False Claims Act - Congressional testimony

<body bgcolor="white"> <div align="left"><table border="0" cellpadding="0" cellspacing="0" width="500"> <tr> <td colspan="2" valign="top"><p align="center"><a href="AF_frm.htm" target="_top">About the Firm</a> | <a href="fca_f.htm" target="_top">The False Claims Act</a> | <a href="wr_f.htm" target="_top">Whistleblower's reward</a> | <a href="caintr_f.htm" target="_top">Have a case?</a><a href="story_f.htm" target="_top"><br> Whistleblowers' stories</a> | <a href="resman_f.htm" target="_top">Resources</a> | <a href="what_f.htm" target="_top">What's new</a> </td> </tr> <tr> <td><font SIZE="4" COLOR="#333366">Senate, Sept. 17, 1985</font> </td> <td valign="top"><img src="../../GIF/PC_url.GIF" width="143" height="14" align="right"></td> </tr> <tr> <td colspan="2"><p align="center"><br> <font size="4"><b>Testimony of John R. Phillips on S.1562, a bill to amend <br> the False Claims Act, before the Senate Judiciary Subcommittee on Administrative Practice and Procedure <br> Sept. 17, 1985</b></font> </p> <p><b>Introduction<br> </b>My name is John Phillips, and I am an attorney and co-director of the Center for Law in the Public Interest, a nonprofit charitable organization based in Los Angeles that provides legal representation without charge to various unrepresented interests.</p> <p>We first became interested in the False Claims Act several years ago when, after public disclosure of fraudulent overcharges within the defense industry, the Center received anonymous calls from employees of defense contractors who were aware of improper and illegal practices but were not sure what they should do or where they should turn with this information. These potential "whistleblowers" did not believe they could go to the government -- they lacked confidence that anything would be done; nor could they go to the top officers of their employers for fear of retaliation. As a result of these calls the Center conducted research into the area of legal rights and remedies available to such people and discovered a little used 122-year old Act, the False Claims Act.</p> <p><b>Brief background of the False Claims Act<br> </b>The original False Claims Act was passed in 1863 to combat the widespread fraud, corruption and misuse of federal funds that occurred during the Civil War. At that time, the F.B.I. did not exist and the U.S. Attorney General's staff was very small. The Department of Defense (then the War Department) lacked investigators to check on its various contractors and suppliers. Thus, the government was largely dependent upon information received from private individuals concerning false claims or fraud against the government.</p> <p>The False Claims Act created civil liability for persons who made false claims against the federal government. The Act provides that any person who knowingly makes false claims against the government shall be subject to a $2,000 civil penalty and double the amount of damages sustained.</p> <p>One portion of the act, referred to as the "qui tam" section, was designed to encourage individuals to come forward and bring suit on behalf of the government against the perpetrators of the fraud. In return for bringing suit, the person received half of the civil penalty, half of the damages, and all court costs.</p> <p>Nonetheless, few private actions under the False Claims Act were brought prior to the 1940's, and the act remained unchanged until 1943. In 1943, the Supreme Court ruled in<i> United States ex rel. Marcus v. Hess</i> that a private person could sue under the Federal Claims Act on behalf of the U.S. government, even though the action was based solely on information acquired from the government. Following that decision, numerous "parasitic" law suits were filed based solely on information they obtained from court indictments, newspaper stories and congressional investigations, without providing any new information. While the literal wording of the act permitted this type of action, it was obviously not consistent with the intent of the act.</p> <p>In the same year, in reaction to these suits, Congress amended the statute. The amended act provides that the court shall dismiss an action brought by a person on discovering the action was "based on evidence or information the government had when the action was brought." The qui tam plaintiff's recovery was also changed. Instead of receiving one-half of the recovery, the plaintiff was entitled to up to 10% of the recovery if the government intervened in the suit. If the government did not intervene in the suit, the plaintiff was entitled to up to 25% of the recovery.</p> <p><b>Benefits of the existing False Claims Act<br> </b>The False Claims Act is the best tool available to private citizens for attacking an important problem plaguing the nation today -- namely the millions of taxpayer dollars that are paid out to private corporations based on fraudulent claims made on government contracts. The purpose behind the enactment of the False Claims Act in 1863 -- to encourage individuals to aid the government in ferreting out fraud against the government -- is even more critical today, where the federal government is spending billions of dollars on federal contracts with private corporations in areas such as defense, aerospace and construction. All one has to do is read the headlines to know mischarging practices are prevalent in the industry. The Justice Department does not have unlimited resources and should benefit from the additional non-governmental resources brought to bear to develop and pursue instances of false claims submitted to the government. Moreover, the critical element -- knowledge of such practice -- is uniquely in the possession of people within the industries that have government contracts. The False Claim Act encourages those people to reveal such information.</p> <p>The False Claims Act benefits everyone: The government, because it recovers twice the amount of damages sustained because of the false claim; the person bringing the suit, because he can receive a substantial monetary award for doing his patriotic duty of exposing fraud against the government; and taxpayers, because they see that their dollars are not being wasted or misspent and know the act deters fraudulent practices perpetrated by companies doing business with the government.</p> <p>A false claims suit brought by an individual puts the machinery of the courts in motion to determine whether false claims have occurred. Once the suit is filed, the government cannot ignore the charges for political or administrative reasons, including lack of resources or low priority.</p> <p><b>Disadvantages of the existing False Claims Act<br> </b>Despite its wide application, the existing act is not utilized by potential plaintiffs because it is flawed both substantively and procedurally, creating problems for both individuals and the U.S. Attorney's office. First, the individuals who have the information of fraudulent practices are very reluctant to risk their jobs and livelihood to expose fraud without a guarantee of adequate protection. There are many risks and personal sacrifices involved in filing a False Claims Act suit, or testifying in such a suit. These risks include, first and foremost, being fired by an employer, being harassed or threatened by employers or co-workers, and if fired, being blackballed from within the industry in which they work.</p> <p>These fears have a basis in fact, for "whistleblowers" have historically not been treated well within our system. They have divulged their information and then lost their jobs. Even if they were able to bring suit against their employer for a retaliatory firing, the cases might take years to prosecute and are a big drain on personal resources, without any guarantee of success.</p> <p>In order for the False Claims Act to be truly effective in encouraging individuals to expose fraudulent claims against the government, the act must contain both employment and personal safeguards for those persons filing the suits or testifying in such suits. Moreover, the act must contain strong measures to deter and punish an employer who violates the act and retaliates against an employee for fulfilling his patriotic and ethical duty.</p> <p>Another problem with the False Claims Act as presently written is that some provisions create harsh and unreasonable obstacles for both the individual plaintiff and the government. These provisions effectively defeat the objectives of the act and create disincentives for an individual to file suit. These obstacles include the following:</p> <p>The opportunity for an individual's<b> </b>suit to be dismissed if the government already has the information upon which the suit is based, even if the information is not being acted upon or analyzed in any way. This provision is unclear and courts have interpreted it differently. For example, a suit could be dismissed if the information was in unanalyzed storage files of disconnected government agencies. The chance that an individual who files a case can be completely cut out of the suit if the U.S. attorney enters the case, leaving the individual unable to ensure the case's effective and speedy prosecution on its merits; the chance that an individual plaintiff will receive a small percentage (or even no percentage) of the recovery, due to the completely discretionary nature of the award and the fact that the person must pay the attorneys' fees out of the recovery amount awarded.</p> <p>There is also a need to amend the act to provide the government with more flexibility in a case. The existing act provides that once the U.S. attorney's office decides not to enter the case, the case is completely prosecuted by the individual filing the suit. What if new material information is uncovered which was not known by the government when making its decision not to enter the case? The proposed amendments to the False Claims Act contained in S.1562 would remedy these unintended disincentives in the act and fulfill the true purpose of the act -- to encourage people with knowledge of false claims to step forward.</p> <p><b>Effect of S.1562 amendments<br> (A) Protection of plaintiff and witnesses<br> </b>The existing False Claims Act does not provide any protection whatsoever for the person bringing a lawsuit on behalf of the government. After filing a suit, such person might be immediately fired by his employer, threatened or harassed by supervisors or co-workers, and blackballed from the industry in which he works. Thus, most individuals would be very reluctant to risk their jobs, their livelihood, and their personal security to expose either through filing a lawsuit or providing testimony the fraudulent practices of their employer or former employer in a False Claims Act suit.</p> <p>The proposed amendment is essential to help alleviate the fears of a potential plaintiff or witness in a False Claims Act suit, and is reasonable just given the many risks the plaintiff assumes in stepping forward. The effect of the proposed amendment is twofold: First, it will encourage a person to do his patriotic duty and expose a false claim with reduced fear of being left stranded without a job or personal security; and second, it will allow punishment - and hence deterrence - of an employer who engages in retaliatory action against such person.</p> <p>The new provision carefully details examples of possible job discrimination outside of employee discharge, including threats, demotions, suspension, and harassment. The examples are given to deter the situation where an employee isn't fired outright, but is treated in an inferior manner by his company. The amendment also protects witnesses and those assisting in a False Claims Act investigation or lawsuit who might otherwise be afraid to testify on behalf of the prosecution.</p> <p>The phrase "discriminated against ... in whole or in part..." is included because an employer might offer another reason why the employee was fired, when in fact, the initiation or participation in a False Claims Act suit was an element in the employee's discharge.</p> <p>The relief portion is designed to make the person whole again, whether that includes restitution with full seniority rights, back pay with interest, or compensation for any special damages sustained as a result of the discrimination.</p> <p>To resolve the problem of a potential plaintiff being unable to bring a suit because of prohibitive attorneys' fees, the provision provides litigation costs and reasonable attorneys' fees as part of the plaintiff's recovery.</p> <p>The provision also provides stiff penalties against employers found guilty of retaliatory action. An employer is liable to the employee for twice the amount of back pay and special damages, and if warranted, is liable for punitive damages.</p> <p>This new provision would go far in ending the "conspiracy of silence" which often surrounds a company and intimidates its employees into compromising their ethical standards.</p> <p><b>(B) Government "acting" on information<br> </b>The purpose behind the existing section -- 3730 (4) was to eliminate the former practice of "parasitic" law suits. Back in the early 1940s, private individuals were filing false claims suits based on information they obtained from court indictments and congressional investigations without providing any new information. In 1943, the section was amended to prevent this abuse by allowing the court to dismiss an action brought by a person on discovering the action was "based on evidence or information the government had when the action was brought." </p> <p>The serious problem with the existing language is that it places no responsibility on the government to have developed the information or evidence in any way before the private citizen's suit is completely precluded. The evidence can just exist in a government file or within several disconnected government agencies without any analyses or connection being made for the suit to be dismissed.</p> <p>The proposed amendment strikes a balance between closing the loopholes which lead to "parasitic" lawsuits and more reasonably and clearly defining what information or evidence is sufficient to warrant a case's dismissal by the court.</p> <p>Under the proposed language, if a person bases a lawsuit on information or evidence that the government has already disclosed in a prior administrative, civil, or criminal proceeding, the person's suit is to be dismissed. Moreover, if a person bases the lawsuit on specific information disseminated by any news media or disclosed during the course of a congressional investigation, the person's suit is to be dismissed. In this way, a person is foreclosed from merely "piggybacking" their lawsuit on to a prior or existing investigation into the facts alleged.</p> <p>On the other hand, the U.S. Attorney's office would not be granted unlimited time to investigate the evidence or information disclosed. If the government has not initiated a civil action within six months of becoming aware of such evidence, the court shall not dismiss the action brought by the person. If, however, the government has been diligently pursuing the information but still has not had sufficient time to investigate the facts and bring a lawsuit, the government can be granted additional time by the court upon a showing of good cause. This time limit assures the person who carried the burden of initiating the action that if the lawsuit has merit, it will proceed, despite the government's reluctance to act on its information for whatever reasons.</p> <p><b>(C) Active involvement of plaintiff<br> </b>The existing language of the act (Section 3730 (3) and (4)) present a harsh, ineffective and self-defeating "all or nothing" proposition both for the person bringing the action and for the government. If the government proceeds with the action within the designated time limits, then according to existing section (3), the action is conducted only by the government. Thus, the person who often faces substantial hardships and considerable personal risk in bringing the action is forced out of the suit entirely, unable to have any role to ensure that the case will be vigorously prosecuted.</p> <p>The proposed language in Section (3) would allow the person who brought the action to continue in the action as a full party on the person's own behalf, even if the government proceeds with the action. The government would have primary responsibility for prosecuting the case but the person would continue to have a direct stake in the outcome, ensuring that once the government takes over in the case, the government doesn't "sit" on the evidence, drag out the case, or let it drop for administrative or political reasons.</p> <p>Since the person bringing the case often has risked their job and livelihood, if not his or her safety, in order to expose the fraud, it is only fair as a matter of public policy to allow the person to continue as a party to see that the case proceeds forward on its merits. Moreover, this furthers the primary purpose of the False Claims Act -- to encourage private parties to expose fraud that they are otherwise discouraged from exposing. The government, however, will not be bound by an act of the person bringing the action and will still be in the position of controlling the litigation.</p> <p><b>(D)<u> </u>Guarantees of monetary awards<br> </b>These provisions deal with the amount of recovery a person may receive for bringing a civil action under Section 3730. The amounts a court currently may award are quite undefined and discretionary.</p> <p>In the existing act, if the government proceeds with the action, the person may receive "no more than 10 percent of the proceeds of the action or settling of a claim," if the government does not proceed with an action, the person bringing the action or settling the claim may receive no more than 25 percent of the proceeds of the action or settlement.</p> <p>The problem with such an undefined and discretionary amount is that it discourages people from bringing a false claims action because there is no guarantee that they will be awarded anything even if there is a substantial recovery. There are many risks involved in bringing such an action. First, a person must find the courage and the confidence to step forward and personally testify to the fraudulent practices of his employer, for example. This can immediately lead to being fired from the job, being blackballed from the industry, and being harassed and threatened by employers and co-workers.</p> <p>In addition, court cases generally take a long time to try and are fraught with continuances and delay tactics on the part of the defendant. The person bringing the case will be forced to spend a tremendous amount of time on the case, and assuming he is fired, must find alternate sources of income to support a family and/or himself. Thus, the case becomes a substantial investment of time, money, energy, and emotion.</p> <p>If a possible plaintiff reads the present statute and understands that in a successful case the court may arbitrarily decide to award only a tiny fraction of the proceeds (or nothing at all) of the action or settlement to the person bringing the action, the person may decide it is too risky to lose a job over a totally unpredictable recovery.</p> <p>The proposed amendments take into account the risks and sacrifices of the plaintiff and offer minimum monetary incentives to induce individuals to step forward and expose fraudulent practices. If the government proceeds with the action within 60 days of being notified, the person bringing the action shall receive between ten and twenty percent of the proceeds of the action or settlement of a claim, based on having brought the important information or evidence to the government's attention.</p> <p>The setting of such a range is sensible and can<b> </b>be looked upon as a "finders fee" which the person bringing the case should receive as of right. The government will still be more than made whole receiving between 80 and 90 percent of the proceeds based on double damages -- substantially more than the zero percent it would have received had the person not brought the evidence of fraud to its attention.</p> <p>Additionally, if the person bringing the action substantially contributes to the prosecution of the action, the person shall receive at least 20 percent of the proceeds of the action or settlement. This award can be looked upon as a "performance fee" based on contributions made in the litigation itself. The more substantial award encourages the person to contribute and participate in the suit through his lawyers in a positive, constructive way and to keep the pressure on the government to effectively try the case.</p> <p>Where the government does not proceed with an action within 60 days of being notified, the person bringing the action or settling the claim shall receive an amount not less than 25 percent and no more than 30 percent of the proceeds of the action or settlement. In this case, the person is principally responsible for the lawsuit and should be well compensated based on having the primary role of prosecuting the case. Another important change made in the existing provisions involves attorneys' fees awards. If the government does not proceed with an action, under the existing act, the person bringing the action may receive "reasonable expenses the court finds to have been necessarily incurred." No express reference is made, however, to attorneys' fees.</p> <p>Assuming the case involves a defendant with substantial resources, the litigation will be hard fought, with the plaintiff facing a phalanx of well financed defendant's lawyers with motions, discovery disputes and continuances. In a case involving a $200,000 claim, for example, the attorneys' bills alone (based on hours spent) in a case such as this could easily reach $100,000 or more. Since under the existing provisions, attorneys' fees are to be paid out of a person's recovery, it works as a disincentive for persons to bring a suit involving smaller cases of fraud, i.e., cases of � million or less. In almost all cases a plaintiff will have to offer the lawyer a percentage of the recovery available to the plaintiff.</p> <p>If there is a formidable array of lawyers on the other side, the plaintiffs' attorney could be required to spend enormous amounts of time for a relatively small financial reward. This would discourage attorneys from agreeing to take the case even though there may be strong evidence of fraud. Thus, reasonable attorney's fees, as defined by the courts, should be paid separately by the guilty defendant and is a fair apportionment of the cost incurred in disgorging the illegally obtained money. Under existing court procedures, these fees would be based on hours reasonably spent times a reasonable hourly rate.</p> <p>In the proposed amendments, a person who contributes to the prosecution of the action along with the government, or who prosecutes the action alone, may receive an amount for reasonable attorneys' fees and costs awarded against the defendant.</p> <p>These proposed monetary awards will serve two main purposes: to provide a person with the incentive to bring a false claims case against a powerful defendant with substantial resources, and to adequately compensate the person for all the resources expended during the course of prosecuting the case.</p> <p><b>(E) Government's ability to re-enter the case<br> </b>The existing provision of section 3730 (2) (A) also works an extremely unreasonable hardship on the government, for it bars the government from entering the case if it does not enter by the end of the 60-day period. What if new material evidence comes to light after that period which would have altered the government's initial decision not to enter the case?</p> <p>The most reasonable solution is to allow the government in such a case to enter so it can bring its considerable resources to bear on the case. This is especially true in a complex case with a great deal at stake, where the resources of the defendant are tremendous and the person initiating the action on behalf of the government is almost inevitably put at a great disadvantage. It is thus in the interest of justice to ensure that the government may enter the case when it knows of new material evidence which will expose the fraud and substantiate the claims filed.</p> <p>The proposed amendment solves this problem because the government now has a chance to enter in the case at a later date even if it did not proceed with the action within the 60-day period after being notified, if it can show the court that it now has new material evidence or information it did not have within the 60-day period after notice. The limitation as to situations where the government has "new" material evidence is to assure that the 60-day limit for the government's initial decision whether to enter the case is meaningful.</p> <p>While allowing the government to enter so that it can play a significant role in the case, the language also ensures that the person who bore the burden of initiating the case and developing it into a strong one is not just pushed aside. The status and rights of the person are retained and protected so that the person remains a formal party to the action.</p> <p><b>V. Conclusion<br> </b>Adoption of S.1562 will make available a new and significant tool to combat a serious problem facing the nation today -- fraud against the government. It offers this potential without any additional costs or additional government personnel and does not create any new government enforcement bureaucracy. It will be self-executing and self-enforcing, calling upon its own citizens to join in the fight to protect the public fisc. And, it will provide a powerful disincentive to government contractors who have in the past forced their employees to either witness or participate in fraudulent and illegal schemes designed to overcharge the government. The only losers from this amendment will be those who cheat the government.</p> <p align="center"> <br> <br> <font SIZE="1">� 1998 Phillips and Cohen. All rights reserved<br> <a HREF="cred_f.htm" TARGET="_top">Credits</a></font> </td> </tr> </table> </div> </body>