Earlier this year, Congress enacted significant changes to the federal False Claims Act, which has been the Government’s principal tool for recovering monies lost through fraud. On May 20, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (FERA), P.L. 111-21. Section 4 of FERA amended the FCA in two significant ways.
First, it expanded the substantive liability provisions of the Act to cover situations that were not covered under the previous version. Second, it expanded the Government’s ability to use powerful civil discovery devices, civil investigative demands (CIDs), before deciding whether to initiate a lawsuit under the FCA or to intervene in a qui tam lawsuit filed by a private person acting on behalf of the U.S.
This Feature Comment discusses the recent amendments to the FCA and their most significant consequences.
OVERVIEW OF THE FCA PRIOR TO THE 2009 AMENDMENTS
The FCA, codified at 31 USCA § 3729, § 3733, is often described as the Government’s primary tool for recovering funds that were stolen through fraud against the Government. Under the provisions of the Act, a person who knowingly submits false claims resulting in the loss of Government funds, or who knowingly causes someone else to submit false claims, is liable to the Government for three times the Government’s damages, plus a civil penalty of between $5,500 and $11,000 per false claim. A person can also be liable under the FCA for other similar kinds of misconduct, such as knowingly using false records to get the Government to pay claims, conspiring with others to get false claims paid or engaging in certain misconduct that prevents the Government from recouping money that is owed to it.
The FCA was originally “enacted in 1863 with the principal goal of stopping the massive frauds perpetrated by large [private] contractors during the Civil War.’ ” Vt. Agency of Nat. Res. v. U.S. ex rel. Stevens, 529 U.S. 765, 781 (2000) (citations omitted).
Among the most important provisions of the FCA are its qui tam provisions, which enable a private person, known as a relator, who knows of a fraud to initiate a lawsuit on behalf of the U.S. and, if the lawsuit is successful, to share in the proceeds recovered by the Government. The FCA has been amended several times since it was originally enacted. The most significant amendments were enacted in 1986, at which time Congress increased the scope of liability from double to treble damages, increased the range of civil penalties, adopted relatively low standards of proof and knowledge, expanded the rights of relators in qui tam cases and granted the U.S. attorney general the power to issue CIDs in order to investigate allegations of civil fraud. It is noteworthy that the 2009 amendments do not address or attempt to modify the qui tam provisions of the FCA.
Although the pre-2009 version of the FCA contained seven separate provisions describing circumstances in which a person could be liable for violating the Act, only four of those provisions were commonly used.
Set forth in 31 USCA § 3729(a), these provisions imposed liability on any person who:
(1) Knowingly presents, or causes to be presented, to an officer or employee of the United States Government with 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;
(3) Conspires to defraud the Government by getting a false or fraudulent claim allowed or paid; or …
(4) Knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an 4-068-519-9 obligation to pay or transmit money or property to the Government.
This last provision has often been referred to as the “reverse false claims” provision.
The scope of liability under the pre-2009 FCA was addressed in two significant court decisions, U.S. ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004), and Allison Engine Co. v. U.S. ex rel. Sanders, 128 S.Ct. 2123 (2008).
In Totten, in a decision written by then-Judge John Roberts, a divided panel of the U.S. Court of Appeals for the D.C. Circuit held that for liability to attach under § 3729(a)(1), it was necessary that a claim be presented for payment or approval to an officer or employee of the United States.
Although this reading of the statute was consistent with the plain language of § 3729(a)(1), the issue before the court was how to reconcile that plain language with another apparently inconsistent provision of the pre-2009 Act, § 3729. That provision defined “claim” to include requests for money directed to contractors or grantees if the U.S. Government had provided the contractor or grantee with, or would reimburse the contractor or grantee for, a portion of the money that was being requested. In Allison Engine, the U.S. Supreme Court held that for liability to attach under § 3729(a)(2) or (a)(3) of the FCA, the plaintiff had to demonstrate that the defendant specifically intended to make a false record or enter into a conspiracy for the purpose of getting the U.S. Government as opposed to a contractor or grantee who had received Government funds to pay or approve a false claim.
Totten and Allison Engine made it much more difficult for the Government to prove liability under the FCA in cases in which Government funds were passed down along a chain e.g., first, from the Government to an entity that administered a program, or to a prime contractor, and then to a grantee or subcontractor who made claims for payment to the administrator of the program or the prime contractor, respectively.
In such cases, to establish liability under § 3729(a)(1), the Government would have to prove the chain of events that culminated in the presentation of a claim to a Government officer or employee; to establish liability under § 3729(a)(2) or (a)(3), the Government would have to prove not only that the defendant engaged in wrongdoing that resulted in the Government’s paying out funds, but also that the defendant specifically intended to make the Government pay out those funds.
Insofar as the 2009 amendments rewrote the substantive liability provisions of the FCA, there is no question that Congress was specifically responding to what it believed to be erroneous judicial interpretations of the Act in the Totten and Allison Engine cases.
Finally, the Department of Justice will judge your case in large part on the basis of your client’s complaint. The complaint must demonstrate that your client’s allegations are credible and that you have full mastery of the rules and regulations that are pertinent to the fraud claims in your client’s case. The latter is not an easy task. The governing regulations and guidance, particularly in the areas of health care and defense procurement fraud, can be complex and highly technical.
Changes in the Substantive Liability Provisions of the FCA The 2009 amendments, which resulted in the renumbering of all of the FCA’s substantive liability provisions, made several significant changes to those substantive requirements.
First, the amendments eliminated the “presentment” requirement, which, according to Totten, was previously incorporated in § 3729(a)(1). The new provision, § 3729(a)(1)(A), which by the terms of the statute is applicable to conduct on or after that date of enactment (May 20, 2009), imposes liability on any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for approval.”
Unlike its predecessor, this provision does not require that the claim be presented to an officer or employee of the U.S. Significantly, the 2009 amendments also revise the definition of “claim,” defining that term to include requests for funds made by the defendant to a contractor or grantee, provided that the funds are to be used on the Government’s behalf or to advance a Government interest, and provided that the U.S. provided or will reimburse any portion of the funds. 31 USCA § 3729(b)(2).
Unlike the situation under the pre-2009 FCA, in which there was a conflict between the plain language of § 3729(a)(1) and the definition of “claim” in § 3729, there is no similar conflict between the new FCA provisions.
Second, the amendments eliminated the requirements under § 3729(a)(2) and (a)(3) of the pre-2009 FCA that the defendant “specifically intend” that the misconduct for example, making false statements or participating in a conspiracy cause the Government to pay money. Instead, the new § 3729(a)(1)(B) imposes liability on any person who knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” As noted above, a “claim” can be a demand to a contractor or grantee who received Government funds. Moreover, although the new provision expressly incorporates a “materiality” requirement, the amended FCA now defines that term in a way that is relatively easy for the Government to satisfy, stating, “the term material’ means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”
§ 3729(b)(4); see U.S. ex rel. Longhi v. Lithium Power Techs., Inc., 575 F.3d 458 (5th Cir. 2009). By the express terms of the statute, new § 3729(a)(1)(B) has retroactive effect, legislatively reversing the holding of the Allison Engine case.
Third, the amendments significantly change the provision known as the “reverse false claims” provision, i.e., under which someone can be liable for misconduct that prevents the Government from recouping funds that are owed to it. Under the old version of the FCA, liability attached to a person who “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.”
Under the amended FCA, however, liability attaches to a person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money to the Government.” § 3729(a)(1)(G).
There is a significant difference between the old version of this provision and the new one. To be liable under the old version, a person had to do something, i.e., the person had to make or use, or cause to be made or used, a false record or statement. To be liable under the new version, however, a person does not have to commit some affirmative act, i.e., to make or use or cause something. Under the new version, one can also be liable by knowingly concealing, or knowingly and improperly avoiding, an obligation to pay or transmit money to the Government.
Finally, the amendments changed the conspiracy provision of the FCA. Under the pre-2009 version, liability attached to a person who “conspires to defraud the Government by getting a false or fraudulent claim allowed or paid.” § 3729(a)(3). Under the amended version, however, liability attaches to a person who conspires to violate any of the other substantive liability provisions of the Act. § 3729(a)(1)(C).
CHANGES IN THE CID PROVISIONS
The ability to issue a CID can be an extremely powerful tool in the investigation of a fraud case. A CID can be used to compel a witness to give a deposition, answer written interrogatories or produce documents in short, the full range of civil discovery. In ordinary fraud cases, Federal Rule of Civil Procedure 9(b) requires that a plaintiff’s initial complaint “state with particularity the circumstances constituting fraud.” Thus, the plaintiff in an ordinary fraud case cannot even begin to engage in civil discovery without first alleging the details of the defendant’s fraudulent conduct in the initial complaint. With the power to issue CIDs, however, the Department of Justice can conduct discovery before filing a complaint alleging that the defendant has committed fraud. In other words, the power to issue CIDs gives DOJ the ability to sidestep the obstacle that Rule 9(b) places on other plaintiffs in fraud cases.
Congress first gave DOJ the power to issue CIDs in civil fraud cases in the 1986 amendments to the FCA. However, although on the one hand Congress gave DOJ an extraordinarily powerful investigative tool, on the other hand, it restrained DOJ’s ability to make widespread use of this tool by requiring that a CID had to be personally signed by the attorney general and insisting that this power could not be delegated.
The amended FCA has removed this restriction and permits the attorney general to delegate the authority to issue CIDs. § 3733(a)(1). In removing this restriction, the amended FCA makes it much easier for DOJ to issue CIDs. In addition, the amended FCA makes it much easier for DOJ to use the information obtained through CIDs in furtherance of a fraud investigation. Although DOJ attorneys previously were permitted to make “official use” of the information in furtherance of fraud investigations, the amended FCA now incorporates a broad definition of “official use,” to include, for example, use in “interviews of any qui tam relator or other witness,” or “communications with the counsel of other parties concerning an investigation, case, or proceeding.” § 3733(l)(8).
This Feature Comment was written for the Government Contractor by Robert L. Vogel of Vogel, Slade & Goldstein, LLP, Washington, D.C. © 2009 Thomson Reuters
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