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FUNDAMENTALS OF THE FALSE CLAIMS ACT

Published by the American Bar Association Center for Continuing Legal Education as part of A National Institute on the Civil False Claims Act and qui tam Enforcement

by Paul D.Scott
January 13, 2000

I. LIABILITY

The False Claims Act (“FCA” or “the Act”) provides liability for any person who:

  1. knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval;
  2. knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government; conspires to defraud the Government by getting a false or fraudulent claim allowed or paid;

    . . . .

     

  3. knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.

31 U.S.C. 3729(a).

A. Definition of “Person”

  1. Individuals With certain limited exceptions applicable to senior government officials, any individual can be held liable under the FCA.
  2. Corporations Corporations can be held liable under the Act for the actions of their employees within the scope of their employment under the doctrine of respondeat superior. Grand Union Co. v. United States, 696 F.2d 888, 891 (11th Cir. 1983); United States v. Ridglea State Bank, 357 F.2d 495, 500 (5th Cir. 1966). Benefit to the corporation is not required. American Society of Mechanical Engineers v. Hydrolevel Corp., 456 U.S. 556, reh’g denied, 458 U.S. 1116 (1982); United States v. O’Connell, 890 F.2d 563, 568 (1st Cir. 1989); but see United States v. Hill, 676 F. Supp. 1158, 1179 (N.D. Fla. 1987).
  3. States There is a division in authority on the question of whether States can be held liable under the False Claims Act when the Government declines intervention in a case. Courts of Appeal have historically held that States can be held liable under the Act. See United States ex rel. Rodgers v. Arkansas, 154 F.3d 865, 868 (8th Cir. 1998) (suit not barred); United States ex rel. Stevens v. Vermont Agency of Natural Resources, 162 F.3d 195, 201-03 (2d Cir. 1998) (same); United States ex rel. Fine v. Chevron, U.S.A., Inc., 39 F.3d 957, 963 (9th Cir. 1994), vacated, 72 F.3d 740 (9th Cir. 1995) (same). The Fifth Circuit Court of Appeals, however, has recently held to the contrary. U.S. ex rel. Foulds v. Texas Tech University et al. 1999 WL 170139 (5th Cir. March 29, 1999) (hold state’s immunity under the 11thamendment not abrogated by FCA, because statute does not provide for relators to act as deputies of the United States or surrogates of responsible federal officers). The conflict should be resolved shortly, for the Supreme Court recently granted certiorari on this issue in Vermont Agency of Natural Resources v. United States, No. 98-1828 (U.S.).

B. Knowledge Requirement

“Knowing” and “knowingly” are defined by the Act to mean that a person:

  1. has actual knowledge that a statement or claim is false;
  2. acts in deliberate ignorance of the truth or falsity of the information; or
  3. acts in reckless disregard of the truth or falsity of the information,

31 U.S.C. § 3729(b). No proof of specific intent to defraud is required. Id.; See also United States ex rel. Wang v. FMC Corp., 975 F.2d 1412, 1420 (9th Cir. 1992).

Proof of Government knowledge is not a defense to liability under the False Claims Act, but may be relevant to whether the defendant acted “knowingly.” United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416 (9th Cir. 1991).

C.What is a Claim?

The False Claims Act creates liability for both claims for payment and so-called “reverse false claims” to avoid an obligation to pay the Government.

  1. Affirmative False ClaimsThe Act defines claims against the Government to include “any request or demand, whether under a contract or otherwise, 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.” 31 U.S.C. § 3729(c).The foregoing language has properly been interpreted to cover virtually any claim for payment or transfer of Government money or property, such as an invoice, progress payment request, loan application, or other bill requesting payment that is submitted to the federal government.See e.g. United States v. Bornstein, 423 U.S. 303 (1976) (invoice); United States v. Neifert-White Co., 390 U.S. 228 (1968) (loan application).It also has been interpreted to cover a wide variety of indirect claims, including:
    1. Claims submitted by subcontractors on Government contracts to prime contractors. United States v. Bornstein, 423 U.S. 303 (1976).
    2. Claims submitted to private fiscal intermediaries (e.g. Medicare claims). Peterson v. Weinberger, 508 F.2d 45 (5th Cir.), cert. denied, 423 U.S. 830 (1975).
    3. Claims submitted to Government Corporations. Rainwater v. United States, 356 U.S. 590, 592 (1958).
    4. Claims submitted to state programs that receive funding from the Federal Government (e.g., Medicaid). United States ex rel. Davis v. Long’s Drugs, Inc., 411 F. Supp. 1144, 1146-47 (S.D. Cal. 1976).
    5. Claims submitted to financial institutions for federally guaranteed loans (e.g., loans guaranteed by the SBA, VA or HUD). See United States v. First National Bank of Cicero, 957 F.2d 1362 (7th Cir. 1992)(SBA loan).

    The Act does not, however, apply to claims, records or statements made under the Internal Revenue Code of 1986. 31 U.S.C. § 3729(e).

  2. “Reverse False Claims”

The Act covers false claims made to “to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.” 31 U.S.C. § 3729(a)(7). The meaning of this language has been the subject of conflicting opinions in recent years. Numerous district courts had construed the provision broadly to permit actions based on false statements made to avoid potential or contingent obligations, such as fines or penalties. See e.g. United States ex rel. Terry J. Wilkins v. State of Ohio, et al., 885 F. Supp. 1055, 1064 (S.D. Ohio 1995); Earl O. Pickens v. Kanawha River Towing, 916 F. Supp. 702 (S.D. Ohio 1996). Several courts of appeal, however, have interpreted the provision more narrowly in recent times. See United States v. Q International Courier, Inc., et al., 131 F.3d 770 (8th Cir. 1997) (Government must show it was owed “a specific, legal obligation at the time that the alleged false record or statement was made, used, or caused to be made or used . . . defendant must have had a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness”); United States v. Pemco Aeroplex, Inc., 166 F.3d 1311 (11th Cir. 1999) (citing Q International); American Textile Manufacturers Institute, Inc. v. The Limited, Inc., et al., 190 F.3d 729 (6th Cir. 1999) (concurring with Q International).

D. What is a False Statement?

False statements can be found in any communications with the government that ultimately provide a basis for a claim to be paid or approved. Examples of false statements include false representations regarding goods or services allegedly provided, false certifications regarding performance on a contract, or false progress reports.

E. Standard of Proof

“In any action brought under section 3730, the United States shall be required to prove all essential elements of the cause of action, including damages, by a preponderance of the evidence.” 31 U.S.C. § 3731(c).

F. Statute of Limitations

The Act bars suits filed:

  1. more than 6 years after the date on which the violation of section 3729 is committed, or
  2. more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.”

31 U.S.C. § 3731(c).

According to the majority of courts, in cases brought by the United States, the “official of the United States charged with responsibility to act in the circumstances” is an official within the Department of Justice. See United States v. Incorporated Village of Island Park, 791 F. Supp. 354 (E.D.N.Y. 1992); Kreindler & Kreindler, 777 F. Supp. 195 (N.D.N.Y. 1991), aff’d on other grounds, 985 F.2d 1148 (2d Cir. 1993).

The tolling provision has also been found to apply to qui tam actions, but the relator has been treated as the “official” in such cases for purposes of determining when the Government gained knowledge of the alleged fraud. United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211 (9th Cir. 1996).

G. Service of Process

The False Claims Act provides for nationwide service of process. 31 U.S.C. 3731(a).

II. DAMAGES

A. Treble Damages and Penalties

A person who violates the False Claims Act will be liable for “a civil penalty of not less than $5,000 and not more than $ 10,000, plus 3 times the amount of damages which the Government sustains because of the act of that person . . . .” 31 U.S.C. § 3729(a).

B. Single Damages

The measure of single damages (subject to trebling under the Act) is generally the amount of additional money the United States had to pay as a result of the false statement or claim. United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943); United States v. Woodbury, 359 F.2d 370, 379 (9th Cir. 1966). The precise method of determining the amount of the Government’s overpayment varies depending on the type of case.

C. Penalties

The FCA provides for the mandatory award of penalties of between $5,000 and $10,000 per false claim. 31 U.S.C. § 3729(a). While damages are not necessarily required for penalties to be awarded, United States v. Cherokee Implement Company, 216 F. Supp. 374, 375 (D. Iowa 1963), large penalty awards may be limited by the Double Jeopardy Clause in cases where the defendant has already had a prior criminal conviction. United States v. Halper, 490 U.S. 435 (1989). Penalties may also be potentially limited by the Excessive Fines Clause. United States ex rel. Smith v. Gilbert Realty Co., 840 F.2d Supp. 71 (E.D. Mich. 1993).

D. Voluntary Disclosure

A defendant’s exposure to damages under the Act may be limited to double damages plus costs under the following circumstances:

  1. the person committing the violation of this subsection furnished officials of the United States responsible for investigating false claims violations with all information known to such person about the violation within 30 days after the date on which the defendant first obtained the information;
  2. such person fully cooperated with any Government investigation of such violation; and
  3. at the time such person furnished the United States with the information about the violation, no criminal prosecution, civil action, or administrative action had commenced under this title with respect to such violation, and the person did not have actual knowledge of the existence of an investigation into such violation;

31 U.S.C. § 3729(a).

III. QUI TAM PROVISIONS

A. Who Can File A Qui Tam?

The False Claims Act permits actions to be filed under the Act by either the United States Attorney General or by private citizens. Actions brought by private persons (referred to as “relators”) are brought “for the person and for the United States Government” but are “brought in the name of the Government.” 31 U.S.C. § 3730(b)(2).

The only persons expressly precluded from filing a qui tam under the Act are “former or present member[s] of the armed forces” who bring suit against a member of the armed forces based a claim “arising out of such person’s service in the armed forces.” 31 U.S.C. § 3730(e)(1).

In practice, courts have frequently also barred suits by government employees on public disclosure grounds. See e.g. United States ex rel. Fine v. Chevron, U.S.A., Inc., 72 F.2d 740 (9th Cir. 1995), cert. denied, 116 S.Ct. 1877 (1996). No court, however, has accepted the argument that government employees per se can never be relators. United States ex rel. Williams v. NEC Corp., 931 F.2d 1493, 1500-01 (11th Cir. 1991); United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416, 1419-20 (9th Cir. 1991); United States ex rel. LeBlanc v. Raytheon Co., 913 F.2d 17, 20 (1st Cir. 1990); United States ex rel. Givler v. Smith, 760 F. Supp. 72, 75 (E.D. Pa. 1991); United States v. CAC-Ramsay, Inc., 744 F. Supp. 1158, 1161 (S.D. Fla. 1990), aff’d, 963 F.2d 384 (11th Cir. 1992).

Suits by attorneys have also tended to be disfavored. See e.g. United States ex rel. Stinson v. Prudential Ins. Co., 944 F.2d 1149 (3rd Cir. 1991) (attorney); United States ex rel. Kreindler & Kreindler v. United Technologies Corp., 985 F.2d 1148 (2d Cir. 1993), cert. denied, 508 U.S. 973 (1993) (same).

B. How to File a Qui Tam Action?

Relators must file both a complaint and a written disclosure statement under seal to begin a qui tam action. Both are served on the Government pursuant to the Federal Rules of Civil Procedure.

  1. Complaint The complaint in a False Claims Act action is subject to review under Fed. R. Civ. P. 9(b), which provides that “in all averments of fraud or mistake, circumstances constituting fraud or mistake shall be stated with particularity.” See United States ex rel. Gold v. Morrison-Knudsen Co., 68 F.3d 1475 (2nd Cir. 1995), cert. denied, 116 S.Ct. 1836 (1996). It is thus generally required that the complaint describe “the outline of the fraudulent scheme and facts identifying ‘who, what, when and where’ of the fraud.” United States ex rel. Robinson v. Northrop Corp., 824 F. Supp. 830, 832 (1993). Successful motions under Rule 9(b), however, normally only result in dismissal without prejudice, if leave to amend has not previously been granted. Id.
  2. Written Disclosure Statement The disclosure statement consists of a “written disclosure of substantially all material evidence and information the person possesses.” 31 U.S.C. § 3730(b)(2). This generally means a detailed description of the parties, the fraud, applicable legal authority, and any relevant documents in the possession of the relator, along with a list of any relevant witnesses, and a list of relevant documents not in the relator’s possession. The basic objective is to provide the Government with as clear and complete a presentation of the facts as possible to facilitate an intervention decision by Government attorneys who are often burdened by numerous cases competing for their attention.Although disclosure statements may include work product, some courts have held that they are not protected by the work product doctrine or any other privilege. See e.g. United States ex rel. Burns. V. A.D. Roe Co., Inc., 904 F. Supp. 592 (W.D. 1995).
  3. Seal Requirement The complaint in a qui tam action is filed under seal. 31 U.S.C. § 3730(b)(2). Service of the complaint on the defendant is prohibited “until the court so orders.” Id.The appropriate method for filing an action under seal can vary by district. In some districts, simply including a cover sheet that omits the names of the parties is sufficient. Other districts require that pleadings be submitted in a sealed manilla envelope. Yet others require that a motion to file under seal be submitted along with the complaint. Reference should be made to local rules on this point.Once the complaint is filed, maintaining the seal is important, for a breach of the seal may lead to dismissal of the complaint with prejudice. See United States ex rel. Erickson v. Amer. Institute of Bio. Sciences, 716 F. Supp. 908, 912 (E.D. Va 1989); United States ex rel. Pilon v. Martin Marietta Corp., 60 F.3d 995 (2nd Cir. 1995); but see United States ex rel. Lujan v. Hughes Aircraft, 67 F.3d 242 (9th Cir. 1995) (reversing dismissal, directing district court to consider three factors: actual harm to government, nature of the violation, and whether the violation involved bad faith or willfulness).
  4. Service of the Complaint The Act states that the complaint and disclosure statement “shall be served on the Government pursuant to Rule 4(d)(4) of the Federal Rules of Civil Procedure.” Service on the United States is no longer covered by this rule; Fed. R. Civ. P. 4(i) now governs. Rule 4(i) requires that the complaint and disclosure statement be delivered to the United States Attorney General and to the United States Attorney in the district where the case is filed. Service can be made on the United States Attorney General by registered or certified mail. Service can be made on the United States Attorney by hand service on the United States Attorney (or his or her official designee) or by registered or certified mail on the civil process clerk at the United States Attorney’s office. Sending the complaint by registered or certified mail to the United States Attorney is not sufficient.

C. Government’s Investigation and Intervention Decision

The Act provides that the complaint “shall be filed in camera, shall remain under seal for at least 60 days, and shall not be served on the defendant until the court so orders.” 31 U.S.C. § 3730(b)(2). During this period, the Government investigates the allegations in the complaint and disclosure statement.

“The Government may elect to intervene and proceed with the action within 60 days after it receives both the complaint and the material evidence and information.” Id. As a practical matter, however, the Government rarely makes intervention decisions within the original 60 days. The Government is permitted to request extensions of the 60 day period “for good cause shown,” id., and frequently does so. The length of extension sought varies by case and by district. In most jurisdictions, the Government’s first request is almost always granted, and subsequent requests are often granted as well. The Government normally seeks the relator’s consent when requesting an extension. It is generally in the relator’s interest to concur with such requests, for if the Government is forced to make an intervention decision before it is ready to do so, it is likely to decline intervention. Not surprisingly, in most cases Government participation in a case facilitates both litigation and settlement.

D. Litigating and Otherwise Resolving The Case

If the Government intervenes in the case, then it takes on “primary responsibility for prosecuting the action . . . .” 31 U.S.C. § 3730(c)(1). The relator may still participate in the action, id., but the Government may request the Court to place limits on the relator’s participation in the case. 31 U.S.C. § 3730(c)(2)(C). The Government may also settle the case, notwithstanding the objections of the relator, “if the court determines after a hearing, that the proposed settlement is fair, adequate, and reasonable under all the circumstances.” 31 U.S.C. § 3730(c)(2)(B).

If the Government declines intervention in the case, the relator “shall have the right to conduct the action.” 31 U.S.C. § 3730(c)(3). The relator, however, does not then take on the powers and privileges of the Government. The relator litigates the case as if it were any other private lawsuit. See United States ex rel. Lamers v. City of Green Bay, Wis., 924 F. Supp. 96 (E.D. Wis. 1996). Moreover, the relator’s control of the case is not guaranteed; the court may always “permit the Government to intervene at a later date upon a showing of good cause.” 31 U.S.C. § 3730(c)(3).

E. Public Disclosure Bar & Original Source Exception

One of the most litigated provisions of the False Claims Act is its public disclosure bar. The provision reads as follows:

(4)(A) 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

.

31 U.S.C. § 3730(e). Some of the key issues of general relevance are reviewed briefly below. Individual cases, however, should be analyzed in the context of decisions that involve similar types of disclosures, which are not reviewed here.

  1. What is a “Public” Disclosure?The courts have differed on who must have received information for it to have been publicly disclosed. See United States ex rel. Mathews v. Bank of Farmington, 166 F.3d 853 (7th Cir. 1999) (information must be disclosed to either “a public official” whose duties extend to the claim in question or to the “public at large”); United States ex rel. Findley v. FPC-Boron Employees’ Club, 105 F.3d 675, 682-85 (D.C. Cir.), cert. denied, 118 S.Ct. 172 (1997) (discovery information not filed with the court is only theoretically available upon the public’s request); United States ex rel. Fine v. Advanced Sciences, Inc., 99 F.3d 1000 (10th Cir. 1996) (public disclosure occurs “if the allegations are disclosed to any single member of the public not previously informed thereof”).
  2. Disclosure of “Allegations or Transactions”In United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645 (D.C. Cir. 1994), the Court of Appeals for the District of Columbia Circuit established the following equation for determining whether a public disclosure consists of the “allegations or transactions” that form the basis of the FCA complaint:

    [I]f X + Y = Z, Z represents the allegation of fraud and X and Y represent its essential elements. In order to disclose the fraudulent transaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e., the conclusion that fraud has been committed. . . . [Q]ui tam actions are barred only when enough information exists in the public domain to expose the fraudulent transaction (the combination of X and Y), or the allegation of fraud (Z).

    Id. at 654. Other courts have since adopted this same framework. See United States ex rel. Rabushka v. Crane Co., 40 F.3d 1509, 1514 (8th Cir. 1994); United States ex rel. Dunleavy v. County of Delaware, 123 F.3d 734, 741 (3d Cir. 1997); Jones v. Horizon Healthcare Corp., 160 F.3d 326, 330 (6th Cir. 1998).

  3. What Action is “Based Upon” a Public Disclosure?Courts have also reached varying decisions regarding the meaning of the phrase “based upon” in the Act. In United States ex rel. Siller v. Becton Dickinson & Co., 21 F.3d 1339, 1348 (4th Cir.), cert. denied, 513 U.S. 928 (1994), the Fourth Circuit held that “a relator’s action is ‘based upon’ a public disclosure of allegations only where the relator has actually derived from that disclosure the allegations upon which his qui tam action is based.” See also United States ex rel. v. Mathews v. Bank of Farmington, 166 F.3d 853 (7th Cir. 1999) (same). Most of the other circuits to have considered the issue, however, have held that “based upon” means “supported by” or “substantially similar to,” so that the relator’s independent knowledge of the information is irrelevant. See United States ex rel. Biddle v. Board of Trustees of the Leland Stanford, Jr. Univ., 147 F.3d 821, 828 (9th Cir. 1998), cert. denied, ___ S. Ct. ___, 1999 WL 66673 (U.S. Apr. 19, 1999); United States ex rel. Precision Co. v. Koch Indus., Inc., 971 F.2d 548, 552 (10th Cir. 1992), cert. denied, 507 U.S. 951 (1993); United States ex rel. Doe v. John Doe Corp., 960 F.2d 318, 324 (2d Cir. 1992). See also United States ex rel. Findley v. FPC-Boron Employees’ Club, 105 F.3d 675, 682-85 (D.C. Cir.), cert. denied, 118 S. Ct. 172 (1997) (holds that a qui tam action is based upon public disclosures if it relies on the same allegations or transactions as those in the public disclosure; rejects the Fourth Circuit’s approach “because it renders the ‘original source’ exception to the public disclosure bar largely superfluous”); Mistick PBT v. Housing Auth. of the City of Pittsburgh, et al., 186 F.3d 376 (3rd Cir. 1999) (recognizing conflict between ordinary meaning of the phrase “based upon” and precept that a statute should be construed if possible so as not to render any of its terms superfluous, but electing to adhere to majority interpretation that “based upon” means “supported by”).
  4. The “Original Source” ExceptionDecisions concerning the “original source” exception to the public disclosure bar are largely fact based. The statute reads in pertinent part as follows:

    (B) For purposes of this paragraph, “original source” means an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.

    31 U.S.C. § 3730(e)(4).

    1. Direct KnowledgeWhile the law on this point is not unanimous, some courts have held the relator must have come by the information directly, that is, without any intervening agency or instrumentality. See e.g. United States ex rel. Stinson v. Prudential Ins., 944 F.2d 1149, 1160 (3rd Cir. 1991); United States ex rel. Precision Co. v. Koch Indus., Inc., 971 F.2d 548, 554 (10th Cir. 1992), cert. denied, 507 U.S. 951 (1993); United States ex rel. Barth v. Ridgedale Electric, Inc., 44 F.3d 699, 703 (8th Cir. 1995).
    2. Independent KnowledgeSeveral Courts have required that the relator have obtained the “knowledge” through some source other than the public disclosure. Houck on Behalf of United States v. Folding Carton Admin., 881 F.2d 494, 505 (7th Cir. 1989), cert. denied, 494 U.S. 1025 (1990);Wang v. FMC Corp., 975 F.2d 1412, 1417 (9th Cir. 1992); but see United States ex rel. Barajas v. Northrop Corp., 5 F.3d 407 (9th Cir.), cert. denied, 114 S.Ct. 1543 (1994).
    3. Voluntarily Provided Information to GovernmentThe Act requires that the relator have “voluntarily provided the information to the Government before filing an action under this section which is based on the information.” 31 U.S.C. § 3730(e)(4). The courts have reached varying conclusions on when an individual has “voluntarily” provided information to the Government. See United States ex rel. Barth v. Ridgedale Electric, Inc., 44 F.3d 699, 704 (8th Cir. 1995) (relator who only revealed information after a government investigator approached him deemed not an original source); but see United States ex rel. Pentagen Technologies Int’l Ltd., No. 94-CIV. 2925 (RLC), 1995 WL 693236 (S.D.N.Y. Nov. 22, 1995) (party disclosing information through deposition could still be original source).Some courts have additionally required that the relator have been the source of the publicly disclosed information. See Wang, 975 F.2d at 1418; United States ex rel. Dick v. Long Island Lighting Co., 912 F.2d 13, 16 (2d Cir. 1990). But the majority have not required such proof. See Stinson, 944 F.2d at 1160 (3d Cir.); U.S. ex rel. Siller v. Becton Dickinson, 21 F.3d 1339, 1355 (4th Cir.), cert. denied, 115 S.Ct. 16 (1994); Advanced Sciences, 99 F.3d at 1006-1007 (10th Cir.); United States ex rel. Mathews v. Bank of Farmington, 166 F.3d 853 (7th Cir. 1999); see also United States ex rel. Findley v. FPC-Boron, 105 F.3d 675 (D.C. Cir. 1997) (rejecting requirement that the relator be the source of the entity making the public disclosure but requiring that the information have been voluntarily provided to the Government before the public disclosure).

F. Relator’s Share

  1. Government Intervenes In Action – If the Government intervenes in a qui tam action, the relator is normally entitled to between 15% and 25% of the proceeds of the action or settlement, “depending upon the extent to which the person substantially contributed to the prosecution of the action.” 31 U.S.C. § 3730(d)(1). See United States v. General Electric, 808 F. Supp. 580 (S.D. Ohio 1992) and United States ex rel. Taxpayers Against Fraud and Walsh v. General Electric, 41 F.3d 1032, 1040 (6th Cir. 1994) (22.5% awarded by district court, but case ultimately settled for 19%); United States ex rel. Merena v. SmithKline Beecham Corporation, 1998 U.S. Dist. LEXIS 5077 at *71 (E.D. Pa. Apr. 8, 1998) (17% of $42,000,000 awarded).If the court finds that the action is “based primarily on disclosures of specific information (other than information provided by the person bringing the action) relating to 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, the court may award such sums as it considers appropriate, but in no case more than 10 percent of the proceeds, taking into account the significance of the information and the role of the person bringing the action in advancing the case to litigation.” 31 U.S.C. § 3730(d). See United States v. CAC-Ramsay, Inc., 744 F. Supp. 1158 (S.D. Fla. 1990) (5% awarded).
  2. Government Declines to Intervene – If the Government does not intervene in the case, the relator shall receive not less than 25 and not more than 30 percent of the proceeds of the action or settlement. 31 U.S.C. § 3730(d)(2). See United States ex rel. Pedicone v. Mazak Corp., 807 F. Supp. 1350 (S.D. Ohio 1992) (30% awarded).
  3. Relator Plans or Initiates Fraud – If the court concludes that the relator “planned and initiated the violation of section 3729 upon which the action was brought,” the court may reduce the relator’s share under paragraphs (d)(1) and (d)(2) “to the extent the court considers appropriate.” 31 U.S.C. § 3730(d)(2);United States ex rel. Barajas v. Northrop, No. CV-87 7288-KN (Kx) (C.D. Cal. May 15, 1992) (wrongdoing relator, who made “small but meaningful contribution,” awarded 10.8%). If the relator “is convicted of criminal conduct arising from his or her role in the violation of section 3729, that person shall be dismissed from the civil action and shall not receive any share of the proceeds of the action.” Id.
  4. Statistics – According to Department of Justice statistics, in qui tam cases resolved since the 1986 Amendments through November 1999, the average relator’s share has been approximately 16% in cases where the Government has intervened, and 26% in cases where the Government has declined to intervene (excluding the relator’s share in U.S. ex. rel. Boisvert v. FMC Inc.).

G. Attorney’s Fees and Costs

Whether the Government intervenes or not, if the qui tam action is successful, the relator “shall also receive an amount for reasonable expenses which the court finds to have been necessarily incurred, plus reasonable attorney’s fees and costs.” 31 U.S.C. § 3730(d)(1)-(2).

“If the Government does not proceed with the action and the person bringing the action conducts the action, the court may award to the defendant its reasonable attorneys’ fees and expenses if the defendant prevails in the action, and the court finds that the claim of the person bringing the action was clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.” 31 U.S.C. § 3730(d)(1)-(2).

H. Protection for the Relator

The FCA protects employee-relators against any retaliation by employers “because of lawful acts done by the employee on behalf of the employee or others in furtherance of an action under this section, including investigation for, initiation of, testimony for, or assistance in an action filed or to be filed under this section . . . .” 31 U.S.C. 3730(h). Circuit court decisions interpreting the scope of protected activity have produced differing results. See Neal v. Honeywell, 33 F.3d 869, 865-66 (7th Cir. 1994) (holding that Section 3730(h) applies to intracorporate complaints of fraud); Robertson v. Bell Helicopter, Inc. 32 F.3d 948, 951 (5th Cir. 1994), cert. denied, 115 S. Ct. 1110 (1995) (internal reporting of concerns about charges to the Government by a contractor employee is not protected activity where employee never used terms “illegal,” “unlawful,” or “qui tam action”); United States ex rel. Ramseyer v. Century Healthcare Corp., 90 F.3d 1514 (10th Cir. 1996) (reports of non-compliance not sufficient if employee’s job was to report non-compliance).

If an employer is found to have retaliated against an employee in violation of the Act, the employee “shall be entitled to all relief necessary to make the employee whole.” 31 U.S.C. § 3730(h). The relief provided under the statutes includes “reinstatement with the same seniority status such employee would have had but for the discrimination, 2 times the amount of back pay, interest on the back pay, and compensation for any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys’ fees.” Id. Cases interpreting this provision have concluded that the damages available are limited to those forms of relief specified in the Act. See In re Visiting Nurse Association, 176 B.R. 748 (Bankr. Ed. Pa. 1995); Neal v. Honeywell, 995 F. Supp. 889 (N.D. Ill. 1998) (punitive damages not available). Additional forms of relief, such as punitive damages, however, may be available under state law in the jurisdiction where the suit is filed.

IV. COMMON FRAUD SCHEMES

A. DEFENSE

  1. Cost Mischarging: Contractors often perform services for the government on a cost-plus basis, where they are paid for the cost of making a product plus an additional fee. It is inappropriate for a contractor to charge the government under the cost-plus contract for the costs it incurs while working on other contracts such as fixed-price government contracts or commercial contracts. False Claims Act cases are often predicated on the knowing misallocation of such costs.
  2. Defective Pricing: The government often purchases products that can only be produced by a single company. In these cases, where competitive bidding is not available, the government must negotiate a price with the company based on the manufacturer’s costs of producing the product. The Truth in Negotiations Act (“TINA”), 10 U.S.C. § 2306(g) (1988), requires the company to truthfully disclose all relevant cost information and provide a certification to that effect to the government. Intentionally inflating costs in order to obtain a higher price from the government may constitute a violation of the False Claims Act.
  3. Product Substitution: Government contracts often describe the exact specifications of the components that are to be used by contractors in manufacturing products for delivery to the government. In order to reduce their costs, manufacturers will sometimes substitute cheaper components for those they promised to deliver to the government. Such conduct may be actionable under the False Claims Act.
  4. Defective Products: Because of the often critical uses it has for the products it purchases, the government frequently has stringent quality requirements. Government contracts often require that contractors employ particular manufacturing processes or that they test their products according to specific guidelines. In such cases, contractors are normally required to certify that they are delivering products that have been manufactured according to the specified standards. If they represent that they have met such standards, when they are aware that they have not, they may be liable for submitting false claims.

B. MEDICARE/MEDICAID

  1. Billing for Services or Supplies Not Provided: One of the more blatant forms of health care fraud is billing for medical services or supplies that were never actually provided to patients. This form of fraud can be found in most sectors of the medical industry, from hospitals to nursing homes.
  2. Upcoding: Health care providers often bill for their services by attributing a particular ICD-9 or CPT code to the particular service provided. In order to increase revenues, health care providers will sometimes assign codes that are associated with a higher level of service than the level of service actually provided. The knowing submission of such false claims is actionable under the False Claims Act.
  3. Unbundling: Medicare regulations require that certain procedures (e.g., blood tests) be coded and billed together as one group, rather than broken out and billed separately. Health care providers will nonetheless sometimes break out the individual tests or services and bill them separately, thus increasing the payment by the government for the service. This conduct is not permitted and often a basis for suit under the False Claims Act.
  4. Medical Necessity: Medicare/Medicaid regulations require that medical services billed to the government be medically necessary. Health care providers will sometimes falsely represent that certain medical services, supplies, or equipment are medically necessary in order to collect payment for services that would otherwise be ineligible for reimbursement. Numerous cases have been filed challenging fraudulent claims of medical necessity.
  5. Fraudulent Cost Reports: Health care facilities are reimbursed by Medicare for certain overhead costs in addition to the reimbursements they receive for treating individual patients. The amount of such reimbursements is largely dependent on the costs incurred by the health care facility in preceding years for expenses such as personnel and capital improvements. If the health care facility overstates or improperly characterizes its expenses, it is able to inflate the amount of its reimbursement beyond that to which it is entitled. This is a growing field of liability under the Act.

C. EDUCATION

  1. False Representations Regarding Student Qualifications: The Department of Education’s financial aid programs often require that students meet certain minimal academic standards in order to qualify for financial aid. Some post-secondary schools (e.g., trade schools) will falsify records relating to the qualifications of their students in order to assure that the students qualify for financial aid. When the students receive the financial aid, the money is normally then paid to the school for tuition or related expenses. The school is potentially liable for all financial aid improperly obtained in this manner.
  2. False Representations Regarding Student Enrollment: A student is obviously only entitled to financial aid when he or she is enrolled in school. Some institutions, however, will continue to list a student as enrolled after he or she drops out in order to continue collecting financial aid. This again is a potential basis for suit under the Act.

D. HOUSING

  1. False Representations Regarding Qualifications of Purchasers: The Department of Housing and Urban Development and the Department of Veterans Affairs both guarantee loans made to certain individuals (e.g., low income persons and veterans) for housing. Financial institutions therefore have an incentive to lend money to these individuals, since they can charge loan fees yet not bear the risk of loss normally associated with making a loan. In order to assure prudent lending practices under these circumstances, the government requires that the borrowers meet certain minimal qualifications. Some financial institutions, however, knowingly misrepresent the qualifications of borrowers in order to make loans that would otherwise not qualify. When the borrowers default, the government then has to pay on the guarantee.

E. ENVIRONMENTAL

  1. False Environmental Compliance Certifications : A recent source of liability under the Act has been false certification by Government contractors of compliance with environmental statutes or regulations, such as the Clean Water Act or the Clean Air Act. The Government often requires certification of compliance with such statutes as a prerequisite to payment. Falsely claiming compliance can thus provide a basis for suit.
  2. False Statements to Avoid Fines, Penalties, or Forfeitures:  The False Claims Act has been used successfully to prosecute parties not doing business with the government, who have made false statements to avoid payment of fines or penalties for environmental violations. Similar cases have been brought against private parties who have made false statements to avoid the payment of customs duties or forfeitures. The plaintiffs in these cases have argued that the defendants made false statements to reduce obligations that would otherwise be due the government. The often contingent nature of the alleged obligations, however, has resulted in mixed decisions in these cases. The law continues to evolve on the subject.

F. GENERIC SCHEMES

  1. Bid-rigging: Bid-rigging occurs when companies bidding on a particular contract secretly agree in advance on how each of them will bid. The companies thus determine who the government will select and normally cause it to pay more than it would under competitive conditions. The companies then either share the extra profits or simply take turns as the winning bidder on successive contracts. The inflated claims for payment in such cases are normally actionable as false claims.
  2. Bribery: Although such cases are not common, government employees occasionally are found to have accepted bribes, gratuities or other consideration for favoritism in the contracting process. Contractors who submit claims for payment pursuant to contracts procured by such fraud are normally subject to liability under the False Claims Act for at least the amount of the bribe and/or any increase in the contract price that resulted from the bribe.
  3. False Progress Reports: Many government contracts call for payments to be made based on the progress of the contractor in completing the required work. Contractors will sometime make false representations regarding their progress in order to receive payments sooner rather than later. Such false representations, which result in the government losing interest on the pre-paid funds, can form the basis for liability under the Act.
  4. Kickbacks: Whenever a company is entitled to reimbursement by the government for its costs, the possibility of kickbacks harming the government is present. The scheme typically works as follows: The company doing business with the government overpays a supplier and bills the government for the full amount it paid to the supplier. The company then has a separate arrangement with the supplier by which part of the money overpaid to the supplier is “kicked back” to the company or one of its representatives. The original claim to the government for the inflated amount is the false claim.

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AAA Ambulance Industry Journal

Whistle-blowers Dial 911 on Fraud in the Ambulance Industry

by Paul D.Scott
Fall 1999

If a Medicare patient in need of kidney dialysis treatment requests ambulance service to a dialysis center, you provide it, right? Wrong. Not if the patient is ambulatory. Not unless you are prepared to pay multiple damages and penalties to the United States government and a substantial reward to a private citizen who has reported your conduct.

The United States Department of Justice, and bounty hunting “whistle-blowers” acting on its behalf, is in the midst of a campaign against ambulance services that stray from the government’s rigorous billing regulations. Companies caught providing medically unnecessary services, such as nonessential outpatient dialysis transport, have been hit with lawsuits costing them millions of dollars, and more suits are on their way.

Civil False Claims Act

The statutory weapon for this assault on ambulance companies is the civil False Claims Act. The Act permits the Department of Justice, or whistle-blowers in its stead, to file suit against any person or business that submits false statements or claims to the federal government. Virtually any type of claim that is submitted for reimbursement directly or indirectly to Medicare, Medicaid or any other federal government program is covered.

And proving the case is not difficult. At trial, the False Claims Act requires proof that the defendant knowingly submitted the false statement or claim. This standard can easily be met, since “knowingly” is defined in the Act to include even reckless disregard or deliberate ignorance of the truth.

If the trier of fact concludes the defendant submitted false claims, the Act mandates payment by the defendant of three times the government’s damages plus penalties of between $5,000 and $10,000 for each false statement or claim. Of course, in the ambulance business, where hundreds and thousands of claims are submitted by companies to Medicare intermediaries, even if the damages are small, penalties can quickly mount into the millions of dollars.

Recent Cases

A recent case involving a New Orleans based ambulance service provides a prime example of how the False Claims Act can operate in combination with other government regulations to devastating effect. The government’s complaint alleged that the company improperly sought reimbursement from Medicare for transporting dialysis patients by ambulance from their places of residence to dialysis treatment facilities when doing so was not medically necessary.

Under Medicare regulations, a patient receiving maintenance dialysis on an outpatient basis is not ordinarily considered ill enough to require ambulance transportation to a dialysis treatment facility. Transportation is only medically necessary, and therefore reimbursable under Medicare regulations, when the patient can be moved only by stretcher or is bed-ridden both before and after the ambulance trip.

According to the complaint, over a span of approximately six years, the firm transported numerous dialysis patients at the government’s expense, despite the fact that the patients were ambulatory. The company subsequently submitted claims to the government’s fiscal intermediary, falsely representing that the patients had been bed-ridden, and the government ultimately paid the claims.

The complaint cited 501 claims in particular for which it had ready proof. These claims — which generally ran well under $200 per claim — led to only minor damages, but the threat of paying 501 separate $10,000 penalties gave the firm pause. It paid $1.8 million to settle the case.

Other ambulance enterprises have paid out similarly large sums for the provision of medically unnecessary services. A Minnesota based service recently paid $3 million dollars to settle allegations that it had defrauded the government by billing for advanced life support care when only basic life support care was actually provided. A case involving similar allegations was settled earlier this year for $120,000 by a service based in Massachusetts.

Yet additional cases are underway. For instance, in November 1997, an action was filed against a firm in Oklahoma, alleging the medically unnecessary transport of dialysis patients. Criminal charges were also filed. Two of the individuals involved entered pleas to the criminal charges and a third was convicted at trial. The two who pleaded guilty have now settled the civil False Claims Act cases against them. The third person, who was convicted at trial, is litigating against the government from jail.

Qui Tam Provisions

One of the key factors in this upsurge in cases involving the ambulance industry has been whistle-blower actions. These cases are filed in federal court under the qui tam provisions of the False Claims Act by individuals called “relators” who have information about fraud against the government.

Most anyone is permitted to file a qui tam. This includes wrongdoers, unless they have been convicted of or initiated the fraud. When the Act was first passed in 1863, Congress expressed no compunction about “setting a rogue to catch a rogue.”

The key limitation concerns whether the information has previously been publicly disclosed in a public hearing, report or investigation, or in the news media. If so, then the relator can only continue with the action if the relator was the “original source” of the information, meaning they supplied the information to the government or the media prior to its being made public.

Complaints must be filed under seal and are only initially served on the government. The relator provides the government with a copy of the complaint and a disclosure statement describing the evidentiary basis for the allegations in the complaint. The purpose of this procedure is to provide the government an opportunity to conduct an undercover investigation of the allegations in the complaint and determine whether it should intervene in and take over the action.

If the Government does take over the action, the relator is normally relegated to a secondary role. If a judgment or settlement is obtained, the relator is generally entitled to 15 to 25 percent of the recovery, depending on, among other things, the degree of assistance the individual lends to the government’s prosecution of the case. Alternatively, if the government does not intervene in the case, the relator may still pursue the case on the government’s behalf. If the relator is successful in this effort, the relator’s share jumps to between 25 and 30 percent of the recovery.

Historically, the government has only intervened in a small number of cases — less than one quarter of the qui tams filed since 1986 — and it is those cases that have been by far the most successful. Over $2.189 billion has been recovered in cases where the government intervened (as of August 1998). By contrast, only $60,000,000 has been recovered in the same period in cases where the government declined to intervene.

Good and bad alike, qui tam cases have exploded in recent years since the passage of liberalizing amendments to the False Claims Act in 1986. In 1987, only 32 qui tams were filed. In 1997, a decade later, 530 cases were filed. In 1998, the number of cases filed was at 417 by the end of August, and there is no reason to expect the pace to slow down.

The challenge for the ambulance industry in this dangerous climate will be to avoid the practices that lead to the catastrophic consequences of a False Claims Act case, for it is highly likely that such conduct will ultimately be detected by some individual, and it is equally likely that the same individual will file suit on the government’s behalf, so that they might share in the resultant recovery.

Paul D. Scott is a litigator practicing in San Francisco specializing in qui tam and government contracts cases. Between 1989 and early 1995, he served in the Civil Fraud Section of the Department of Justice where he was responsible for prosecuting cases under the False Claims Act. He can be contacted by phone at (415) 981-1212 or by mail at the Law Offices of Paul D. Scott, 1105 Battery Street, San Francisco, California 94111. For more information about the False Claims Act and whistle-blower actions, visit www.fraudhotline.com.

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Reverse False Claims

by Paul D.Scott
November 20, 1998

Published by the American Bar Association Center for Continuing Legal Education as part of A National Institute on the Civil False Claims Act and qui tam Enforcement

I. Introduction

Prior to 1986, the False Claims Act (“FCA” or “Act”), 31 U.S.C. § 3729 et seq., did not explicitly cover false claims made to reduce or avoid an obligation to the United States. As part of the 1986 Amendments to the Act, Congress added a provision to address these so-called “reverse false claims.” The provision reads, in pertinent part, as follows:

(a) Liability for certain acts. — Any person who — (7) knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government, is liable to the United States Government . . . 31 U.S.C. § 3729(a)(7).

A critical issue in the interpretation of subsection (a)(7) has been the exact definition of the term “obligation.” Courts are split on the issue. The first courts to consider the question construed subsection (a)(7) broadly to cover false statements made to avoid contingent fines, penalties, or forfeitures that might be imposed by the United States for the violation of a regulation or statute. See United States ex rel. Sequoia Orange Co. v. Oxnard Lemon Co., 1992 WL 795477 (E.D. Cal.); United States ex rel. Stevens v. McGinnis, Inc., 1994 WL 799421 (S.D. Ohio); United States ex rel. Terry J. Wilkins v. State of Ohio, et al., 885 F. Supp. 1055, 1064 (S.D. Ohio 1995); and Pickens v. Kanawha River Towing, 916 F. Supp. 702 (S.D. Ohio 1996). More recently, however, the Eighth Circuit Court of Appeals and at least two district courts have construed the term obligation more narrowly as referring only to an existing duty to pay money or property and have specifically rejected the notion that a contingent fine, penalty or forfeiture constitutes an “obligation” under the terms of the Act. See United States v. Q International Courier, Inc., 131 F.3d 770 (8th Cir. 1997); United States ex rel. American Textile Manufacturers v. The Limited, Inc., 1997 U.S. Dist. LEXIS 18142 (S.D. Ohio November 13, 1997) (American Textile I); United States ex rel. American Textile Manufacturers v. The Limited, Inc., 179 F.R.D. 541 (S.D. Ohio 1997) (American Textile II); and United States ex rel. S. Prawer & Co. v. Verrill & Dana, 946 F. Supp. 87 (D. Me 1996). A few additional cases have acknowledged the viability of reverse false claims causes of action under circumstances that satisfy the standards set forth in both the earlier cases and in the recent Eighth Circuit decision Q International Courier, Inc. See United States. v. American Heart Research Foundation, Inc., 996 F.2d 7, 9 (1st Cir. 1993); United States ex rel. Maclennan v. JCB, Inc., Civ. No. WN-88-874 (D. Md. Nov. 3, 1992); United States ex rel. Dunleavy v. County of Delaware, 1998 WL 151030 (E.D. Pa. 1998).

Each of the foregoing cases is reviewed in turn below under the heading “Current Cases.” The legislative history of subsection (a)(7), other related cases, the Government’s position on the issue, and the subject of preemption are dealt with separately. The ultimate conclusion of the paper is that the Eighth Circuit’s narrow definition of the term “obligation” as “a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness,” or some close variation of this definition, is likely to carry the day, and the successful use of the FCA to prosecute false statements made to avoid potential fines, penalties or forfeitures is unlikely to continue in the future. Q International Courier, Inc., 131 F.3d at 773.

II. Current Cases

A. Subsection (a)(7) Construed Broadly

In United States ex rel. Sequoia Orange Company v. Oxnard Lemon Company, et al., 1992 U.S. Dist. LEXIS 22575, the relator filed suit against several lemon importers, the Secretary of Agriculture and several lower level employees of the Department of Agriculture. The suit alleged, inter alia, that the defendant importers conspired together to submit false reports of their lemon shipments to the Lemon Administrative Committee (“LAC”) to avoid paying per carton assessments to the LAC and to avoid paying statutory forfeitures for shipments of lemons in excess of weekly shipping quotas. The United States intervened in the action and filed a motion to dismiss, arguing, in pertinent part, that the relator could not state a reverse false claim with respect to the potential fines or forfeitures that it avoided through its false statements, “because violation of an administrative enforcement statute does not constitute an obligation to transmit money or property to the Government.” 1992 U.S. Dist. LEXIS 22575, *5 (internal citations omitted).

The district court rejected the argument, holding that the relator’s claims based on alleged false statements to avoid payment of fines or forfeitures were actionable under the FCA. In reaching this conclusion, the court reviewed the applicable regulations under the Agricultural Marketing Agreement Act of 1937 (“AMAA”), 7 U.S.C. § 608c, which provided for the imposition of criminal penalties and civil fines, and which also provided for the imposition of a forfeiture in an amount equal to the market value of the excess fruit imported in violation of the quota or allotment fixed by the Secretary. Id. at *25. These regulations, in the view of the court, “established a fixed amount of damages recoverable by the Government for shipments in excess of quota, a claimed obligation equal to the market value of the overshipped fruit.” Id. As a result, “the Government had ‘potential claims’ for forfeitures and fines against defendants for the alleged overshipments,” which defendants concealed by submitting false shipping reports. Id. at 26. “Had the Government successfully prosecuted defendants for the violations, the United States Treasury would have been enhanced through the payment of the appropriate fines and forfeitures.” Id. The court thus effectively held that the term “obligation” in subsection (a)(7) covered contingent fines and forfeitures.

In United States ex rel. Darrell Edward Stevens, et al. v. McGinnis, Inc., et al., 1994 U.S. Dist. LEXIS 20953, *14, the allegation of a reverse false claim arose out of the defendant’s “failure to record its discharge of bilge slop and other pollutants into the Ohio River on its logs, and its failure to report these pollution spills to the United States Government as required by the Clean Water Act.” The court held that “the conclusion reached in the Sequoia Orange case . . . is equally applicable to this case.” Id. at *18. “By failing to record and report these illegal discharges of pollutants into the Ohio River, defendant McGinnis may have made misrepresentations to the Government thus, avoiding the fines, penalties, and cleanup costs imposed by § 311(f) of the Clean Water Act, 33 U.S.C. § 1321(f).” Id. at *19. The court only required that the plaintiff prove that the false information, whether in the form of an affirmative false statement or omission, have been knowingly submitted to the United States, id. at *20, and the court suggested that the defendant’s vessel logs “arguably constitute[d]” such misrepresentations. Id.

Both McGinnis and Sequoia Orange were cited approvingly in United States ex rel. Terry J. Wilkins v. State of Ohio, et al., 885 F. Supp. 1055, 1064 (S.D. Ohio 1995). While the definition of the term “obligation” was not central to the case, the court essentially reiterated the reasoning in Sequoia Orange and McGinnis on that issue. The court then focused on the question of whether subsection (a)(7) required proof that defendants actually submitted a false representation to the Government.

The reverse false claim allegation in Wilkins was based on allegations that the “defendants destroyed documents, tried to cover up the misuse of funds, failed to conduct proper audits, and failed to inform the Government about the improper use of funds” in the Community Services Block Grant Program, a federally funded program administered by the State of Ohio. The complaint failed to allege, however, “that defendants were obligated to identify misspent funds” or “any other allegations concerning records or statements which were false due to omissions submitted to or reviewed by the government.” Id. at 1064-1065. The court thus distinguished the case from McGinnis, where such misrepresentations had allegedly been made in the form of false entries in vessel logs. Id. at 1064. In the view of the court, the simple allegation that “defendants did not tell the United States Government about the misuse of federal funds and that they all acted to prevent repayment to the United States Government” was not sufficient to state a claim under subsection (a)(7). Id.

Violations of the Clean Water Act, 33 U.S.C. § 1251 et seq., were again the basis for reverse false claims allegations in Earl O. Pickens v. Kanawha River Towing, 916 F. Supp. 702 (S.D. Ohio 1996). The relator in Pickens alleged that the defendants discharged bilge into the Ohio River, then failed to record that fact in the vessel’s log. The court held that such failures to report can create liability under subsection (a)(7). In reaching its decision, the court agreed with the holding in Wilkins that the Act requires proof that “the defendant prepare, create or submit some type of statement or record that is false” and that “a failure to report does not constitute a statement or record.” Id. at 708. The court also acknowledged that defendants’ had no statutory obligation to make a record of discharges. Id. Nonetheless, the court concluded that defendants’ alleged failure to record the discharge in the vessel’s log would have created a false record, and since the Government relies upon such logs as part of its regulatory role, then such a record would constitute a false statement to avoid an obligation to the Government. Id. The court referred to the “payment of fines owed to the United States under the CWA” as the obligation that defendants were seeking to avoid. Id. at 705. It did not engage in any analysis to explain its conclusion that potential fines constituted an “obligation” under the Act.

B. Subsection (a)(7) Construed Narrowly

The first decision to construe subsection (a)(7) to exclude claims based on false statements to avoid fines, penalties and forfeitures was United States ex rel. S. Prawer & Co. v. Verrill & Dana, 946 F. Supp. 87 (D. Me. 1996). In Prawer, the relator brought suit against several attorneys who had represented Fleet Bank of Maine (“Fleet”) and the Federal Deposit Insurance Corporation in connection with the FDIC’s repurchase of a non-performing loan from Fleet. Id. Fleet had taken over the relator’s $2 million line of credit with Main National Bank when it was declared insolvent in early 1991. Id. at 88. Under the terms of its agreement with the FDIC, Fleet could make a “put” (that is, require the FDIC to repurchase) non-performing loans, including lines of credit, under certain conditions. Id. at 89. The relators alleged that Fleet made false statements to the FDIC in order to make the put of the relator’s loan. Id. The relators further alleged that Fleet’s lawyers and the FDIC attorney who supervised the firm learned after the fact that the put had been improper, but did not disclose that fact to the FDIC; instead, they concealed the impropriety. Id. The Government intervened to pursue Fleet but not the lawyer defendants. The case before the court involved the lawyer defendants only.

The relators made two principal arguments. First, relators contended that in paying for the put, the FDIC purchased an asset it was not obligated to purchase because of defects in the put. Id. at 90. Under its agreement with the FDIC, Fleet thus had an immediate obligation, in relators’ view, to repurchase the put. Id. When the lawyers concealed that obligation, reasoned the relators, they violated subsection (a)(7). After an extensive review of the agreement between Fleet and the FDIC, the court disagreed, concluding that, while Fleet may be liable to the FDIC on other grounds for any false representations made in connection with its put, “no contractual obligation to pay automatically [sprang] into existence” under its agreement with the FDIC after the FDIC accepted the put. Id. at 93. Accordingly, there was no existing obligation under the agreement for the lawyers to conceal in violation of subsection (a)(7). Id.

Relators’ second contention was that the lawyer defendants’ false representations concealed Fleet’s obligation to pay funds to the FDIC for violations of the False Claims Act, common law fraud and breach of the implied covenant of good faith and fair dealing. The court rejected this argument, observing “that obligation’ in the False Claims Act refers to something more than potential liability or moral or social duty; a legal obligation seems to be the touchstone.” Id. at 94. The court then focused on when a legal obligation to pay or transmit money exists, and it concluded that no such obligation exists immediately after the commission of a tort, a violation of the False Claims Act, or a breach of a contract (unless there is a specific remedy provided in the contract). Id. at 94. “Money is not owed’ without a specific contract remedy, a judgment or an acknowledgment of indebtedness.” Id. at 95. Since “Fleet had no such obligation to pay at the time the lawyer defendants acted,” the lawyer defendants thus could not be held liable under subsection (a)(7) for false statements to reduce an obligation to pay. Id.

The court criticized the decisions in Sequoia Orange, McGinnis, and Pickens for failing to discuss “why violations gave rise to an immediate obligation’ prior to any judgment except the general recitation of legislative history . . . .” The court conceded, however, that “the Sequoia Orange case is perhaps closer to the tax and lease cases where there was a fixed remedy that could be construed as an obligation.” Id. at 95, n. 14.

In a subsequent holding on relators’ motion for reconsideration in the same case, the court conceded that “the matter was not free from doubt,” but still maintained its basic position that the term “obligation to pay” included “judgment[s] . . . settlements, other contract remedies and acknowledgments of indebtedness.” U.S. ex rel. Prawer v. Verrill & Dana, 962 F. Supp. 206, 209 (D. Me. 1997) (emphasis added).

The Eight Circuit Court of Appeals cited the Prawer court decision with approval in United States v. Q International Courier, Inc., 131 F.3d 770 (8th Cir. 1997). The defendant in the case, Q International Courier (“Quick”), was engaged in a practice known as “ABA remail.” Id. at 772. In order to take advantage of differences in domestic and international mailing rates, Quick would transfer bulk mail from the United States to Barbados, then remail the letters individually back to the United States at reduced rates, thus achieving postage savings for its customers. Id. The United States alleged that Quick violated the reverse false claims provision of the Act, since it had made false statements to reduce its obligation to pay postage. Id.

In analyzing the Government’s claims, the Eighth Circuit echoed the reasoning set forth in Prawer, but expanded the definition of “obligation” to include a duty to pay money arising from a “statute” or “regulation.” Id. at 773: To recover under the False Claims Act, we believe that the United States must demonstrate that it was owed a specific, legal obligation at the time that the alleged false record or statement was made, used or caused to be made or used. The obligation cannot be merely a potential liability: instead, in order to be subject to the penalties of the False Claims Act, a defendant must have a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness. The duty, in other words, must have been an obligation in the nature of those that gave rise to actions of debt at common law for money or things owed. Id. at 773 (emphasis added).

In applying this rationale to the facts before it, the court of appeals reviewed the Postal Service’s International Mail Manual (June 9, 1997) (“IMM”). The Government relied upon language in the IMM indicating that “payment of domestic postage ‘is required to secure delivery of mail’ sent by or on behalf of a resident of the United States, if the foreign postage applied to the mail is lower than the comparable United States domestic postage rate.” Q International Courier, 131 F.3d at 773 (quoting IMM § 791). The court rejected this argument, however, based on the notion that the “language serves only to release the Postal Service from an obligation” to deliver mail sent by United States residents from certain foreign locations, “not to impose an obligation on anyone to pay postage.” Id.

The Government also claimed that the Private Express Statutes, 39 U.S.C. §§ 601-606, which prohibit the private carriage of letters in the United States, created an obligation on Quick’s part to pay postage. Id. at 773. The court disagreed with this contention as well. Even assuming that Quick may have violated the Private Express Statutes, the court concluded that the statutes did not create any fixed obligation to pay postage. Id. at 774. The implementing regulations of the Private Express Statutes permit the Postal Service to seek payment of a penalty in “‘an amount or amounts not exceeding the total postage,'” but it does not create an obligation to pay postage; it just sets the limit of a potential penalty. Id. at 774. The court thus held that the penalties did not provide a basis for liability under the Act. Id. “A potential penalty, on its own, does not create a common-law debt. A debt, and thus an obligation under the meaning of the False Claims Act, must be for a fixed sum that is immediately due.” Id.

The court reached similar conclusions with respect to the possible criminal penalties for violating the Private Express Statutes. Id. The court emphasized that “the fine is unrelated to the postage due,” and are “designed to punish one who violates the Private Express Statutes, not to create an obligation to pay postage.” Id.

Lastly, the court rejected the Postal Service’s assertion that Quick owed postage because ABA remail is in reality domestic mail, not international mail. The court assumed arguendo that the mail was domestic but still concluded that the Government had failed to establish a duty for Quick to pay postage, noting that the Government did not direct it “to any source imposing a duty on Quick’s part to pay postage on any mail other than those already rejected above.” Id.

In United States ex rel. American Textile Manufacturers Institute, Inc. v. The Limited, et al., 1997 U.S. Dist. LEXIS 18142 (S.D. Ohio November 13, 1997) (“American Textile I”) and United States ex rel. American Textile Manufacturers Institute, Inc. v. The Limited, Inc., et al., 179 F.R.D. 541 (S.D. Ohio 1997) (“American Textile II”), the court followed the trend of interpreting subsection (a)(7) narrowly. The relator in American Textile alleged that the defendants knowingly permitted manufacturers to misidentify the country of origin of goods in order to import amounts of those goods in excess of quotas imposed by the United States. Id. at *6-7. This conduct, in the relator’s view, violated statutes and regulations under which the United States could assess fines and penalties. Id. at *9-15. According to the relator, when defendants subsequently falsified the corresponding entry documents, they attempted to avoid obligations owed to the U.S. Government in violation of subsection (a)(7). Id.

The district court rejected the argument in two decisions — the first on a motion to dismiss (“American Textile I”) and the second on a motion to alter judgment (“American Textile II”). In the first decision, the court thoroughly reviewed the legislative history and relevant case law before concluding that Congress did not intend, by the 1986 amendments to the FCA, “to convert that Act into an all-inclusive vehicle for the enforcement of any federal statute or government regulation . . . whenever it can be found that some false statement has been made regarding conduct subject to monetary sanctions.” American Textile I, 1997 U.S. Dist. LEXIS 18142, *38. The court gave several examples of how a contrary interpretation of the Act (in the context of environmental statutes, OSHA regulations, and even civil rights claims under 42 U.S.C. § 1983) would create a “super enforcement tool with a private right of action for the imposition of some new additional penalty” beyond those already available under federal law. Id. at 38-45. The Court concluded that “[s]o drastic an expansion in the scope of the False Claims Act, through the use of language which strongly implies that there be some type of financial relationship between the defendant and the United States which is subject to being affected by an act of concealment or avoidance, could not reasonably have been intended.” Id. at *45.

The court did not, however, come up with a final definition of the term “obligation.” Id. at 48. The court stated that “the proper definition of the term ‘obligation’ may well go beyond that contemplated by the Prawer court to include matters other than direct contractual obligations or claims which have been reduced to judgment.” Id. But as to what additional matters might be covered, the court did not comment; it only held that “the language of § 3729(a)(7) is not so broad as to encompass every statutory or regulatory violation which might lead the United States to attempt to assess a fine or other type of monetary penalty against the violator.” Id. at *49.

In applying its reasoning to the facts before it, the court summarily rejected the relators’ claims based on defendants’ alleged concealment of potential liability for fines or penalties under the various importation laws cited by the relators. Id. The court spent more time, though, on the “closer question” of whether defendants could be held liable for allegedly concealing an obligation to pay a ten percent ad valorem duty (assessed on mismarked goods) through the filing of false entry documents. Id. at *50. In that situation, the court did not dispute that the amount of the duty was fixed; it focused instead on the contingent nature of the duty, noting that “[t]he act of importing such goods does not itself create “an obligation to pay or transmit money or property to the Government.” Id. at *51. (internal citations omitted). “Rather, if, after importation, the goods are then exported, destroyed or properly marked, there is no obligation to pay the additional ad valorem duty.” Id. Accordingly, the court concluded that the obligation did not exist at the time the false statements were made.

In further support of its position, the court pointed out that if it were to accept the relators’ position, it would be difficult for courts to determine the amount of the Government’s damages. Id. at *46. “It is difficult to envision what procedure would be used in an FCA case to determine exactly what amount of money, in the form of penalties or fines, the government would hypothetically be entitled to for violations of statutes or regulations which the government has chosen not to enforce directly against the defendant.” Id. at *47.

The court distinguished the case before it from one where the defendant falsely represented the country of origin in order to pay a lower duty. Id. at *50. In such a case, the court stated “there is clearly an existing obligation to pay the correct duty and, if not paid, the government has been deprived of duties to which it is entitled.” Id. The customs duties owed by the defendants in American Textile would have been the same whether or not the country of origin had been misrepresented. Id.

The court also explicitly distinguished situations where a government contractor falsely certifies that it has complied with a federal statute in order to qualify for payment by the Government. Id. at 40, n. 6. (citing United States ex rel. Fallon v. Accudyne Corporation, 880 F. Supp. 636 (W.D. Wis. 1995)). In the case before the court, no such false statements were being made to qualify for payment.

The district court’s second decision on defendant’s motion to alter judgment was reached after the Eighth Circuit’s holding in Q International. American Textile II, 179 F.R.D. 541. The district court relied heavily on the Eighth Circuit’s decision as well as the district court decision in Prawer in upholding the court’s original decision. Id. at 548-549. It offered little in the way of new analysis of the issues.

C. Neutral Decisions

Several courts considering subsection (a)(7) have reached conclusions that are generally consistent with both lines of authority referenced above.

In United States. v. American Heart Research Foundation, Inc., 996 F.2d 7 (1st Cir. 1993), defendants allegedly made false statements to qualify for a nonprofit mailing permit, which they used prior to 1986 to make for-profit mailings. The issue on appeal was the retroactivity of the reverse false claims provision of the Act. While ruling on this issue, the court indicated that the present version of the False Claims Act “clearly embraces” postage deficiency cases. Id. at 9. Since the obligation to pay postage at specified rates is a product of regulations promulgated by the Postal Service, the Court thus implicitly held that false statements made to reduce an obligation created by regulation can be the basis for an action under subsection (a)(7).

In United States ex rel. Maclennan v. JCB, Inc., Civ. No. WN-88-874 (D. Md. Nov. 3, 1992), an obligation created by regulation was again the focus of the case. The relator alleged that defendant knowingly misclassified vehicles imported from the United Kingdom in order to avoid customs duties. In denying defendant’s motion to dismiss, the court reviewed the FCA’s legislative history, concluding that “[w]hen the entire legislative scheme is evaluated, it becomes clear that the FCA is a detailed comprehensive enforcement mechanism” designed to address fraudulent attempts to avoid paying customs duties. Id. at 8.

The most recent decision on the subject of reverse false claims — United States ex rel. Dunleavy v. County of Delaware, 1998 WL 151030 (E.D. Pa. 1998) — came in the context of a sale by Delaware County of property that had been purchased in part with a Community Development Block Grant (“CDBG”) provided by the Department of Housing and Urban Development (“HUD”). Under the applicable regulations, the County was obligated to record the proceeds from the sale in reports submitted to HUD as “program income,” then treat the funds as additional CDBG funds subject to the requirements governing the use of CDBG funds. Id. at *3. The relator claimed that the County had failed to record the proceeds it received from the sale of the land and had used the funds for ineligible purposes. Id. The district court briefly reviewed the cases concerning subsection (a)(7) before concluding that “even under the most restrictive reading of § 3729(a)(7), the County was obligated to return the program income to the Government because once it failed to abide by the preconditions to retention . . . there was a present duty to pay money to the Government pursuant to HUD regulations.”

All of these decisions thus reach conclusions that are consistent with the broad reading of the term “obligation” in the Sequoia Orange, McGinnis, and Pickens cases yet are also compatible with the Eighth Circuit’s narrower definition of the term in Q International Courier. 131 F.3d at 773 (defining obligation as “a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness”). But see Prawer, 946 F. Supp at 95 (“Money is not owed’ without a specific contract remedy, a judgment or an acknowledgment of indebtedness”).

III. Legislative History

Since the FCA did not explicitly cover reverse false claims prior to 1986, there was a division among courts as to whether the Act created liability for such claims. The debate was resolved by the addition of 31 U.S.C. § 3729(a)(7) in 1986, which specifically imposed liability for the use of a false record or statement “to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.” The precise meaning of the term “obligation,” however, was not addressed directly in either the statute or the legislative history.

The Senate Report describes subsection (a)(7) as meant to apply to a person who fraudulently “attempts to defeat or reduce the amount of a claim or potential claim by the United States against him.” S. Rep. 99-345, 99th Cong., 2d Sess. 18 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5283 (emphasis added). The Report also states that “the Committee strongly endorses” the Supreme Court’s “opinion in United States v. Neifert-White Co., 390 U.S. 228 (1968), . . . that the False Claims Act “‘was intended to reach all types of fraud, without qualification, that might result in financial loss to the Government.'” Id. at 19. These two statements suggest that Congress intended the term “obligation” to refer to contingent obligations such as fines or penalties, not just to fixed legal obligations.

On the other hand, the Senate Report also states at another point that the amendment was intended “to provide that an individual who makes a material misrepresentation to avoid paying money owed to the Government would be equally liable under the Act as if he had submitted a false claim to receive money.” Id. (emphasis added). Moreover, the cases cited favorably in the Senate Report as the types of cases the Act was meant to cover all involved situations where the defendants had made false statements to avoid or reduce the amount of money they would otherwise have been obligated to pay the Government, without the Government first making a discretionary decision to assess a fine or penalty. Id. at 9, 18-19 (citing Smith v. United States, 287 F.2d 299 (5th Cir. 1961) (false expense reports reduced rent due to Government from public housing authority); United States v. Douglas, 626 F. Supp. 621 (E.D. Va. 1985) (film maker liable for understating amount owed to the Government for use of Navy F-14 aircraft); United States v. Gardner, 73 F. Supp. 644 (N.D. Ala. 1947) (defendant held liable for understating payments due Government for operating a housing project); United States ex rel. Rodriguez v. Weekly Publications, Inc., 9 F.R.D. 179 (S.D.N.Y. 1949) (false statements made to avoid payment of higher postage rate a violation of Act)).

Similarly, the Senate Report criticized decisions where the courts had failed to recognize reverse false claims as actionable when the amount due was fixed by regulation or contract. Id. at 9, 18 (citing United States v. Marple Community Record, Inc., 335 F. Supp. 95 (E.D. Pa. 1971) (false statements made to qualify for second class postage rates held not to violate the Act); United States v. Howell, 318 F.2d 162 (9th Cir. 1963) (court declined to hold concessionaire liable for under reporting profits, portion of which were to be paid to PX); United States v. Brethauer, 222 F. Supp. 500 (W.D. Mo. 1963) (same)).

The House Report discussing the House Bill, which contained language identical to that ultimately enacted in subsection (a)(7), contains language akin to that in the Senate Report. It states that the proposed bill “allows the Government to prosecute a false claim which has been filed for the purpose of reducing the amount the claimant owes to the Government.” H.R. Rep. No. 660, 99th Cong., 2d Sess. 20 (1986) (emphasis added).

The legislative history thus provides grounds for arguing both for and against an expansive interpretation of the term “obligation” in subsection (a)(7). See American Textile I, 1997 U.S. Dist. LEXIS 18142, *26.

IV. Related Cases

Several False Claims Act cases that do not deal directly with subsection (a)(7) nonetheless contain language that may be useful in interpreting the meaning of the term “obligation.”

In United States v. Neifert-White, 390 U.S. 228, 232 (1968), the Supreme Court stated that it “refused to accept a rigid, restrictive reading [of the False Claims Act].” In concluding that defendant could be held liable for making a false statement in an application for a loan by the Commodity Credit Corporation, the Court held that the Act “was intended to reach all types of fraud, without qualification, that might result in financial loss to the Government.” Id. Such language suggests that the Act should be construed expansively to reach false statements made to evade potential fines, penalties or forfeitures, as such false statements “might result in financial loss to the Government.” Id. The distinguishing factor in Neifert-White, though, is that the case focused on whether a false statement made in an application for a loan could constitute a false claim, which is obviously a very different issue from what definition should be given to the term “obligation” under subsection (a)(7). This is particularly true, since the Court has also stated in another case unrelated to subsection (a)(7) that the False Claims Act “was not designed to reach every kind of fraud practiced on the government.” United States v. McNinch, 356 U.S. 595, 599 (1958).

Also potentially helpful are several recent lower court decisions on the question of whether a more typical FCA action can be maintained under subsections (a)(1) or (a)(2) where the alleged false statement did not impact on either the amount of money to be paid the Government or the existence of the obligation to pay. In United States ex rel. Pogue v. American Healthcorp., Inc., 914 F. Supp. 1507 (M.D. Tenn. 1996), for instance, the principal allegation was that the defendants had referred Medicare and Medicaid patients to other providors in violation of self-referral and anti-kickback statutes, then presented claims for payment for services on behalf of the patients, implicitly representing that they had not violated any Medicare or Medicaid statutes or regulations. The Court concluded that the case could proceed because the relator “alleged that the government would not have paid the claim submitted by Defendants if it had been aware of the alleged kickback and self-referral violations.” Id. at 1513. In reaching this decision, however, the Court stated its belief that the FCA “was not intended as a stalking horse for enforcement of every statute, rule or regulation” that might give rise to a monetary claim by the Government. Id.

In United States ex rel. Thompson v. Columbia/HCA Health Care, 938 F. Supp. 399 (S.D. Tex. 1996), mod. 125 F.3d 899 (Fifth Cir. October 23, 1997), the district court dismissed a claim based on the same allegations. In reaching its decision, the court defined a false claim as a claim “that the government would not have had to pay but for the fraud.” Id. at 405. It also stated that the Act was not “intended to be used as a private enforcement device for the Medicare anti-kickback statute and [self-referral] laws.” Id. The court of appeals vacated the decision in part on the basis that the complaint alleged that compliance with the anti-kickback and self-referral laws were prerequisites to payment. United States ex rel. Thompson v. Columbia/HCA Health Care, 125 F.3d 899, 903 (Fifth Cir. 1997), But the court of appeals otherwise “agree[d] with the district court that claims for services rendered in violation of a statute do not necessarily constitute false or fraudulent claims under the FCA.” Id. at 902. See also United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996) (“[v]iolations of laws, rules, or regulations alone do not create a cause of action under the FCA;” false certifications of compliance create liability under the FCA when certification is a prerequisite to obtaining a Government benefit); Ab-Tech Constr. v. United States, 31 Fed. Cl. 429 (1994), aff’d 57 F.3d 1084 (Fed. Cir. 1995) (payment vouchers submitted by defendant held to be false claims, despite Government receiving fair value for its money, since defendant impliedly certified that it was eligible to participate in the program when it was not).

The foregoing cases, while not specifically addressing the issue of reverse false claims, all implicitly suggest that the term “obligation” in subsection (a)(7) should not be read to include potential claims for fines, penalties or forfeitures. None of the courts was prepared to recognize a False Claims Act action based on false representations concerning compliance with a statute, unless compliance with the statute was a prerequisite to payment. Under the broad reading of subsection (a)(7) suggested by Sequoia Orange, McGinnis and Pickens, however, no such requirement would be necessary, as relators could simply allege that the false statements submitted in connection with the statutory violations were false records to avoid an obligation to pay the relevant fines, penalties or forfeitures associated with violating the underlying statute. An expansive view of subsection (a)(7) thus is in direct conflict with the holdings in Pogue, Ab-Tech, Thompson, and Hopper. The question of whether or not false statements caused the Government to pay any monies would be irrelevant, so long as false statements in connection with statutory violations could be proven. See American Textile Manufacturers I, 1997 U.S. Dist. LEXIS 18142, *29-38.

V. Preemption

Several courts have considered and rejected the argument that a False Claims Act action predicated on a violation of another statute should be preempted by the remedies set forth in the subject statute. In United States ex rel. Sequoia Orange Company v. Oxnard Lemon Company, et al., 1992 U.S. Dist. LEXIS 22575, the United states argued that the forfeiture provisions of the Agricultural Marketing Agreement Act of 1937 should provide the exclusive remedy for sanctioning the excess importation of fruit in violation of quotas or allotments set by the Secretary of the Treasury. Id. at *30. The court rejected the argument, inferring from the FCA’s express exclusion of false claims under the Internal Revenue Code that “all other regulatory schemes are covered by the FCA.” Id. at *31. The court also pointed to Congress’ decision to expand the qui tamprovisions of the Act despite concerns expressed by the Department of Justice at the time concerning possible interference with pending criminal investigations. Id. at *33. The court reasoned that Congress’ willingness to expand the private enforcement provisions of the Act, despite concerns about overlapping efforts to address the same fraud, demonstrated its intent to accept cumulative remedies in cases like the one before it. Id. at *34.

In Pickens v. Kanawha River Towing, 916 F. Supp. 702 (S.D. Ohio 1996), the court rejected a similar preemption argument in the context of an alleged failure to report bilge discharge in violation of the Clean Water Act. The defendants in Pickens argued, under Middlesex County Sewerage Authority v. National Sea Clammers Assoc., 453 U.S. 1, 101 S.Ct. 2615 (1981), that the comprehensive enforcement provisions of the Clean Water Act preempted application of the False Claims Act to their conduct. Id. at 705. The court disagreed, noting that the implied preemption doctrine described in Sea Clammers only applied in cases where the statute sought to be applied was a “purely remedial act” and the underlying statute provide[d] its own specific and detailed remedies.” Id. at 706. Since the False Claims Act is not a purely remedial statute (i.e., it provides distinct remedies for different conduct than the CWA), the court concluded that the doctrine did not apply. Id.

The court’s decision on this issue was buttressed by the well established principle that federal law disfavors preemption amongst federal laws except when there is an “expressed manifestation of preemptive intent.” United States v. General Dynamics, 19 F.3d 770, 774 (2d Cir. 1994); see also Connecticut National Bank v. Germain, 503 U.S. 249, 253, 112 S. Ct. 1146, 1149 (1992) (quoting Wood v. United States, 16 Pet. 342, 363, 10 L. Ed. 987 (1842) (effect should be given to both statutes unless there is a “positive repugnancy between the two laws”).

VI. Government’s Position

The Department of Justice has taken varying positions on the scope of subsection (a)(7). In Sequoia Orange, the Government argued that “the phrase ‘obligation to pay’ encompasses only money owed to the Government under a contract for goods, services, concessions or other benefits.” Sequoia Orange, 1992 U.S. Dist. LEXIS 22575, *24. The Government supported this position as follows in its memorandum of points and authorities in support of its motion to dismiss:

“An attempt to circumvent an obligation to pay created solely as the result of a violation of an administrative enforcement statute does not constitute a cognizable claim under the Act. . . . Not every false statement or record submitted in connection with even a bona fide Government benefits program gives rise to liability under the Act; rather, only those fraudulent records and statements that (1) seek to obtain more Government money or property than would otherwise be due; or (2) represent that the Government is owed less money or property than is actually the case, constitute actionable False Claims Act violations. False claims submitted by individuals or entities seeking to avoid payment to the Government of administrative fines, penalties or forfeitures (OSHA, FAA, SEC, etc.), or criminal fines imposed pursuant to Title 18 of the United States Code, are not the stuff of False Claims Act lawsuits, regardless of whether the fine or forfeiture, payment of which has been evaded, is imposed in connection with the violation of a federal benefits program.”

American Textile, Slip. Op. at 39 (quoting Government’s Memorandum of Points & Authorities in Support of Motion to Dismiss in Sequoia Orange at pp. 6-7); see also Sequoia Orange, 1992 U.S. Dist. LEXIS 22575, *5.

In the Government’s reply brief, it added the following:

The government believes that the touchstone in determining whether the FCA applies to past conduct must be the identification of some loss or potential loss to the Treasury through a false claim or statement submitted pursuant to a contract or agreement with the United States. . . . Relator’s interpretation, which would authorize private parties to unilaterally use the FCA as an omnibus federal regulatory enforcement statute, finds no support in the Act itself or its legislative history.

American Textile, 1997 U.S. Dist. LEXIS 18142, *60 (quoting Government’s Reply to Relator’s Opposition to Motion to Dismiss in Sequoia Orange at pp. 6-7, n. 4).

In Prawer, however, the Government altered its view, stating in its amicus brief that “a cause of action for a reverse false claim does not turn upon whether or not [there is] a present contractual obligation.” Prawer, 946 F. Supp. at 93, n. 10.

The Government maintained this new position in American Textile Manufacturers I, wherein it hotly contested the Prawer court’s holding that no obligation to pay money exists under subsection (a)(7) “without a specific contract remedy, a judgment or an acknowledgment of indebtedness.” Prawer, 946 F. Supp. at 94.

First, the court’s conclusion that an obligation must be contractual in nature — unless it is, in a rare instance, based on an existing judgment or acknowledged indebtedness — is antithetical to the purpose of the False Claims Act, which is to reach all instances of fraud where the government has suffered financial loss. United States v. Neifert-White Co., 390 U.S. 228, 232 (1968). In the context of reverse false claims, obligations to pay money to the government arise not only by contract, but also by statute and regulation. For example, a classic reverse False Claims Act case involves the submission of a false application for reduced postage rates.

. . .Second, the Prawer court is also mistaken in its requirement that the government or relator obtain a judgment or an “acknowledgment of indebtedness.” . . . The legislative history of the reverse false claims provision describes the offending conduct as an attempt to “defeat or reduce the amount of a claim or potential claim by the United States against [defendant].” S. Rep. 99-345 at 18 (emphasis added). The conjunctive phrase demonstrates Congress’ awareness that “obligations” under the reverse false claims provision can be created without the finality of an enforceable judgment.

American Textile II, United States’ Supplemental Amicus Brief, pp. 4-5.

VII. Conclusion

The clear trend in the foregoing cases is toward a narrower interpretation of subsection (a)(7) that excludes false statements made in connection with statutory violations that may give rise to the assessment of fines, penalties or forfeitures. This conclusion makes intuitive sense for, as the Prawer court said, there would be “no way to define the scope of such cases, which would seem to be as broad as any lawyer’s creative impulses in defining a possible claim in the first place.” Prawer, 946 F. Supp. at 95, n. 13.

It is unlikely, however, that the Prawer court’s definition of the term “obligation” will become the rule. By holding that subsection (a)(7) requires proof that the alleged obligation to the government must arise from a “specific contract remedy, a judgment or an acknowledgment of indebtedness,” the Prawer court excluded the possibility of prosecuting a case under subsection (a)(7) for false statements made to reduce or to avoid an obligation owed to the United States pursuant to statute or regulation. Id. at 95. This conclusion appears clearly incorrect. Virtually every court faced with the issue directly has held that false statements made to reduce such obligations constitutes a violation of subsection (a)(7). See United States. v. American Heart Research Foundation, Inc., 996 F.2d 7 (1st Cir. 1993) (underpaid postage); United States ex rel. Maclennan v. JCB, Inc., Civ. No. WN-88-874 (D. Md. Nov. 3, 1992) (customs duties); United States ex rel. Dunleavy v. County of Delaware, 1998 WL 151030 (E.D. Pa. 1998) (reimbursements owed to HUD). Indeed, Congress had precisely such cases in mind when it passed the False Claims Amendment Act of 1986. S. Rep. 99-345, 99th Cong., 2d Sess. 9, 18-19 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5274, 5283-5284 (emphasis added).

The Eighth Circuit’s formulation of the term “obligation” in Q International as “a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness,” which addresses the foregoing concern, is thus closer to a satisfactory definition. It remains to be seen, however, under the myriad of scenarios likely to be presented, whether even this definition will prove adequate. As the court suggested in American Textile I, it may not even be necessary to create a definition; it may be enough simply to determine on a case-by-case basis what is not a qualifying “obligation” under subsection (a)(7). If a definition has to be selected, though, the one proposed by the Eighth Circuit is a reasonable starting point.

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False Claims Act, Whistle-blowers Pose Threat to Device Industry

Devices and Diagnostics Letter

by Paul D.Scott
Vol. 22, No. 26
July 7, 1995

A new and ominous peril confronts manufacturers submitting applications to the FDA for approval of devices. The False Claims Act, a statute dating back more than a century, has recently become a significant weapon in the federal government’s arsenal against fraud on the FDA. Companies caught making false statements in applications to the FDA can now expect to pay enormous sums in damages and penalties to compensate the government for federal funds expended on the devices. Meanwhile, whistle-blowers who report such conduct can look forward to collecting generous bounties.

False representations to the FDA once produced certain predictable consequences. The government has long sought criminal sanctions against companies that submit “false or misleading” reports to the FDA in violation of the Food Drug and Cosmetic Act or related criminal statutes. Recently, however, the government has begun to focus on its own harm resulting from such false statements and thus has introduced the False Claims Act to the fight.

Passed in 1863 during the height of the Civil War, the False Claims Act permits the Justice Department, or whistle-blowers acting on its behalf, to file suit against any person or entity that knowingly submits false statements or claims to the government for payment.

Virtually any claim is covered, including claims for reimbursement for medical devices, whether submitted directly to the government or indirectly through a third party like a hospital, distributor or intermediary. If the claim is paid in whole or in part under a federal government program like Medicare or Medicaid, it is covered.

The Act requires proof that the statement or claim was made “knowingly”, but this standard is easily met. The term “knowingly” is defined in the Act to include “actual knowledge,” “reckless disregard” or “deliberate ignorance” of the truth.

Treble Damages and $10,000 penalties

A firm found liable for submitting false claims can pay up to three times the government’s damages plus penalties of between $5,000 and $10,000 for each false statement or claim. Of course, in the medical device industry, where sometimes hundreds and thousands of claims are submitted for reimbursement, even if the damages per claim are small, penalties can quickly mount into the millions of dollars.

Indeed, the government’s leverage is confirmed by the size of some of the settlements it has obtained recently from device manufacturers. In 1994, Shiley paid $10.75 million to settle claims it had made false representations in its application for pre-market approval of the company’s convexo-concave prosthetic heart valve.

C.R. Bard last year paid $30.5 million in damages and penalties to settle claims that it made false statements to the FDA about its heart catheters. Cordis paid $5 million a few years ago to settle claims that it made false statements to gain approval of a defective pacemaker.

With these recent successes, the government is sure to bring more False Claims Act cases in the future. More important, though, whistle-blowers acting on the government’s behalf will be even more likely to bring such cases.

The False Claims Act permits people possessing information about fraud against the government to file suit on its behalf, and collect a substantial chunk of the government’s winnings for their effort. In the past several years, the number of these cases has exploded.

Whistle-blower suits are filed in federal court under the “qui tam” provisions of the False Claims Act. [qui tam, from Latin, “who as well,” prosecuting the case for the government as well as oneself.] Individuals who file suit on the government’s behalf are called “relators.” Almost anyone can file suit as a relator, including wrongdoers, unless they have been convicted of or initiated the fraud. When the Act was first passed in 1863, Congress expressed no compunction about “setting a rogue to catch a rogue.”

The key limitation on relators concerns whether the information they provide has been publicly disclosed previously in a public hearing, report or investigation, or in the news media. If so, then the relator can only be assured of a share of the government’s recovery if the relator was the “original source” of the information, meaning the relator supplied the information to the government or the media before it became public.

Complaints are filed under seal and are initially served only on the Government, giving the Justice Department a chance to investigate the allegations in the complaint and determine whether or not to intervene. If Justice decides to intervene, the relator is generally entitled to 15 to 25 percent of the recovery, depending on, among other things, how much he or she helped the government’s prosecution of the case.

If the government does not intervene, the relator may still pursue the case on the government’s behalf. If this effort is successful, the relator’s share jumps to between 25 and 30 percent of the recovery.

Only One Device Case — So Far

Because of these strong incentives, and the passage of liberalizing amendments to the False Claims Act in 1986, qui tam cases have multiplied exponentially over the past decade. In 1987, only 32 qui tams were filed. Last year, the number was well over 220. Recoveries by the government in qui tam actions have correspondingly grown from none in 1987 to $378 million last year. Over the same period, relators have collected over $90 million for themselves.

While only one qui tam case — Cordis — has been reported against a device maker, firms can expect more of such suits in the future. The Shiley and Bard cases, for example, could well have been qui tam actions had knowledgeable parties stepped forward and filed suit against the defendants before the government resolved the cases.

The simple fact is that the amended qui tam provisions of the False Claims Act were designed to encourage whistle-blowing and they are working, with dramatic consequences for all firms doing business with the government. The challenge for industry in this dangerous climate will be to avoid questionable representations that might lead to a fraud case. The temptation, of course, for individuals aware of such practices will be to file suit on the government’s behalf and collect their statutory reward.

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