc. in January 2008,[6] and a record $1 billion from Pfizer Inc. in September 2009.[7] One need only glance at the aforementioned sampling of the gargantuan recoveries possible under the FCA to appreciate why it serves as the Federal Government’s weapon of choice for combating fraud.[8] With little doubt, government contractors must be well aware of the FCA’s existence and its extensive reach.

The FCAholds liable any person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim” for payment from the Government.[9] Additionally, the FCA empowers whistleblowers, known as relators, to file qui tam lawsuits on behalf of the U.S. Government.[10] The FCA’s controversial quitam mechanism allows successful relators to receive between 15% to 25% of the Government’s total financial recovery.[11] The “bounty” recovered by the Government could easily amount to tens of millions of dollars.[12] The FCA authorizes the U.S. Department of Justice (DoJ) to intervene in a quitam action, whereupon the DoJ assumes primary prosecutorial responsibility.[13] The relator may proceed with an action whenever the DoJ elects not to intervene[14] or fails to dismiss the action.[15]

Though the FCA has existed for nearly 150 years, it did not become a highpaying, public-private enforcement mechanism until after the enactment of relatively recent amendments.[16] The recent amendments to the FCA also stimulated a rapid growth of a private quitambar,[17] and, coupled with minimal judicial and regulatory policing, the amendments threw the floodgates wide open for a multiplicity of quitam lawsuits.[18] To combat this trend, this article proposes modest measures for handling the perceived systemic problem of wasteful or abusive quitamlitigation by private parties.[19] First, this article suggests increasing transparency in regards toboth key segments of the quitam process and the DoJ’s intervention decisions.[20] Increasing transparency will reveal the extent to which the DoJ’s choices correlate, if at all, to wasteful litigation.[21] Second, this article advocates implementing a scheme similar to Federal Rule of Civil Procedure 23(g) to ensure competence amongst qui tam plaintiff-attorneys.[22] Third, this article recommends exposing plaintiff-attorneys to the penalties of 31 U.S.C. § 3730(d)(4) (2006), as plaintiff-attorneys are in the best position to determine whether a case is or has become baseless.[23] Finally,to further reduce the possibility of wasteful litigation, this article suggests eliminatingprose litigation when the Government declines intervention.[24]

Part II of this article provides a brief historical overview of the FCA and discusses the initial rarity of its usage. This partexamines the FCA’s progression until it was amended in 2010—focusing on the major congressional amendments since 1986 as well as a few judicial interpretations that gave the FCA additional life. Part III lays out the chronic issue that arises when the DoJ declines to intervene and litigate a given qui tam suit. Part IV presents the need for improved transparency inquitam litigation, particularly in regards to the Government’s decision-making process over intervention, to better diagnose and treat any systemic incongruities existing in the FCA’s current design. Part V discusses proposed measures for ensuring the accountability of quitamplaintiff-attorneys. Finally, Part VI argues for the prohibition of prose litigation in cases where the Government declines to intervene.

II.The Eruption of Qui Tam Suits

The term “quitam” derives from the Latin phrase “qui tam pro domino rege quam pro se ipso in hac parte sequitur,” which translates to “who sues on behalf of the King as well as for himself.”[25] A quitam action is an action filed on behalf of the Government by a private citizen, known as a “relator.”[26] At the urging of President Lincoln, and in response to the extensive fraud against the Government by unscrupulous contractors who sold the Union Army faulty war supplies during the Civil War, Congress enacted the False Claims Act in 1863.[27] The FCA provided both criminal and civil penalties,[28]and it contained a quitam provision that sought to enlist the resources of private citizens, to augment the Government’s anti-fraud enforcement efforts.[29] As an incentive for exposing and prosecuting fraud perpetrated on the Government, the FCA originally permitted whistleblowers to collect 50% of the damages.[30] Over time, however, Congress modified the FCA to respond to the perceived abuses wrought by opportunistic and parasitic lawsuits.[31]

In an attempt to curb instances of improper suits brought pursuant to the FCA, Congress blunted the FCA’s edge in 1943 by making a number of dramatic changes to the act.[32] Qui tam actions under the FCA were rarely viable after the passage of the 1943 amendments.[33] Courts have interpreted the 1943 jurisdictional bar to preclude all quitam actions involving information already known to the Government, even when thequi tamrelator was the source of that information.[34]

The risks associated with whistleblowing became more significant as individuals faced losing their employment and had no guarantee that they would be rewarded even if a quitam suit were successfully brought.[35] The 1943 version of the FCA included no right of action to protect whistleblowersagainst retaliation.[36] Furthermore, if the Government intervened in the case, relators lost a large stake in the outcome of litigation.[37] As a result, from 1943 to 1986, the number of relator suits broughtunder the FCA only averaged about six per year.[38]

Government studies in the early to mid-1980s revealed the widespread existence of wasteful, if not fraudulent, spending, including such examples as“[$600] toilet seats, $748 pliers, and $7000 coffeepots.”[39] These findings contributed to Congress once again making sweeping amendments to the FCA in 1986.[40] Because most fraud was believed to have gone undetected,[41] Congress attempted to increase incentives, while simultaneously eliminating disincentives, for potential whistleblowers to bring fraudulent activities to light.[42]

Beginning in 1986, Congress made substantial amendments to the FCA with an eye towards encouraging more whistleblowers and relators[43] to expose and prosecute those who defraud the Government.[44] Congress eliminated the uncertainty of rewards given purely at the discretion of the courts, while adjusting the rewards to reflect relators’ contributions.[45] Congress also created an important protection for whistleblowers by establishing a new cause of action thatmaybe employed if the whistleblower is retaliated againstfor lawful acts in furtherance of FCA proceedings.[46] The amendments also increased the FCA’s damages provision from double to treble, thus requiring those found to have defrauded the Government to pay three times the damages sustained by the Government.[47] Congress fashioned several of these amendments specifically to overturn narrow judicial interpretations of the FCA.[48] Therefore, the 25-year span since 1986 has reflected significant congressional efforts to combat fraud against the Government.[49]

Congress also significantly amended the FCAby passing the Fraud Enforcement and Recovery Act (FERA) of 2009.[50] Upon enacting FERA, Congress endeavored to overturn the U.S. Supreme Court’s decision in Allison Engine Co. v. United States ex rel. Sanders,[51] whichheld that liability under the FCA requires more than a showing that a false payment was made using government funds.[52] The plaintiff must show that the conspirators intended to bring about the Government’s payment of the false or fraudulent claim.[53] The Court reasoned in Allison Engine Co. that to read the FCA to require only the false expenditure of Government funds “would expand the FCA well beyond its intended role of combating ‘fraud against the Government,’”[54] and would potentially turn the FCA into an “all-purpose anti-fraud statute” by making it applicable to any claim relating togovernment funds.[55] Congress’ disavowal of the decision in Allison Engine Co., along with other provisions of the FERA amendments, expanded the scope of the FCA.[56] The changes made to the FCA by FERA create potential FCA liability for defendants who make false statements in relation to claims for payment submitted to recipients of federal funds, even if the false statements never made their way to or were relied upon by the Federal Government.[57]

A.Public Disclosure Bar and Original Source Exception

Though the FCA provides powerful financial incentives for private citizens to file suits exposing fraud against the Government,[58] the FCA also endeavors to discouragepurely parasitic or opportunistic suits.[59] For instance, the FCA contains a “public disclosure” jurisdictional bar,[60]which states:

No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.[61]

The statute originally defined the “original source” exception to the public disclosure bar as a person who has “direct and independent knowledge” of the information comprising the substance of the allegations and has voluntarily provided this information to the Government prior to filing an action based on such information.[62]

In Graham County Soil Water Conservation District v. United States ex rel. Wilson,[63] the U.S. Supreme Court broadened the scope of the “public disclosure” bar and provided defendants with a viable defense against quitam lawsuits.[64] The Court held that the public disclosure bar applied both to disclosures made in state and local proceedings and those released in federal hearings, reports, audits, and investigations.[65] Only days before the Court issued its opinion, however, Congress enacted amendments to the statute through the 2010 Patient Protection and Affordable Care Act (PPACA).[66] These amendments expanded the ability of whistleblowers to bring quitam suits by making clear that only disclosures in certain federal domains or in the news media meet the definition of “public disclosure” under the FCA.[67] Furthermore, the PPACA modified the FCA so that it no longer requires an “original source” to have “direct and independent knowledge,” but rather now requires only ashowing of “knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions.”[68] Under the new definition of “original source,” relators may now bring FCA claims even with secondhand information as long as they obtained the information through sources independent of any public disclosure.[69]

B.Weakening of Federal Rule of Civil Procedure 9(b)’s

“Particularity” Requirement

After the 1986 amendments, one of the biggest weapons contractors found useful in combating meritless suits centered on arguing that complaints lacked sufficient detail.[70] At the outset of the case, contractors often file motions to dismiss pursuant to Federal Rule of Civil Procedure (FRCP) 9(b), which mandates that complaints alleging common law fraud “state with particularity” the circumstances constituting fraud.[71] In many cases, relators have been unable to specifically identifythat even a single fraudulent claim was submitted to the Government.[72] In cases where the relators could not specifically point to demonstrable instances of fraud, they may identify shortcomings with business managementto support their position that the contractor likely submitted false claims to the Government.[73]

The majority of federal appeals courts have applied a strict reading of FRCP 9(b), requiring FCA plaintiffs to point directly to an allegedly fraudulent claim in their complaint.[74] A number of other appellate courts, however, have recently adopted a relaxed reading of the rule, accepting complaints that sufficiently allege fraudulent schemes even if they do not allege any specific false claims.[75] Courts adopting the relaxed reading of the FCAonly require the plaintiff toestablish a link between the alleged “fraudulent scheme” and the likelihood that the contractor submitted false claims.[76]

While a relaxed FRCP 9(b) pleading standard in the context of the FCA has made inroads for relators’ counsel in some courts, Congresshas moved towards amending the FCA to universally mandate the relaxed standard.[77] Both H.R. 4854 and H.R. 1788, neither of which became law, proposed language that explicitly made FRCP 9(b) inapplicable to quitam filings:

In pleading an action brought under [the FCA], a person shall not be required to identify specific claims that result from an alleged course of misconduct if the facts alleged in the complaint, if ultimately proven true, would provide a reasonable indication that one or more violations of [the FCA] are likely to have occurred, and if the allegations in the pleading provide adequate notice of the specific nature of the alleged misconduct to permit the Government effectively to investigate and defendants fairly to defend the allegations made.[78]

Neither bill, however, providedguidance for the courts to use in determining whether a relator’s factual allegations raise “a reasonable indication that one or more violations of [the FCA] are likely to have occurred.”[79] Nevertheless, the proposed bills clearly signal a desire for courts to follow the relaxed pleading standard endorsed by the First and Fifth Circuits.[80]

While relaxing the pleading standards required by FRCP 9(b) could further encourage the exposure of fraud against the Government, therelaxed standard may also permit relators with little knowledge of fraud to make speculative allegations in which to base FCA claims.[81] As such, it has been argued that the relaxed rule would open the door to more speculative and frivolous suits.[82] Additionally, adopting the more relaxed pleading standards would require contractors to commit more resources to discovery-related litigation.[83] Proponents of applying a relaxed FRCP 9(b) standard to FCA claims want to permit relators to file a general complaint and then “fill in the blanks” after discovery.[84] But the opposing contention is that using discovery to satisfy FRCP 9(b) will contribute to increased filings of quitamsuits where no injury was suffered and where relators merely hoped to uncover yet unknown wrongs.[85] Subsequently, in addition to risking defendant’s “goodwill and reputation,” these allegations could be used to extract settlements from defendants who hope to avoid even more expensive litigationcosts.[86] Finally, opponents of the relaxed standard fear that it would eliminate FRCP 9(b)’s important gatekeeping function of blocking meritless and speculative fraud claims.[87]

C.Looking Ahead: An All-Purpose Anti-Fraud Statute

Emerging trends suggest that instances of quitam actions will continue to increase.[88] Since the FCA only requires a “knowing” state of mind, as opposed to a specific intent to defraud, government contractors have been forced to “bite the bullet” for violating seemingly innocuous contract terms as well as non-existent ones.[89] In addition, despite the U.S. Supreme Court’s caution that the FCA was not intended as an “all-purpose antifraud statute,”[90] new theories of liability continue to arise, which are promoted by boththe Government and relators.[91] Neither Congress nor the courts have posed a significant impediment to the continued expansion of FCA liability.[92] With the added filing of quitam claims through these new avenues, it stands to reason that the Government’s capability to intervene in quitam actions decreases on account of its limited and finite resources.[93]

III.The Festering QuiTam Controversy

Quitam cases in which the Government has declined to intervene are dismissed at a staggering rate of 86%.[94] The continuous influx of quitam actions, assisted by a seemingly interminable expansion of FCA liability, impacts the DoJ’s ability to intervene in every case.[95] The surge of quitam actions can be ascertained by reviewing the statistics collected by the DoJ, which reveals that the cumulative number of quitam actions between federal fiscal years 1987 and 2010 has far exceeded non-quitam, i.e. government-initiated, FCA cases.[96]

Over $18 billion was recovered pursuant to qui tam FCA actions—over double the amount recovered in non-qui tam FCA suits.[97] As of September 2010, the DoJ intervened in only about 22% of quitam actions, or approximately one in every five cases.[98] Yet, despite intervening in only 22% of quitamcases, the DoJ recovered about 97%, or $17.59 billion, of total quitam recoveries.[99] In stark contrast, in the remaining 78% of the total quitam actions, relators recovered only 3%, or $571 million, of the total quitam recoveries.[100] Of the 4,628 quitam cases in which the DoJ declined intervention, 3,962 cases, or roughly 86%, were eventually dismissed.[101] In contrast, only 60 cases in which the DoJ intervened, which are about 5% of intervened cases, have been dismissed.[102]

The immense disparity between recoveries in quitam actions in which the Government intervened and those in which it did not suggests that most quitamactionsbrought without Government intervention assert meritless or frivolous claims.[103] If this perceptionreflects reality, then perhaps the vast majority of qui tam cases in which the Government declines intervention simply produce unwanted social costs such aswasting taxpayer dollars by consuming the scarce resources of the courts, delaying meritorious claims, burdening legitimate businesses with defense litigation costs, and causing serious economic and reputational damage to the parties involved.[104] As a result of the burdensome social costs resulting from the proliferation of quitam suits, private firms may not wish to do business with the Government, thereby eroding the Government’s goal of obtaining maximum competition in contracting.[105] Overall, the social costs resulting from a proliferation of FCA claims negatively impact the economy as a whole.[106] Regardless of who bears the immediate impacts of these social costs—whether they are borne by businesses, by courts, or by taxpayers—substandard cases in no way serve the public interest. Accordingly, if qui tam cases in which the Governmentdeclines to intervene are in fact mostly meritless or frivolous, the DoJ indeed has a compelling economic interest in actively preventing such waste.