| Shorttitle: | False Claims Act of 1863 |
The False Claims Act of 1863 (FCA)[1] is an American federal law that imposes liability on persons and companies (typically federal contractors) who defraud governmental programs. It is the federal government's primary litigation tool in combating fraud against the government.[2] The law includes a qui tam provision that allows people who are not affiliated with the government, called "relators" under the law, to file actions on behalf of the government. This is informally called "whistleblowing", especially when the relator is employed by the organization accused in the suit. Persons filing actions under the Act stand to receive a portion (15–30%, depending on certain factors) of any recovered damages.[3]
As of 2019, over 71% of all FCA actions were initiated by whistleblowers.[4] Claims under the law have typically involved government health care programs (Medicare, Medicaid and TriCare), military, or other government spending programs. FCA actions dominate the list of largest pharmaceutical settlements. Between 1987 and 2019, the government recovered more than $62 billion under the False Claims Act.[5]
Qui tam laws have history dating back to the Middle Ages in England. In 1318, King Edward II offered one third of the penalty to the relator when the relator successfully sued government officials who moonlighted as wine merchants.[6] The Maintenance and Embracery Act 1540 of Henry VIII provided that common informers could sue for certain forms of interference with the course of justice in legal proceedings that were concerned with the title to land.[7] This act is still in force today in the Republic of Ireland, although in 1967 it was extinguished in England. The idea of a common informer bringing suit for damages to the Commonwealth was later brought to Massachusetts, where "penalties for fraud in the sale of bread [are] to be distributed one third to inspector who discovered the fraud and the remainder for the benefit of the town where the offense occurred."[6] Other statutes can be found on the colonial law books of Connecticut, New York, Virginia and South Carolina.[6]
The American Civil War (1861–1865) was marked by fraud on all levels, both in the Union north and the Confederate south. During the war, unscrupulous contractors sold the Union Army decrepit horses and mules in ill health, faulty rifles and ammunition, and rancid rations and provisions, among other unscrupulous actions.[8] In response, Congress passed the False Claims Act on March 2, 1863, .[9] Because it was passed under the administration of President Abraham Lincoln, the False Claims Act is sometimes referred to as the "Lincoln Law".[10]
Importantly, a reward was offered in what is called the qui tam provision, which permits citizens to sue on behalf of the government and be paid a percentage of the recovery. Qui tam is an abbreviated form of the Latin legal phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur ("he who brings a case on behalf of our lord the King, as well as for himself")[11] In a qui tam action, the citizen filing suit is called a "relator".[12] [13] As an exception to the general legal rule of standing, courts have held that qui tam relators are "partially assigned" a portion of the government's legal injury, thereby allowing relators to proceed with their suits.[14]
U.S. Senator Jacob M. Howard, who sponsored the legislation, justified giving rewards to whistle blowers, many of whom had engaged in unethical activities themselves. He said, "I have based the [''qui tam'' provision] upon the old-fashioned idea of holding out a temptation, and ‘setting a rogue to catch a rogue,’ which is the safest and most expeditious way I have ever discovered of bringing rogues to justice."[15]
In the massive military spending leading up to and during World War II, the US Attorney General relied on criminal provisions of the law to deal with fraud, rather than using the FCA. As a result, attorneys would wait for the Department of Justice to file criminal cases and then immediately file civil suits under the FCA, a practice decried as "parasitic" at the time. Congress moved to abolish the FCA but at the last minute decided instead to reduce the relator's share of the recovered proceeds.[16]
The law was again amended in 1986, again due to issues with military spending. Under President Ronald Reagan's military buildup, reports of massive fraud among military contractors had become major news, and Congress acted to strengthen the FCA.[17]
The first qui tam case under the amended False Claims Act was filed in 1987 by an eye surgeon against an eye clinic and one of its doctors, alleging unnecessary surgeries and other procedures were being performed.[18] The case settled in 1988 for a total of $605,000. However, the law was primarily used in the beginning against defense contractors. By the late 1990s, health care fraud began to receive more focus, accounting for approximately 40% of recoveries by 2008[17] Franklin v. Parke-Davis, filed in 1996, was the first case to apply the FCA to fraud committed by a pharma company against the government, due to bills submitted for payment by Medicaid/Medicare for treatments that those programs do not pay for as they are not FDA-approved or otherwise listed on a government formulary. FCA cases against pharma companies are often related to off-label marketing of drugs by drug companies, which is illegal under a different law, the Federal Food, Drug, and Cosmetic Act; the intersection occurs when off-label marketing leads to prescriptions being filled and bills for those prescriptions being submitted to Medicare/Medicaid.[19]
As of 2019, over 72% of all federal FCA actions were initiated by whistleblowers.[20] The government recovered $62.1 billion under the False Claims Act between 1987 and 2019 and of this amount, over $44.7 billion or 72% was from qui tam cases brought by relators. In 2014, whistleblowers filed over 700 False Claims Act lawsuits.[21] In 2014, the Department of Justice had its highest annual recovery in False Claims Act history, obtaining more than $6.1 billion in settlements and judgments from civil cases involving fraud and false claims against the government. In fiscal year 2019, the Department of Justice recovered over $3 billion under the False Claims Act, $2.2 billion of which were generated by whistleblowers. Since 2010, the federal government has recovered over $37.6 billion in False Claims Act settlements and judgments. In 2020, the DOJ recovered $2.2 billion from FCA cases: $1.6 billion of that total was from cases filed under the FCA.[22] Qui tam whistleblowers received a total of $309 million in whistleblower rewards in 2020.
The Act establishes liability when any person or entity improperly receives from or avoids payment to the Federal government. The Act prohibits:
The statute provides that anyone who violates the law "is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, as adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990,[24] plus 3 times the amount of damages which the Government sustains because of the act of that person."[25] The False Claims Act requires a separate penalty for each violation of the statute.[26] Under the Civil Penalties Inflation Adjustment Act, False Claims Act penalties are periodically adjusted for inflation. In 2020, the penalties range from $11,665 to $23,331 per violation.[27]
Certain claims are not actionable, including:
There are unique procedural requirements in False Claims Act cases. For example:
In addition, the FCA contains an anti-retaliation provision, which allows a relator to recover, in addition to his award for reporting fraud, double damages plus attorney fees for any acts of retaliation for reporting fraud against the government.[33] This provision specifically provides relators with a personal claim of double damages for harm suffered and reinstatement.[34]
Under the False Claims Act, the Department of Justice is authorized to pay rewards to those who report fraud against the federal government and are not convicted of a crime related to the fraud, in an amount of between 15 and 25 (but up to 30% in some cases) of what it recovers based upon the whistleblower's report.[20] The relator's share is determined based on the FCA itself, legislative history, Department of Justice guidelines released in 1997, and court decisions.[35]
(False Claims Act Amendments
See main article: Fraud Enforcement and Recovery Act of 2009.
On May 20, 2009, the Fraud Enforcement and Recovery Act of 2009 (FERA) was signed into law. It includes the most significant amendments to the FCA since the 1986 amendments. FERA enacted the following changes:
With this revision, the FCA now prohibits knowingly (changes are in bold):
On March 23, 2010, the Patient Protection and Affordable Care Act (also referred to as the health reform bill or PPACA) was signed into law by President Barack Obama. The Affordable Care Act made further amendments to the False Claims Act, including:
The False Claims Act has a detailed process for making a claim. Mere complaints to the government agency are insufficient to bring claims under the Act. A complaint (lawsuit)must be filed in a U.S. District Court (Federal court) in camera (under seal). The Department of Justice (DOJ) must thence investigate within 60 days, but it often enjoys several months' worth of extensions by the Court. In this time, the department decides whether it will pursue the case.
If the case is pursued by DOJ, the amount of the reward is less than if the Department of Justice had decided not to pursue the case and the plaintiff/relator continues the lawsuit himself. However, the success rate is higher in cases that the Department of Justice decides to pursue.
Technically, the government has several options in handing cases. These include:
In practice, there are two other options for the Department of Justice:
There is case law where claims may be prejudiced if disclosure of the alleged unlawful act has been reported in the press, if complaints were filed to an agency instead of filing a lawsuit, or if the person filing a claim under the act is not the first person to do so. Individual states in the U.S. have different laws regarding whistleblowing involving state governments.
The U.S. Internal Revenue Service (IRS) takes the position that, for Federal income tax purposes, qui tam payments to a relator under FCA are ordinary income and not capital gains. The IRS position was challenged by a relator in the case of Alderson v. United States;[37] and, in 2012, the U.S. Court of Appeals for the Ninth Circuit upheld the IRS' stance. As of 2013, this remained the only circuit court decision on tax treatment of these payments.[38]
In a 2000 case, Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000),[11] the United States Supreme Court held that a private individual may not bring suit in federal court on behalf of the United States against a State (or state agency) under the FCA. In Stevens, the Supreme Court also endorsed the "partial assignment" approach to qui tam relator standing to sue, which had previously been articulated by the Ninth Circuit Federal Court of Appeals and is an exception to the general legal rule for standing.[11] [14] [39]
In a 2007 case, Rockwell International Corp. v. United States, the United States Supreme Court considered several issues relating to the "original source" exception to the FCA's public-disclosure bar. The Court held that (1) the original source requirement of the FCA provision setting for the original-source exception to the public-disclosure bar on federal-court jurisdiction is jurisdictional; (2) the statutory phrase "information on which the allegations are based" refers to the relator's allegations and not the publicly disclosed allegations; the terms "allegations" is not limited to the allegations in the original complaint, but includes, at a minimum, the allegations in the original complaint as amended; (3) relator's knowledge with respect to the pondcrete fell short of the direct and independent knowledge of the information on which the allegations are based required for him to qualify as an original source; and (4) the government's intervention did not provide an independent basis of jurisdiction with respect to the relator.
In a 2008 case, Allison Engine Co. v. United States ex rel. Sanders, the United States Supreme Court considered whether a false claim had to be presented directly to the Federal government, or if it merely needed to be paid with government money, such as a false claim by a subcontractor to a prime contractor. The Court found that the 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 payment of, a claim.[40] The Fraud Enforcement and Recovery Act of 2009 reversed the Court's decision and made the types of fraud to which the False Claims Act applies more explicit.[41]
In a 2009 case, United States ex rel. Eisenstein v. City of New York,[42] the United States Supreme Court considered whether, when the government declines to intervene or otherwise actively participate in a qui tam action under the False Claims Act, the United States is a "party" to the suit for purposes of Federal Rule of Appellate Procedure 4(a)(1)(A) (which requires that a notice of appeal in a federal civil action generally be filed within 30 days after entry of a judgment or order from which the appeal is taken). The Court held that when the United States has declined to intervene in a privately initiated FCA action, it is not a "party" for FRAP 4 purposes, and therefore, petitioner's appeal filed after 30 days was untimely.
In a 2016 case, Universal Health Services, Inc. v. United States ex rel. Escobar,[43] the United States Supreme Court sought to clarify the standard for materiality under the FCA. The court unanimously upheld the implied certification theory of FCA liability and strengthened the FCA's materiality requirement.
In a 2023 combined case, United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, a unanimous U.S. Supreme Court opinion rejected an attempt to dilute the FCA's "knowledge standard."[44] Under the knowledge standard, a defendant is liable under the FCA if a false claim is "knowingly" submitted to the government for payment. The statute defines "knowingly" as acting with actual knowledge, deliberate ignorance, or reckless disregard.[45] The unanimous opinion found that a defendant is liable if it submits a false claim to the government based on its own knowledge and subjective beliefs — not what an objectively reasonable person may have thought.
In a 2024 case, Murray v. UBS Securities, LLC, et al. 601 U. S. ____ (2024), a unanimous U.S. Supreme Court endorsed a lower burden of proof for whistleblowers, holding that whistleblowers do not need to prove that an employer acted with "retaliatory intent" in order to be protected under the Sarbanes-Oxley Act. The Supreme Court found that a whistleblower needs only to prove that their actions in making a whistleblower complaint were a "contributing factor" in the employer's unfavorable action.[46] The unanimous opinion found that liability hinges on a defendant’s “knowledge and subjective beliefs” — not what an objective, reasonable person would have thought — at the time they submitted their claims to the government.[47]
As of 2020, 29 states and the District of Columbia have false-claims laws modeled on the federal statute to protect their publicly funded programs from fraud by including qui tam provisions, which enables them to recover money at state level.[48] [49] Some of these state False Claims Act statutes provide similar protections to those of the federal law, while others limit recovery to claims of fraud related to the Medicaid program.
The California False Claims Act was enacted in 1987, but lay relatively dormant until the early 1990s, when public entities, frustrated by what they viewed as a barrage of unjustified and unmeritorious claims, began to employ the False Claims Act as a defensive measure.[50]
In 1995, the State of Texas passed the Texas Medicaid Fraud Prevention Act (TMFPA), which specifically aims at combating fraud against the Texas Medicaid Program, which provides healthcare and prescription drug coverage to low-income individuals.[51] The Texas law enacts state qui tam provisions that allow individuals to report fraud and initiate action against violations of the TMFPA, imposes consequences for noncompliance and includes whistleblower protections.[52]
In Australia, The Treasury Laws Amendment (Enhancing Whistleblower Protections) Act,[53] was passed in December 2018 and went into effect in 2019. The law expanded protections for whistleblowers, allowing them to report misconduct anonymously, as well as applying anti-retaliation protections to additional kinds of whistleblowers. Importantly, the law does not provide for rewards for whistleblowers. There have been calls since 2011 for legislation modeled on the False Claims Act and for their application to the tobacco industry and carbon pricing schemes.[54] [55]
In October 2013, the UK Government announced that it was considering the case for financially incentivising individuals reporting fraud in economic crime cases by private sector organisations, in an approach much like the US False Claims Act.[56] The 'Serious and Organised Crime Strategy' paper released by the UK's Secretary of State for the Home Department sets out how that government plans to take action to prevent serious and organised crime and strengthen protections against and responses to it. The paper asserted that serious and organised crime costs the UK more than £24 billion a year. In the context of anti-corruption, the paper acknowledged that there was a need to not only target serious and organised criminals but also support those who seek to help identify and disrupt serious and organised criminality.
Three UK agencies, the Department for Business, Innovation and Skills, the Ministry of Justice and the Home Office, were tasked with considering the case for a US-style False Claims Act in the UK.[56] In July 2014, the Financial Conduct Authority and the Bank of England Prudential Regulation Authority recommended Parliament enact strong measures to encourage and protect whistleblowers, but without offering whistleblower rewards, rejecting the US model.[57]
Under Rule 9(b) of the Federal Rules of Civil Procedure, allegations of fraud or mistake must be pleaded with particularity.[58] All appeals courts to have addressed the issue of whether Rule 9(b) pleading standards apply to qui tam actions have held that the heightened standard applies.[59] The Fifth Circuit,[60] the Sixth Circuit,[61] the Seventh Circuit,[62] the Eighth Circuit,[63] the Tenth Circuit,[64] and the Eleventh Circuit[65] have all found that plaintiffs must allege specific false claims.
In 2010, the First Circuit decision in U.S. ex rel. Duxbury v. Ortho Biotech Prods., L.P.(2009) and the Eleventh Circuit ruling in U.S. ex rel. Hopper v. Solvay Pharms., Inc.(2009) were both appealed to the U.S. Supreme Court. The Court denied certiorari for both cases, however, declining to resolve the divergent appeals court decisions.[66]
In 2009, the American Civil Liberties Union (ACLU), Government Accountability Project (GAP) and OMB Watch filed suit against the Department of Justice challenging the constitutionality of the "seal provisions" of the FCA that require the whistleblower and the court to keep lawsuits confidential for at least 60 days. The plaintiffs argued that the requirements infringe the First Amendment rights of the public and the whistleblower, and that they violate the separation of powers, since courts are not free to release the documents until the executive branch acts.[67] The government moved for dismissal, and the district court granted that motion in 2009.[68] The plaintiffs appealed, and in 2011 their appeal was denied.[69]
In 2004, the billing groups associated with the University of Washington agreed to pay $35 million to resolve civil claims brought by whistleblower Mark Erickson, a former compliance officer, under the False Claims Act. The settlement, approved by the UW Board of Regents, resolved claims that they systematically overbilled Medicaid and Medicare and that employees destroyed documents to hide the practice. The fraud settlement, the largest against a teaching hospital since the University of Pennsylvania agreed to pay $30 million in 1995, ended a five-year investigation that resulted in guilty pleas from two prominent doctors. The whistleblower was awarded $7.25M.[70]
In 2010, a subsidiary of Johnson & Johnson agreed to pay over $81 million in civil and criminal penalties to resolve allegations in a FCA suit filed by two whistleblowers.[71] The suit alleged that Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI) acted improperly concerning the marketing, promotion and sale of the anti-convulsant drug Topamax. Specifically, the suit alleged that OMJPI "illegally marketed Topamax by, among other things, promoting the sale and use of Topamax for a variety of psychiatric conditions other than those for which its use was approved by the Food and Drug Administration, (i.e., "off-label" uses)." It also states that "certain of these uses were not medically accepted indications for which State Medicaid programs provided coverage" and that as a result "OMJPI knowingly caused false or fraudulent claims for Topamax to be submitted to, or caused purchase by, certain federally funded healthcare programs.[71]
In response to a complaint from whistleblower Jerry H. Brown II, the US Government filed suit against Maersk for overcharging for shipments to US forces fighting in Iraq and Afghanistan. In a settlement announced on 3 January 2012, the company agreed to pay $31.9 million in fines and interest, but made no admission of wrongdoing. Brown was entitled to $3.6 million of the settlement.[72] [73]
The largest healthcare fraud settlement in history was made by GlaxoSmithKline in 2012 when it paid a total of $3 billion to resolve four qui tam lawsuits brought under the False Claims Act and related criminal charges.[74] The claims include allegations Glaxo engaged in off-label marketing and paid kickbacks to doctors to prescribe certain drugs, including Paxil, Wellbutrin and Advair.
In 2013, Wyeth Pharmaceuticals Inc., a pharmaceutical company acquired by Pfizer, Inc. in 2009, paid $490.9 million to resolve its criminal and civil liability arising from the unlawful marketing of its drug Rapamune for uses that were not FDA-approved and potentially harmful.[75]
In 2014, CareFusion paid $40.1 million to settle allegations of violating the False Claims Act by promoting off label use of its products in the case United States ex rel. Kirk v. CareFusion et al., No. 10-2492. The government alleged that CareFusion promoted the sale of its drug ChloraPrep for uses that were not approved by the FDA.[76] ChloraPrep is the commercial name under which CareFusion produced the drug chlorhexidine, used to clean the skin before surgery. In 2017, this case was called into question and was under review by the DOJ because the lead attorney for the DOJ serving as Assistant Attorney General in the case, Jeffery Wertkin, was arrested by the FBI on January 31, 2017, for allegedly attempting to sell a copy of a complaint in a secret whistleblower suit that was under seal.[77] [78]
In 2017, bio-pharmaceutical giant Celgene Corporation paid $240 million to settle allegations it sold and marketed its drugs Thalomid and Revlimid off-label in U.S. ex rel. Brown v. Celgene, CV 10-03165 (RK) (C.D. Cal.).[79]
In 2021, A South Carolina pain management company was ordered to pay $140 million under the False Claims Act after a judge in U.S. district court found it in default after fraud schemes.[80] [81]