February 26, 2009
In January, we provided you with our 2008 Year-End False Claims Act Update in which we discussed, among other things, legislation proposed in Congress in 2007 that would significantly broaden the scope of the False claims Act (the "FCA"). As we predicted, Senator Grassley (R-IA) recently introduced legislation to amend the FCA that, given the current economic environment, Congress is likely to pass. Congress may feel more pressure to pass these bills this session to demonstrate a commitment to protect taxpayer’s dollars from fraud, waste, and abuse.
First, on February 5, 2009, Senator Grassley introduced the Fraud Enforcement and Recovery Act, S. 386 ("FERA"). The primary focus of FERA is to investigate and prosecute recent financial and mortgage frauds and to cover fraud in connection with TARP funds. To that end, the bill authorizes $155 million a year for hiring fraud prosecutors and investigators at DOJ for FY 2010 and 2011 and proposes amendments to criminal fraud, money laundering, and securities statutes (principally by amending the definition of "financial institution" in Title 18 to include mortgage lending businesses). Somewhat buried within the bill is a significant amendment to the FCA: Specifically, concerned that the "effectiveness of the False Claims Act has recently been undermined by court decisions limiting the scope of the law allowing subcontractors and non-governmental entities to escape responsibility for proven frauds," FERA proposes amendments to the FCA that "clarify that the False Claims Act was intended to extend to any false or fraudulent claim for government money or property, whether or not the claim is presented to a government official or employee, whether or not the U.S. Government has physical custody of the money, and whether or not the defendant specifically intended to defraud the U.S. government." This provision is similar to the amendments proposed in S.458, the principal focus of this client alert.
Second, on February 24, 2009, Senator Grassley introduced a bill (S. 458) to the Senate Judiciary Committee to amend the False Claims Act. The proposed legislation, known as the False Claims Clarification Act of 2009, is co-sponsored by Sen. Durbin (D-IL), Sen. Leahy (D-VT), Sen. Specter (R-PA), and Sen. Whitehouse (D-RI). Sen. Grassley explained that the bill is intended to clarify, modify and strengthen the False Claims Act to combat fraud and waste in government spending, especially in light of the trillions of dollars in new government stimulus spending. This legislation explicitly identifies and attempts to overturn four federal cases and to resolve a split in the Federal Circuit Courts of Appeal interpreting the False Claims Act.
Key Provisions of the Bill
The proposed False Claims Clarification Act of 2009 expands the definition of "claim" and revises the categories of whistleblowers with standing to bring qui tam suits under the FCA, in addition to other technical amendments. These changes are attempts to overturn four federal cases and to resolve a Federal Circuit split that Sen. Grassley asserts "threaten to undermine both the spirit and intent of the 1986 Amendments" to the FCA. In fact, according to Senate Report 110-507 prepared in support of the similar 2008 version of this bill, the proposed amendments are consistent with positions taken by the Department of Justice in briefs filed in the first three cases discussed below.
Expanded definition of "claim" under 31 U.S.C. 3729(b)(2).
In his statement introducing the bill, Sen. Grassley noted that recent cases have limited the applicability of the FCA, "cutting off many worthy cases from ever going forward." For example, he notes that the Supreme Court decision in Allison Engine (discussed below) makes it difficult to recover taxpayer dollars wasted by subcontractor fraud. Specifically, he expressed concern that bailout funds used to purchase distressed assets through a third party broker as originally envisioned by the Troubled Assets Relief Program ("TARP") could be exempted from FCA liability unless the amendments are adopted. To address these concerns, the proposed legislation would supersede the FCA holdings discussed below by expanding the definition of "claim" in 31 U.S.C. 3729(b)(2) to include
any request or demand … for money or property … whether or not the United States has title to the money or property, that is presented to an officer, employee or agent of the United States; or is made to a contractor, grantee, or other recipient if the United States Government provides or has provided any portion of the money or property requested or demanded; or will reimburse such contractor, grantee, or other recipient for any portion of the money or property.
- United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004). In Totten, employees at Amtrak brought a case under the FCA for delivery of allegedly defective rail cars. The contractor was paid by Amtrak only in part by funds from the government. Then-Judge John Roberts dismissed the complaint holding that "under the plain language of Section 3729(a)(1), claims must be presented to an officer or employee of the government" not to a government grantee. Id. at 490.
- Allison Engine Co. v. United States, ex rel., Sanders, 471 F.3d 610 (6th Cir. 2006), cert granted, 128 S. Ct. 491 (2007), rev’d on other grounds, 128 S.Ct. 2123 (2008). Successfully argued by Gibson Dunn’s Ted Olson, and described in more detail in a prior client alert, U.S. Supreme Court Narrows the Scope of the False Claims Act, in Allison Engine, the Supreme Court made clear that Sections 3729(a)(2) and 3729(a)(3) of the False Claims Act apply only to fraud directed against the federal government itself and do not encompass fraud upon federally funded private entities, such as government contractors and universities. To recover under those sections, a plaintiff "must prove that the defendant intended that [a] false record or statement be material to the Government’s decision to pay or approve [a] false claim." The Court found that the defendant must "intend that a claim be paid … by the Government and not by another entity." The Court explained "[i]f a subcontractor or another defendant makes a false statement to a private entity and does not intend the Government to rely on that false statement as a condition of payment, the statement is not made with the purpose of inducing payment of a false claim ‘by the Government’" and thus does not give rise to liability under the False Claims Act.
- United States ex rel. DRC, Inc. v. Custer Battles, LLC, 376 F. Supp. 2d 617 (E.D. Va. 2006). In Custer Battles, a jury held that a defense contractor in Iraq had defrauded the government of $10 million. However, the judge overturned the jury verdict because the money lost was not U.S. taxpayer money but was Iraqi money under the control of the U.S. government. The expanded definition of claim is designed to encompass this type of situation. Senate Report 110-507 regarding the prior version the proposed legislation stated, "[w]hen the U.S. Government elects to invest its resources in administering funds belonging to another entity, or providing property to another entity, it does so because use of such investments for their designated purposes will further interest of the United States. False claims made against Government-administered funds harm the ultimate goals and U.S. interests and reflect negatively on the United States. The FCA should extend to these administered funds to ensure that the bad acts of contractors do not harm the foreign policy goals or other objectives of the Government."
Standing in Qui Tam Whistleblower Claims.
The proposed legislation would also address two issues regarding the "public disclosure bar" in qui tam suits.
- United States ex rel. Stone v. Rockwell Int’l Corp., 127 S. Ct. 1397, 1411 (2007). In Rockwell, the Supreme Court held that the qui tam whistleblower was barred from receiving a share of any money recovered because under the "public disclosure bar" the whistleblower was not an original source with "independent knowledge of the information on which the allegations are based." Sen. Grassley noted that Rockwell provides a disincentive for a whistleblower to bring a case, even if the Justice Department is overloaded or does not chose to bring the case. The proposed legislation seeks to eliminate procedural uncertainties by requiring the Justice Department to file a timely motion to dismiss claims that violate the "public disclosure bar."
- United States ex rel. Holmes v. Consumer Ins. Group, 318 F.3d 1199 (10th Cir. 2003). In Consumer Ins. Group, the Tenth Circuit allowed a federal employee to proceed as relator in a qui tam suit despite her status as a federal employee and the fact that her job duties included uncovering and investigating fraud. However, in then-Chief Judge Tacha’s dissent in Consumer Ins. Group, Tacha argued that when the federal employee had a specific duty to report fraud, discovered fraud and is participating in the fraud investigation, the employee is acting on behalf of the government and had access to the information regardless of whether it had been publicly disclosed. The proposed legislation codifies Tacha’s dissent by allowing a qui tam action by a federal employee based on information learned in the course of her employment only when 1) the employee discloses the fraud to her supervisor; 2) discloses the fraud to the Inspector General of the agency; and 3) discloses the fraud to the Attorney General and then waits 18 months without government action. In addition, the proposed legislation allows the government to move to dismiss a government employee’s qui tam suit if the employee derives the information from an indictment or ongoing civil, criminal or administrative investigation into substantially the same fraud alleged, or the employee has a duty to investigate the fraud.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Gibson Dunn successfully argued the Allison Engine case in the Supreme Court, which resulted in a unanimous decision by the Court. Our attorneys have handled more than 100 FCA investigations and have a long track record of litigation success. The firm has more than 30 attorneys with substantive FCA expertise and 20 former Assistant U.S. Attorneys and DOJ attorneys. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
Washington, D.C.
F. Joseph Warin (202-887-3609, [email protected])
Karen L. Manos (202-955-8536, [email protected])
Joseph West (202-955-8658, [email protected])
Andrew Tulumello (202-955-8657, [email protected])
New York
Randy Mastro (212-351-3825, [email protected])
James A. Walden (212-351-2300, [email protected])
Denver
Robert C. Blume (303-298-5758, [email protected])
Jessica H. Sanderson (303-298-5928, [email protected])
Laura Sturges (303-298-5929, [email protected])
Dallas
Evan S. Tilton (214-698-3156, [email protected])
Orange County
Nick Hanna (949-451-4270, [email protected])
Los Angeles
Timothy Hatch (213-229-7368, [email protected])
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