Fixing the False Claims Act - The Case For Compliance-Focused Reforms
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Fixing the False Claims Act The Case For Compliance-Focused Reforms OCTOBER 2013
© U.S. Chamber Institute for Legal Reform, Octorber 2013. All rights reserved. This publication, or part thereof, may not be reproduced in any form without the written permission of the U.S. Chamber Institute for Legal Reform. Forward requests for permission to reprint to: Reprint Permission Office, U.S. Chamber Institute for Legal Reform, 1615 H Street, N.W., Washington, D.C. 20062-2000 (202.463.5724).
Table of Contents Executive Summary............................................................................................................... 1 False Claims Act Overview. . .................................................................................................. 5 FCA Reforms to Incentivize Effective Compliance Programs............................................. 8 Four Proposed FCA Reforms............................................................................................... 13 FCA Reforms to Ensure Fair and Effective Enforcement................................................... 23 Proposed Policy Changes to DOJ Use of Civil Investigative Demands............................................................................................ 45 Conclusion. . .......................................................................................................................... 49 Prepared for the U.S. Chamber Institute for Legal Reform by Peter B. Hutt II and Anna Dolinsky Akin Gump Strauss Hauer & Feld LLP David W. Ogden and Jonathan G. Cedarbaum Wilmer Cutler Pickering Hale and Dorr LLP
Executive Summary The False Claims Act (FCA) is the government’s most important tool to uncover and punish fraud against the United States. The FCA has been used to address alleged false claims in many economic sectors, including healthcare, pharmaceuticals, finance, and defense. The statute is intended not only to recover funds for the federal fisc, but also to deter fraud and encourage ethical corporate behavior. The FCA also provides a monetary reward to whistleblowers (known as “relators”) who come forward with evidence of fraud and file lawsuits on behalf of the government. Despite some successes, the FCA is This paper proposes reforms to the simply ineffective at preventing fraud as it FCA that build on the FCA’s strengths— is currently structured and enforced. The including the important role that Government Accountability Office has whistleblowers play in detecting fraud— estimated that the United States Treasury and improve its enforcement, while loses approximately $72 billion to fraud, radically improving its role in preventing abuse, and improper payments each year.1 fraud. The proposed reforms are based on The Department of Health and Human three basic premises: Services (HHS) has estimated that fraud • First, the FCA is a complex statute costs the Medicare program $60 billion that in operation has proved flawed in annually.2 Looking at the Medicare program ways that reduce its effectiveness in alone, simple math suggests that an preventing fraud. The statute does not astounding $600 billion may have been lost promote compliance with applicable to fraud in the past decade. Using the FCA, laws as effectively as it could or provide the government has recovered only $35 the right incentives to ensure that fraud billion since 1987—a tiny fraction of the is reported to the government. As a moneys believed to be lost to fraud over result, the government recovers only that period.3 Based on these figures alone, a fraction of what it loses to fraud and the FCA plainly is not getting the job done. spends too much time and money on 1 Fixing the False Claims Act
investigations and enforcement after Proposed Amendments
fraud has already been committed rather
than on preventing it in the first place. First, the paper explains how rigorous
compliance programs can reduce the
• Second, earlier detection and better incidence of fraud, describes a model
prevention of fraud will generate for creating incentives for widespread
greater savings for the government adoption of such programs, and proposes
and the public than the existing after- that independent entities should determine
the-fact, punishment-through-litigation whether a company’s practices meet
approach. Businesses are best placed general and industry-specific state-of-
to detect and prevent wrongdoing as the-art “gold standards” for compliance.
the first line of defense against fraud. Companies that obtain and maintain this
They should be incentivized to maintain “gold standard” certification would gain the
effective compliance programs that benefit of four proposed FCA reforms:
stop violations before they occur and
to disclose and make restitution to the 1. Re-calibration of the damages
government swiftly and completely multiplier, so that a defendant would be
when violations do occur. Appropriately liable for treble damages only if it acted
incentivizing whistleblowers is a crucial with specific intent to defraud; double
component of FCA enforcement, damages if it acted with knowledge,
but the statute should incentivize reckless disregard, or deliberate
companies to take the lead in curbing ignorance; and 1.5 times damages if it
and reporting fraud. made a qualifying self-disclosure to the
government of the conduct.
• Third, certain aspects of the FCA
as used by many relators and the 2. With limited exceptions, a bar on qui tam
government today, and as interpreted actions against a company if the company
and applied by some courts, incentivize had previously disclosed substantially
the filing of frivolous lawsuits and the same allegations to an appropriate
impose irrationally excessive penalties, government Inspector General or other
sometimes for technical violations federal investigative office.
that occur despite businesses’ good 3. In order to create incentives for
faith efforts to comply with contracts employees to report alleged
or regulations. These aspects of FCA misconduct internally, an employee
practice generate unnecessary litigation who failed to report internally at least
costs for government and businesses 180 days before filing a qui tam action
and coerce businesses that may have would face dismissal of the action.
done nothing wrong to pay enormous
4. A change to the government’s
out-of-court settlements based on
exclusion and debarment regulations
untested and questionable legal theories.
to provide that a company and,
absent personal involvement in
fraud, its executives would not be
subject to mandatory or permissive
exclusion or debarment.
U.S. Chamber Institute for Legal Reform 2Second, the paper describes eight 3. A
definition of the phrase “false or
proposed reforms that would apply to all fraudulent claim” to exclude the
individuals and entities subject to the FCA. judicially-created concept of “implied
These reforms are designed to address false certification” liability, so that
current inefficiencies in the way the statute liability is imposed when a claim is
operates and is enforced. The proposed “materially false or fraudulent on its
reforms are as follows: face,” or when a claim is presented
or made “when the claimant has
1. A reduction to the relator’s share
knowingly violated a requirement
of the government recovery to
that is expressly stated by contract,
provide substantial but not excessive
regulation, or statute to be a condition
incentives for bringing fraud to light.
of payment of the claim.”
In cases in which the government
intervenes, relators would receive 15 4. A
requirement that all essential
to 25 percent of the first $50 million elements of liability under the FCA
recovered; plus 5 to 15 percent of must be proven by “clear and
the next $50 million recovered; plus convincing evidence” to bring the FCA
1 to 3 percent of amounts recovered in line with other federal and state
above $100 million. In non-intervened anti-fraud statutes.
cases, relators would receive 25 to 5. A
n amendment to the FCA damages
30 percent of the first $50 million provision to better measure the
recovered; plus 20 to 25 percent government’s actual loss. The
of the next $50 million recovered; government would recover its “net
plus 10 to 20 percent of amounts actual damage” before application
recovered above $100 million. of any damage multiplier, which
2. A bar on qui tam actions brought is defined to mean “out-of-pocket
by former or present government monetary losses, less the value of
employees arising out of such benefits received by the government,
person’s employment by the and does not include indirect or
government to prevent government consequential damages.”
employees from cashing in on their
government service.
3 Fixing the False Claims Act6. A change to the current irrational agencies and employees of their
penalty structure of the FCA, so that obligation to preserve the documents.
statutory penalties are assessed only If it fails to provide this notification, the
where no damages are awarded and are court would be instructed to “draw
capped at an “amount equal to the sum or instruct the jury to draw a negative
sought in the claim in addition to all inference from any failure of the
costs to the government attributable to government to produce documents
reviewing the claim.” requested in the course of litigation
based on their loss or destruction.”
7. An amendment to the Wartime
Suspension of Limitations Act, which Third, the paper proposes a policy reform
has been badly misconstrued in several to the use of Civil Investigative Demands
recent court decisions, to clarify that it (CIDs) by the DOJ, which are investigative
applies only to criminal actions, not to tools that can impose extreme costs and
the civil FCA. burdens on companies and individuals. The
paper proposes that the DOJ should adopt
8. A requirement that once the
internal policy guidelines to ensure that CIDs
Department of Justice (DOJ) has
are issued only when necessary to a fraud
received a qui tam complaint, or
investigation and when less burdensome
initiates a false claims investigation,
alternatives are unavailable.
it must notify all relevant government
U.S. Chamber Institute for Legal Reform 4False Claims Act Overview
Liability Under the FCA FALSE OR FRAUDULENT
The FCA imposes liability only when a claim
The FCA imposes liability on any person is “false or fraudulent.” A claim may be
who knowingly submits a false claim “false” on its face—for example, if it seeks
seeking government funds. A company is payment for more money than is due—or it
liable under the FCA when it “knowingly may be “false” if the claimant has failed to
presents, or causes to be presented, a comply with contract or grant requirements,
false or fraudulent claim for payment or regulations, statutes, or other requirements
approval,” or “knowingly makes, uses, on which payment is conditioned.
or causes to be made or used, a false
record or statement material to a false or KNOWING CONDUCT
fraudulent claim.”4 The most important The FCA imposes liability when a claimant
elements of liability are summarized below. has “knowingly” submitted a false
claim. The term “knowingly” is defined
LAIM
C to include not only actual knowledge of
The FCA applies to all “claims” for falsity, but also “reckless disregard” as
payment, defined to mean any request to whether a claim is true or false and
for money or property that is directly “deliberate ignorance” as to whether a
presented to the government, or that is claim is true or false.6 Although the FCA
made indirectly to a contractor, grantee, or does not impose liability for negligence or
other recipient, if the money or property is mistakes, a claimant cannot evade liability
to be spent or used on the government’s by contending that it did not intend to
behalf or to advance a government program commit fraud or submit false claims; the
or interest and if the government provides law states that liability can be imposed
or will provide any portion of the money even when there is no intent to defraud
or property requested.5 The effect of this the government.
definition of “claim” is that any person
receiving funds traceable to the federal
government is potentially subject to liability
under the Act.
5 Fixing the False Claims ActThe “reverse false claim” provision of the Enforcement of FCA
FCA imposes liability for the “reverse”
of the typical situation: when a company by Qui Tam Plaintiffs
“knowingly conceals or knowingly Both the DOJ and private citizens are
and improperly avoids or decreases authorized to bring actions asserting
an obligation to pay or transmit money violations of the FCA. When an individual
or property to the government.”7 This files a qui tam complaint, the DOJ
type of liability can be imposed when a investigates the allegations and decides
company improperly retains a government whether to intervene. If the DOJ intervenes
overpayment or otherwise seeks to in the qui tam action, it has the primary
evade other kinds of established payment responsibility for prosecuting the action,
obligations that arise from contracts, although the relator remains a party and can
grants, licenses, fee-based relationships, assist in the litigation. If the DOJ declines
statutes, or regulations. Liability is not to intervene, the relator has the right to
imposed when a company seeks to avoid conduct the case on his or her own.9
paying a “contingent” future obligation,
The FCA provides financial incentives for
however, such as the potential imposition
current and former employees, and others,
of a fine.
to file qui tam lawsuits. If the government
Violations of the FCA can have substantial intervenes, the relator is eligible for an
monetary consequences. A company that award of between 15 and 25 percent of the
has violated the FCA is liable for three government’s recovery, whether the action
times the amount of the United States’ is resolved by settlement, on summary
damages. In addition, the company must judgment, or at trial.10 If the DOJ declines
pay civil penalties of between $5,500 to intervene, the relator is eligible for an
and $11,000 per individual false claim, award of between 25 and 30 percent.11
which can add up to amounts far larger The statute also provides that a relator
than the multiples of actual harm to the in a successful action shall be awarded
government in many cases where multiple reasonable attorneys’ fees and costs, to be
invoices or prescriptions are issued for paid by the defendant.12
small dollar amounts.8
In addition, qui tam plaintiffs may bring
personal “retaliation” claims alleging that
their employers have retaliated against
them for actions to stop an ongoing FCA
violation. Successful plaintiffs can be
awarded back-pay and other damages,
attorneys’ fees, and reinstatement in their
former position.13 Relators are entitled to
retain all of the damages they recover from
defendants as a result of their retaliation
claims, whether or not the government
intervenes in the qui tam action.
U.S. Chamber Institute for Legal Reform 6“ DOJ intervention is almost always an accurate predictor
of the ultimate success of the case. Approximately 95 percent
of intervened cases result in a settlement or judgment for the
government, while only 6 percent of non-intervened cases do.
Snapshot of FCA more than $35 billion under the FCA, of
”
which $24 billion has been attributable
Enforcement History to qui tam matters. The government
Litigation under the FCA has steadily recovered roughly $3 billion in each of 2010
increased in the quarter century since and 2011, and an all-time high of almost $5
the Act was substantially revised in 1986, billion in 2012.14
and the law has been highly successful in The most recent available DOJ statistics
providing incentives for relators to file suit. show that the DOJ has intervened in
The last two decades have seen roughly approximately 23 percent of all qui tam
three times as many qui tam cases as non- cases filed between 1987 and 2010.15
qui tam cases each year. DOJ intervention is almost always an
Even more striking than the increase in accurate predictor of the ultimate success
FCA litigation is the growth of settlement of the case. Approximately 95 percent of
and award amounts. The amount of intervened cases result in a settlement or
total government recoveries under the judgment for the government, while only 6
statute has significantly increased over percent of non-intervened cases do.16
the past quarter century, and the majority
of the government’s recoveries now are
attributable to qui tam cases. Since 1987,
the government has recovered a total of
7 Fixing the False Claims ActFCA Reforms to Incentivize Effective
Compliance Programs
Under the FCA as it is currently constituted, the government
emphasizes adversarial investigatory and enforcement efforts after
fraud has occurred rather than directly encouraging companies to
prevent fraud before it happens or to support the government’s
interests through early detection and prompt reporting when it does.
Of course, investigations and enforcement The reforms we propose will preserve
will always be needed in some cases, but the FCA’s beneficial effects and increase
the government’s post hoc enforcement healthy incentives for prevention and
approach to fighting fraud in government corporate self-reporting while decreasing
contracting is imbalanced and ineffective. unhealthy incentives for frivolous litigation
As top officials at DOJ have recognized, and coercive out-of-court settlements.
“[l]itigation to recover the costs of fraud At the heart of the proposed reforms are
is a far inferior option to preventing fraud provisions that will incentivize businesses
in the first place.”17 DOJ is increasingly that contract with the government or
considering “forward-looking compliance participate in government programs to
measures” and has asked the business prevent, identify, and disclose wrongdoing,
community “to join with the Department while also providing rational sanctions
in establishing structures that help prevent and restitution to the government in
fraud—and the need for lawsuits to combat cases of genuine fraud. These reforms
it—in the first instance.”18 would create meaningful incentives for
businesses to detect wrongdoing and
“ Investigations and enforcement will always be needed
in some cases, but the government’s post hoc enforcement
approach to fighting fraud in government contracting is
imbalanced and ineffective.
”
U.S. Chamber Institute for Legal Reform 8“ Rigorous corporate compliance programs can be effective
at preventing fraud before it happens.
”
disclose it to the government, generating really want to deter white-collar crime,
significant savings to taxpayers through the best weapon is an effective compliance
less expensive but more effective program.”21 A study by the Ethics Resource
government investigations, and less Center, a leading nonprofit specializing
litigation. At the same time, the proposed in corporate ethics, concluded that
reforms will not reduce the effectiveness [w]hen well-implemented . . . ethics and
of qui tam relators as a crucial final line compliance programs reduce misconduct
of defense when corporations do not and grow strong ethical cultures.”22
prevent, detect, or disclose fraud. There are of course many government
The proposed reforms do not seek to regulations and guidelines recommending
undo the amendments to the FCA enacted or mandating compliance practices and
through the Fraud Enforcement and programs for different types of federal
Recovery Act of 2009 (FERA),19 which contractors and industries, but the world
were intended to clarify that the statute of government contracting and federal
applies to indirect recipients of federal programs lacks a coherent and forward-
funds and to the retention of government looking approach to compliance. Moreover,
overpayments.20 To the contrary, these assessments of the effectiveness of a given
proposals would complement FERA’s compliance program typically occur case-
goal of holding organizations that receive by-case and often after fraud has already
government funds responsible for fraud occurred (e.g., when DOJ is considering
by also ensuring that they undertake whether to impose a lower penalty on a
meaningful compliance programs to company because it has made a good-faith
prevent fraud from occurring in the first effort to comply with applicable laws). This
place rather than relying only on post hoc is like closing the barn door after all the
enforcement and punishment. livestock have run out of the building.
We propose a system for voluntary
Certified State-of-the-Art accreditation of rigorous compliance
Compliance Programs programs tailored to specific industries.
Reduce Fraud Companies that adopt independently
certified, state-of-the-art compliance
Rigorous corporate compliance programs programs would get the benefit of the
can be effective at preventing fraud before package of FCA reforms outlined below.
it happens. Officials and former officials The proposed certification program would
across administrations of both parties have have two components, each carried
increasingly acknowledged that “if you
9 Fixing the False Claims Actout by independent third parties—whether This combination of cross-cutting general
new single-purpose non-profits, or other standards with standards targeted at
industry-specific organizations. particular industry sectors should help
ensure consistency across industries while
STATE-OF-THE-ART STANDARDS FOR
at the same time allowing compliance
CORPORATE COMPLIANCE PROGRAMS
programs to take account of particular
First, the legislation would authorize these
risks and challenges unique to individual
independent entities to develop state-of-
industries. Importantly, both the cross-
the-art standards for corporate compliance
sector best practices and the industry-
programs in a range of industries. The
specific best practices must be more
standard-setting process should be flexible
detailed and more rigorous than existing
and continually evaluated over time to ensure
compliance and guidance regimes.
that it reflects the latest in compliance
practices and responds to evolving sources INDEPENDENT ACCREDITING BODY
of compliance risk. At the same time, Second, companies would be required
effective compliance programs must be to retain—at their own expense—an
tailored to a company’s specific business and independent accrediting body (with legal,
to the risks associated with that business. auditing, investigative, and loss prevention
skills)26 to regularly review and certify
In addition to developing cross-sector
their individual compliance programs as
“best practices,” standard-setting
meeting the new standards. Accreditation
organizations should design industry-
would require monitoring, auditing, and
specific practices that are continually
reporting activities designed to ensure
updated in light of changing business
that a company, once certified, maintains
conditions and practices. For example,
compliance with the rigorous standards
standards in the healthcare industry could
applicable to its industry. This approach
build on the regulatory guidance already
builds on a feature of many government
provided by the HHS Inspector General’s
settlements in which the government
Office for several types of providers.23
requires a company to retain an
Standards in the defense industry could
independent corporate monitor to assess
build on the Defense Industry Initiative’s
a corporation’s compliance with the terms
standards for responsible conduct.24 Similar
of the agreement.27
standards could be developed by industry
organizations in the pharmaceutical, While the independent certifier in this
manufacturing, insurance, banking, context will not continuously monitor
transportation, energy, consumer services, the corporation’s activities, periodic
and telecommunications sectors.25 re-certification will ensure that the
compliance program maintains and applies
the relevant standards.
U.S. Chamber Institute for Legal Reform 10to prevent violations in the future. Readers of this report may well ask
why the compliance reforms suggested
Features of a above should not be mandatory instead
State-of-the-Art of voluntary. If high-quality compliance
Compliance Program programs prevent fraud and save the
government money, and if independent
Existing government regulations certification ensures that such programs
and guidance generally identify the are truly effective, why shouldn’t Congress
following features of an effective require all government contractors
and participants in federal programs to
compliance program.28
adopt such measures? There may be
• Compliance office and officer to companies for whom the costs of obtaining
provide oversight, commit resources, certification will exceed the benefits—
and ensure that a compliance program either because their volume of government
is visible, active, and accountable.
contracting is low or for other reasons.
To require them to expend the resources
• Written standards (such as a code of needed to achieve certification may be
conduct and policies and procedures) to unfair and may unnecessarily constrict the
demonstrate organization-wide commitment government’s options in obtaining goods or
to the detection and prevention of fraud. services or selecting those who will carry
out federal programs. Many companies
• Training and education to engage the would elect to forego the benefits that
workforce in compliance efforts. companies with certified programs would
obtain, and in a system that mandated
• I nternal reporting mechanisms certified compliance, those companies
(such as an anonymous telephone hotline) would simply opt out of government
to allow employees to voice concerns contracting or participation in federal
without fear of retaliation. programs—which would be a bad result.
• Risk assessment measures to
identify fraud and abuse risks specific
to a company’s activities.
• Auditing and monitoring to ensure that
all aspects of operations adhere to
the organization’s compliance policies
and procedures.
• Investigation, response, and
corrective action to indentify
non-compliant conduct, report violations
to the relevant authorities, and take action
11 Fixing the False Claims Act“ Certified gold-standard compliance programs contemplated
by this paper can be expected to save the government billions of
dollars each year that would otherwise be lost to fraud.
Under this proposal, however, such
”
Certified gold-standard compliance
companies would be eligible for federal programs contemplated by this paper
funding but would remain subject to the can be expected to save the government
existing statutory framework of the FCA. billions of dollars each year that would
On the other hand, under this proposal, otherwise be lost to fraud. As noted above,
companies that undertake the costs of conservative estimates indicate that the
obtaining and maintaining certification United States Treasury loses $60 billion or
will accrue meaningful benefits as will more to fraud each year.29 It is reasonable
the government, which will experience to believe that, as a result of the increased
a significantly reduced risk of fraud. To self-policing prompted by the proposed
put it simply, under this proposal certified compliance programs, billions of dollars
businesses will face moderated—though worth of fraud each year will be prevented
still very substantial—consequences, before it occurs. It is also reasonable to
because they pose less risk to the believe that, as a result of the proposed
government. Accordingly, there should be robust self-reporting requirements,
less fraud. But a universal mandate would corporations will be much more likely
be counterproductive. to self-report (and repay) fraud or false
claims when they do occur, making the
government’s enforcement efforts both
more comprehensive and more efficient.
If the proposals in this paper lead to even
a 20 percent annual reduction in fraud, the
government could save over $12 billion
each year or $120 billion over a decade. It is
possible the proposals will result in an even
greater reduction in fraud.
U.S. Chamber Institute for Legal Reform 12Four Proposed FCA Reforms
Calibration of Multiplier the government of the misconduct, has
fully cooperated with the government,
to Culpability and had no knowledge of a government
For companies with certified compliance investigation at the time of the disclosure.
programs, the FCA damages multiplier Courts have only rarely relied on this
would be calibrated to the defendant’s provision, however, often finding that
culpability, so that a defendant would be defendants failed to meet one or more of
liable for treble damages only if it acted with its requirements.31 As a result, the provision
specific intent to defraud; double damages if has not provided companies with any
it acted with knowledge, reckless disregard, material incentive for timely reporting.
or deliberate ignorance; and a maximum of PROPOSED REFORMS
1.5 times damages if it made a qualifying We propose that for companies with
disclosure to the government of the certified compliance programs, the
conduct. Section 3729(a)(2). multiplier structure should differentiate
CURRENT LAW between entities that have acted with
Under the current FCA, a person who intent to defraud (treble damages),
violates the law is generally liable for three entities that have made good-faith
times the amount of damages sustained by attempts to ensure compliance but whose
the government, regardless of the person’s employees have engaged in misconduct
level of culpability.30 Thus, a defendant (double damages), and entities that
who submits false claims with the express promptly disclose any wrongdoing to the
intent of defrauding the government is government (1.5 times damages).
subject to the same damages multiplier As a general matter, the proposed
as the defendant who lacked such intent graduated damages structure follows the
but is later deemed to have been reckless structure of most penal regimes—including
about the truth or falsity of some aspect of Internal Revenue Service penalties
a claim. The FCA at present also provides for fraudulent and negligent errors on
for a reduction to double damages if tax returns; U.S. Customs and Border
the defendant has made a disclosure to Protection enforcement of import controls
13 Fixing the False Claims Actunder the Tariff Act of 1930; and the Model for the government through settlements Penal Code—in imposing its harshest with disclosing entities. Agency officials punishment for the most reprehensible routinely praise such programs for conduct, namely actions undertaken with promoting effective corporate compliance specific intent to defraud. But when a programs and view them as a necessary company has implemented a certified tool in fighting fraud. compliance program and despite that an A maximum of 1.5 times damages is employee acts wrongfully but without an appropriate multiplier whenever a specific intent, a reduction from treble to defendant with a certified compliance double damages operates as an incentive system has made a good-faith disclosure to adopt a state-of-the-art compliance to a relevant government investigative system and reflects the company’s lesser agency or the DOJ.42 As with the current culpability. Finally, companies that also self-disclosure provision, the reduction in voluntarily disclose potential FCA violations the multiplier will only be available if the would get a further reduction, which will defendant has made a disclosure of the incentivize not only the adoption and misconduct, has fully cooperated with the maintenance of a certified program but government, and had no knowledge of a prompt self-reporting as well. government investigation at the time of Certified compliance programs reduce fraud the disclosure. Since certified compliance and thus save the government money. programs would include rigorous Self-reports also save the government mechanisms for monitoring compliance and significant time and money, by reducing identifying fraud, companies will be more the cost of investigating and prosecuting likely to uncover information about potential fraud and ensuring that violations are wrongdoing. A reduction in damages would detected and that restitution is made. serve as strong incentive to fully investigate Without concrete incentives—such as and disclose any fraud, instead of putting assurances that lower damages will be the matter on a back burner. imposed—companies may be hesitant to come forward with reports of possible misconduct. Such incentives are already in place in several federal agencies and have resulted in significant recoveries U.S. Chamber Institute for Legal Reform 14
Examples of Effective Incentives for Self-Disclosure
The HHS Office of Inspector General Provider Self-Disclosure Protocol (SDP)
(in place since 1998) received more than $280 million between 1998 and 2013.32
• Providers may utilize the SDP to make • Commenting on the updated self-disclosure protocol,
disclosures that “in the disclosing party’s HHS Inspector General Daniel Levinson said
reasonable assessment, potentially violate that “self-policing is such a critical part of making
Federal criminal, civil, or administrative laws compliance work” and that health care providers
for which Civil Monetary Penalties (CMPs) are should “take on the role to a certain degree of the
authorized.”33 internal inspector general for their institutions.”35
• HHS typically imposes a multiplier of only 1.5 times
single damages in settlements of matters in which
an entity has self-disclosed under the SDP.34
The DOD Voluntary Disclosure Program (in place from 1986 to 2008)36
recovered $497 million for the government during its existence.37
• Defense contractors could “bring to light potential • DOD officials noted that contractors “were far more
civil or criminal fraud matters.”38 cooperative” in “disclosing a wrongdoing, conducting
an internal investigation, and providing an internal
• The DOD and DOJ considered various factors— investigative report without resorting to subpoenas
including the contractor’s cooperation; truthfulness, or grand juries” when participating in the Voluntary
completeness, and timeliness of the disclosure; Disclosure Program than they would be “in any
and extent of the fraud—in determining whether to adversarial investigation.”40 The DOJ stated that the
prosecute, suspend, or debar the contractor.39 Program “has been remarkably effective in nurturing
business honesty and integrity and in bringing good
new cases to the government’s attention.”41 42
15 Fixing the False Claims ActJurisdictional Bar on Qui Tam PROPOSED REFORM
When a corporation has made a disclosure
Actions after a Defendant’s of fraud to an agency Inspector General or
Disclosure to the Government other investigative office, qui tam actions
With limited exceptions, qui tam actions based on the same allegations of fraud
against a company with a certified should be foreclosed. As one court aptly
compliance program will be barred if the noted, the qui tam enforcement mechanism
company has disclosed “substantially the essentially allows the government to
same allegations or transactions as alleged in “purchase” from private citizens the
the action or claim to a government Inspector information they may have about fraud
General or other federal investigative office on the U.S. Treasury.44 Taxpayers should
under a government voluntary disclosure not be paying relators who file qui tam
program or pursuant to a mandatory lawsuits based on information already in the
disclosure obligation.” Section 3730(e)(5). government’s possession.
CURRENT LAW
Under the current FCA, a qui tam plaintiff
who files suit after the defendant has
already disclosed the same conduct to
an agency Inspector General is entitled
to proceed with the suit and receive a
full bounty.43 This possibility exists even
though the disclosure has been made
to the government authority responsible
for investigating fraud and even though
the party making the disclosure is
typically required to cooperate fully
in the investigation.
“ Taxpayers should not be paying relators who file qui tam
lawsuits based on information already in the government’s
possession.
”
U.S. Chamber Institute for Legal Reform 16Existing Jurisdictional Bars on Parasitic Relators
Congress recognized that the prospect of a bounty might lure “freeloaders” without
any valuable new information and has amended the FCA several times to ensure that
the qui tam provisions pay whistleblowers only with fresh information:
• In 1986 Congress enacted a public disclosure •C
ongress also enacted a “first-to-file” provision
provision to bar qui tam actions based upon that ensured the rewards available under the FCA
information already publicly disclosed, and were given only to the first whistleblower to come
therefore already available to the government.45 The forward, not subsequent would-be whistleblowers.47
purpose of the public disclosure bar is to safeguard This is because “[t]he first-filed claim provides
against “parasitic exploitation of the public coffers the government notice of the essential facts of
[by] . . . opportunistic plaintiffs who have no an alleged fraud, while the first-to-file bar stops
significant information to contribute of their own,” repetitive claims.”48
while rewarding “whistle-blowing insiders with
genuinely valuable information.”46
Just as the public disclosure and first-to-file bars guard against qui tam payments to
relators that bring no new information about fraud to the table, we believe it equally
important for Congress to enact a bar against qui tam payments to relators who provide
substantially the same information already disclosed to the government by the alleged
wrongdoer itself.
The proposed self-disclosure bar • Second, the proposed self-disclosure
would leave open critical avenues for bar would not foreclose qui tam
whistleblowers to file qui tam lawsuits. actions when the corporation had
made a disclosure to any government
• First, the self-disclosure provision
employee other than an Inspector
advocated here would not foreclose
General or other investigative office.
actions filed by whistleblowers
This addresses the concern that
who provide the government with
corporations could make sham
information about fraud before a
disclosures of information to a non-
corporation makes a self-disclosure.
investigative government official
or office that is unlikely to act on
the information or vindicate the
government’s interests.
17 Fixing the False Claims Act• Third, the proposed self-disclosure Incentives for Potential Relators to
bar would not interfere with an
employee-relator’s ability to file a qui Report Internally to their Employers
tam action even after a company’s When a potential relator who is an
self-reporting to the government, employee or who has a contractual or legal
so long as the employee reported duty to report alleged misconduct internally
internally first and waited at least 180 fails to do so under a company’s certified
days before going to court (see next compliance program at least 180 days
reform). before filing a qui tam action, the court shall
In certain circumstances, a relator may dismiss such a qui tam action.
come forward with valuable new information If the company fails to disclose the
related to a company’s activities after the violation within 180 days, the individual
company has disclosed its violation to the may proceed with the qui tam lawsuit.
government. Our provision would not bar Relators who report internally shall be
actions based on such new information, as deemed to have filed an action at that
long as the relator’s action did not merely time for purposes of the “first-to-file”
disclose “substantially the same allegations prohibition in the FCA and the proposed
or transactions” found in the corporation’s “self-disclosure” bar (see previous reform).
prior disclosure. A relator who provides
If the company discloses the violation
additional, non-duplicative information would
within 180 days of the employee’s
be permitted to proceed with a qui tam
internal report and there is a resulting
action based on that information and recover
government recovery from the company,
an award under the FCA’s bounty provisions.
the individual who reported misconduct
Importantly, the self-disclosure qui tam bar internally shall be eligible for up to ten
should be available only if a corporation percent of the government recovery, if the
has implemented a certified compliance individual notifies the DOJ of his or her role
program. As noted above, a certified pursuant to administrative provisions to be
compliance program would include rigorous established by the DOJ.
mechanisms for identifying fraud and
CURRENT LAW
disclosing any information uncovered
The FCA currently provides no incentive
about fraud. A statutory bar on subsequent
for employees to report concerns about
qui tam actions raising substantially the
potential fraud to their employers. To the
same allegations or transactions already
contrary, the statute contains a structural
self-disclosed would serve as a concrete
disincentive to internal reporting in the
incentive for the corporation to fully
form of the “first-to-file” provision, which
investigate and disclose any fraud.
specifies that only the first relator who files
suit is eligible for a bounty.49 This provision
creates a “race to the courthouse,” with
the problematic effect that a potential
relator has no incentive to take the extra
step of reporting internally first since
U.S. Chamber Institute for Legal Reform 18doing so might reveal information to other
employees, one of whom might beat the
Incentives for initial discoverer of the problem to court.
The FCA thus encourages employees to
Internal Reporting “circumvent internal reporting channels
A number of statutory and altogether.”50 The FCA’s disincentives for
regulatory regimes recognize that prompt internal reporting are out of sync
incentivizing internal reporting is with modern statutory and regulatory
more effective at reducing fraud mechanisms that encourage internal
reporting and more robust corporate
than incentivizing a race to the
compliance programs.
courthouse. For example:
PROPOSED REFORM
• The Sentencing Guidelines offer a strong The reforms proposed here would create
incentive for companies to encourage incentives under the FCA similar to those
employees to use internal reporting and found in other whistleblowing regimes.
compliance programs and to develop These reforms would apply to companies
systems that make such reporting that have adopted the certified compliance
effective. The Guidelines provide for a program proposed in this paper. These
reduction in penalties when a company amendments would provide that if an
has taken reasonable steps to “have employee of a company with a certified
and publicize a system, which may compliance program (or any other individual
include mechanisms that allow for
with a contractual or legal obligation to
anonymity or confidentiality, whereby
make reports to such a company) fails to
the organization’s employees and agents
report the alleged misconduct internally at
may report or seek guidance regarding
least 180 days before filing a qui tam suit,
potential or actual criminal conduct
the court would be required to dismiss the
without fear of retaliation.”51
action. The 180-day window would afford
• The SEC, in implementing the Dodd- the employer sufficient time to investigate
Frank Act’s whistleblower provisions, has the allegations and make a determination
established several regulatory incentives whether to self-disclose a violation to the
to encourage employees to report government and/or take corrective action.
possible violations of federal securities
laws to the company, including giving In order to ensure that a person who
the employee a “place in line” that dates uses the internal reporting mechanism
to the first internal report and treating is not disadvantaged, the reforms would
as a plus-factor the whistleblower’s also provide that a person who reports
“participation . . . in internal compliance internally and triggers a prompt disclosure
systems.” These incentives encourage by the company to the government would
companies to develop robust internal still be eligible for up to 10 percent of any
reporting mechanisms and in turn government recovery that results from the
increase the likelihood that employees
will report misconduct.52
19 Fixing the False Claims Act“ This reform would ensure that an employee’s internal reporting
would not handicap the employee in the ‘race to the courthouse’.
”
company’s disclosure, by following The current “first-to-file” rule serves two
administrative procedure to be established purposes, both of which will be furthered
by the DOJ. If the whistleblower by the proposed amendment. The rule is
reports internally, but the company designed “to encourage whistleblowers
does not promptly self-disclose and the to come forward with allegations of fraud
whistleblower proceeds with a qui tam and to prevent copycat actions that do not
action, then the whistleblower will be provide additional material information to
deemed to have filed an action for purposes the government.”53 The proposed change
of the FCA’s “first-to-file” bar dating back to would advance both of those purposes,
the time of the internal report. This reform without the negative incentives the current
would ensure that an employee’s internal rule imposes.
reporting would not handicap the employee First, the amendment would encourage
in the “race to the courthouse.” desirable whistle-blowing. Indeed,
We propose to limit these changes to available evidence suggests that
companies with certified compliance “[w]histleblowers prefer to report internally
programs for two reasons. First, to their employers,” especially if the
certification will assure employees that the company has robust reporting
company in question is conforming to the mechanisms.54 One study, for example,
highest standards with respect to fraud found that almost 90 percent of employees
prevention, protection of whistleblowers, who filed a qui tam case had initially
and self-reporting of violations. An reported their concerns internally.55 Thus,
employee who bypasses such a system amending the FCA to provide a concrete
is unlikely to have a good reason for doing monetary incentive for whistleblowers to
so. Second, this change will provide a report concerns internally should not have
meaningful incentive for companies to any deleterious effect on whistleblowing.
adopt certified compliance programs. The proposed amendment would have the
Companies that provide clear reporting additional positive effect of inducing the
channels and appropriate protections for minority of whistleblowers who would not
whistleblowers and develop effective otherwise report internally
protocols for reporting misconduct to to do so if their employers have strong
the government will benefit from more compliance programs.56
consistent internal reporting of potential Second, because the program proposed
fraud by their employees. here contemplates disclosure to the
government of discovered wrongdoing,
the government would obtain all of the
information that it now obtains from the
first whistleblower to file.
U.S. Chamber Institute for Legal Reform 20No Mandatory or Permissive prescribed to program beneficiaries
subject to exclusion.58 In non-healthcare
Exclusion or Debarment contracting matters, the similar threat
The government’s exclusion and debarment of “debarment” has also led to huge
regulations should be revised to provide that settlements.59 In 2011 alone, over 3,300
a corporation with a certified compliance federal contractors were suspended or
program (and—unless they were personally debarred as a result of increased contract
engaged in fraud—its executives) would monitoring by federal agencies.60
not be subject to mandatory or permissive PROPOSED REFORM
exclusion or debarment. Exclusion or debarment may be necessary
CURRENT LAW to protect federal programs from entities or
As explained in detail in the U.S. Chamber individuals who present a particularly high
Institute for Legal Reform (“ILR”) October risk of recidivism. But for many companies
2012 study entitled The Exclusion Illusion, and employees in many fields, exclusion or
a principal reason for the huge sums that debarment threatens their very existence
healthcare and pharmaceutical companies or the continuation of their careers.
have paid to settle FCA matters is the Consequently, the threat of exclusion
threat of exclusion from federal healthcare or debarment gives agencies enormous
programs, including Medicare and leverage to compel companies to accept
Medicaid.57 Over the last decade, HHS has settlements on the government’s terms,
expanded dramatically the reach of the even when there is little proof that fraud
threat of exclusion by making entities that actually occurred or that the government
are indirectly reimbursed for products suffered any harm.61 This, in turn, precludes
the courts from playing their vital roles in
“ Eliminating the threat of exclusion would create a
powerful incentive for companies to adopt state-of-the-art
compliance programs
”
21 Fixing the False Claims Actarticulating the law to provide guidance on prosecutorial discretion.”64 Those very for future conduct and of guarding against same considerations apply to the FCA, government overreaching.62 And when yet the government continues to use the a company has implemented a certified threat of exclusion or debarment to induce compliance program, the rationale for irrationally high FCA settlements. exclusion or debarment no longer applies The legislation proposed here aims to because the company should not present a reduce the unfairness and inefficiencies significant risk of recidivism. Eliminating the caused by the use of exclusion and threat of exclusion would create a powerful debarment as settlement leverage. At the incentive for companies to adopt state-of- same time, the proposed legislation is the-art compliance programs while also aimed directly at the heart of the problem affording such companies the meaningful that the FCA is designed address— ability, where appropriate, to seek the reducing fraud in government programs. guidance and protection of the courts. Some debarment regulations already The government itself has recognized the take into account considerations such as distorting and counterproductive effects “[w]hether the contractor had effective of exclusion and debarment in other standards of conduct and internal control contexts. For example, the government has systems in place at the time of the activity rejected the possibility of using mandatory which constitutes cause for debarment.”65 debarment as a remedy for Foreign Corrupt This legislation would create a front-end Practices Act violations, finding that the incentive to adopt such controls, while remedy “would likely be outweighed by the eliminating the counterproductive and accompanying decrease in incentives for unjustified possibility that a company with companies to make voluntary disclosures, such a program may be subject to the remediate problems, and improve threat of exclusion or debarment. their compliance systems.”63 Justice Department officials have acknowledged that debarment does not “deter or punish wrongdoing” and “impinge[s] negatively U.S. Chamber Institute for Legal Reform 22
FCA Reforms to Ensure Fair
and Effective Enforcement
The following proposed amendments are intended to address
discrete aspects of the FCA that are ineffective, irrational, or
unfair. The amendments would be applicable to all companies
and individuals, not just those companies that elect to maintain a
certified compliance program.
Some of the problems these amendments Graduated Reduction in
address have arisen because relators
sometimes receive rewards that are Relator’s Share Percentages
much larger than necessary to incentivize In intervened cases, relators shall receive
whistleblowing, or rewards that are based 15 to 25 percent of the first $50 million
on information the relator gained from recovered; plus 5 to 15 percent of the next
government service. Other problems have $50 million recovered; plus 1 to 3 percent
arisen because a number of courts have of amounts recovered above $100 million.
interpreted the FCA to permit lawsuits In non-intervened cases, relators shall
based on violations of regulations or receive 25 to 30 percent of the first $50
contractual provisions unrelated to the million recovered; plus 20 to 25 percent
goods or services defendants provide to of the next $50 million recovered; plus
the government. Still other problems have 10 to 20 percent of amounts recovered
resulted from the statute’s authorization of above $100 million. Attorney’s fees and
large per-claim penalties on top of treble costs would still be available to successful
damages, even when the government relators under Section 3730(d)(1)(D).
receives valuable services or goods for its
CURRENT LAW
money. Finally, problems have resulted
The current structure of the FCA
from erroneous court interpretations of
systematically overpays relators and
the FCA’s statute of limitations. In the
their counsel. The law provides that in
aggregate, the proposals below will provide
cases where the government intervenes,
clarity and a more fair and rational structure
relators are generally paid 15 to 25 percent
to the FCA.
23 Fixing the False Claims Actof the overall recovery, and where the Qui tam advocates criticized the proposed
government declines to intervene, relators $15 million cap on several grounds. First,
are paid 25 to 30 percent of the recovery. they noted that an absolute cap would
These percentages remain fixed, no matter provide a disincentive for relators and
how high the government’s recovery. The their counsel to continue to help the
statute also provides for compensation government achieve recoveries of greater
to the relator’s attorney by requiring the than approximately $100 million, because
defendant to pay successful relators their they would not have any incremental
attorneys’ fees and costs. Attorneys also financial incentive to do so.68 Second, they
typically receive 40 percent of the relator’s contended that the $15 million amount was
share, on top of fees and costs. too low because it failed to account for
the various risks relators and their counsel
PROPOSED REFORM
face.69 Significantly, qui tam advocates did
In high-dollar cases, the government is
not seriously contest the major premise
paying dramatically more—often tens or
underlying the ILR proposal—namely, that
hundreds of millions of dollars—than is
awards of hundreds of millions of dollars
necessary to incentivize whistleblowers
are not necessary to induce whistleblowers
and their counsel to uncover and assist in
to come forward, and that appropriate
the prosecution of fraud under the FCA.66
restructuring of the bounty provisions would
In an October 2011 paper, ILR advocated save the government hundreds of millions
for imposing a $15 million cap on relator of dollars while continuing to provide an
awards, calculated to provide sufficient adequate incentive for whistle-blowing.
compensation to induce relators to come
forward by guaranteeing that the typical To address concerns relating to the $15
relator with information concerning a million award cap, this paper proposes a
high-dollar-value fraud scheme would be revised approach to save the government
able to maintain his or her standard of money while adequately rewarding relators
living even if the relator were never again and their counsel: a graduated structure of
able to find work as a result of blowing award percentages. Under this alternative,
the whistle.67 ILR calculated that if the the reward percentages would remain
government had instituted this $15 million unchanged for all cases in which the
cap in 1986, it would have saved at least amount of the government’s recovery is
$674 million in the 10 largest cases alone $50 million or less—as reflected in Table 1,
over the past 25 years. the great majority of qui tam cases.70
“ The government is paying dramatically more—often
tens or hundreds of millions of dollars—than is necessary to
incentivize whistleblowers and their counsel to uncover and
assist in the prosecution of fraud under the FCA.
U.S. Chamber Institute for Legal Reform
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