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Bar News - October 16, 2009


Federal Practice Law: Amendments to the False Claims Act

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The Fraud Enforcement and Recovery Act of 2009 (FERA) amends one of the government’s most effective fraud fighting weapons—the False Claims Act (35 U.S.C. §3729, et seq.). FERA expands the potential liability of companies and institutions receiving federal funds, just as a tidal wave of federal funds is arriving in response to the economic recession. The combination of expanded liability and more federal funds will surely result in both False Claims Act investigations and litigation.

Background

The False Claims Act provides that any person who knowingly submits, or causes another person or entity to submit, false claims for payment of government funds is liable for three times the government’s damages plus civil penalties of $5,500 to $11,000 per false claim (other than tax fraud). In short, the False Claims Act imposes liability on any person who submits a claim for federal funds that he knows (or should know) is false.

For example, the False Claims Act imposes liability on a physician who submits a bill to Medicare for medical services that he knows he has not provided. Another example includes a government contractor who submits records showing that he complied with certain regulatory requirements in order to obtain payment, even though he knows the records are false. A third example is a "reverse false claim" in which a hospital receives interim payments from Medicare throughout the year, and then knowingly files a false cost report at the end of the year to avoid making a refund to Medicare.


Private Enforcement

The False Claims Act allows any private citizen, not affiliated with the federal government, to file an action on behalf of the government (35 U.S.C. §3730(b). These private citizens are known as whistleblower or "qui tam" realtors, which for all you Latin scholars is an abbreviation of the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur, meaning "[he] who sues in this matter for the king as [well as] for himself." A realtor may receive a portion of the proceeds from a False Claims Act judgment or settlement. If the government intervenes in the action, the realtor receives at least 15 percent but not more than 25 percent of the proceeds with some exceptions. If the government does not intervene, the realtor receives an amount that the court decides is reasonable, but not less than 25 percent and not more than 30 percent of the proceeds.

Amendments

On May 20, 2009, President Obama signed FERA making three major changes in the False Claims Act. First, FERA modifies the False Claims Act by eliminating the requirement that a false claim be presented to a government official for payment of government funds. The new law reverses the U.S. Supreme Court’s 2008 decision in Allison Engine v. U.S., 128 U.S. 2123 (2008). In Allison Engine, the Supreme Court held that a claim need not be presented directly to the government, but that the false statement must be made with the intention that it will be relied upon by the government in paying or approving a payment of a claim. The main problem with the Allison Engine decision was that a false statement or claim by a subcontractor or subgrantee to a government contractor or grantee would not necessarily be within the scope of the act.

Second, FERA also recognizes the "reverse false claim," making it illegal for a person to misrepresent facts to avoid paying an "obligation" owed to the government. FERA closes this "big loophole" by attaching liability for wrongfully retained overpayments and ensures that the government will be able to reach funds that are knowingly withheld from it.

Third, FERA changes the investigative process. As a result of FERA, the Attorney General for the first time may delegate authority to issue civil investigative demands (CIDS)—which include subpoenas for information and materials, depositions, interrogatories, and pre-filing materials. This change will remove what has been a "bottle-neck" in the process. Additionally, the new law allows the attorney general or a designee to share information obtained under a CID with whistleblower-realtors if it is deemed "necessary" as part of the investigation.

Conclusion

FERA is based, at least in part, on Congress’ questionable premise that criminal activity contributed significantly to the recession. Moreover, critics argue that FERA’s expansion of the False Claims Act is unnecessary and redundant because federal agencies already possess the tools to deal with fraud. On the other hand, supporters of FERA cite the need to expand the tools to deal with fraud in view of the enormous increase in the amount of federal funds being appropriated. Whether or not FERA will be helpful remains to be seen.

Paul C. Remus is chair of the Patent, Trademark & Licensing Group of Devine, Millimet & Branch, P.A. in Manchester, New Hampshire. He rows and jogs and refuses to wear a tie. He can be reached at 60-669-1000 or at premus@devinemillimet.com.

Kristen R. Blanchette is a third-year student at Franklin Pierce Law Center. She was born and raised in Berlin, NH and graduated from Dartmouth College in 2007.


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