Law Office of Mark Allen Kleiman

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THE FALSE CLAIMS ACT IN WHISTLEBLOWER LITIGATION

"There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government."

Benjamin Franklin

"I feel like the getaway driver at a bank robbery," a nurse angrily told me. She had watched inflated bills and falsified hospital charts sweeten the bottom line of a large health care corporation while patient care suffered. The first time she questioned these tactics, she was told it was none of her business. The second time she objected, she was fired. A federal law gives that nurse and millions of others a potent weapon to vindicate their rights and to strike back at corporate wrongdoing. State and federal statutes give that nurse and millions of others a potent weapon to vindicate their rights and to strike back at the employer's wrongdoing. The federal false claims act at 31 U.S.C. § 3729, prohibits retaliation, provide "make whole" remedies for whistleblowers, and allows the whistleblower to participate in multi-million dollar recoveries against fraudulent employers. Since 1987 it has led to over two billion dollars in recoveries, with over $350 million being paid out to whistleblowers.

• What Does the Statute Do?

The Civil False Claims Act is simple and severe: It prohibits presenting any false claim for reimbursement to the United States where there is "deliberate ignorance or reckless disregard" of the claim's falsity. This is intended to preclude hear-no-evil see-no-evil defenses. Well-crafted ignorance is no excuse. "[I]ndividuals and contractors seeking public funds have some duty to make a limited inquiry so as to be reasonably certain they are entitled to the money they seek." The contractor or other person submitting a claim is required to make an inquiry which is "reasonable and prudent under the circumstances." Thus, a deliberate ignorance or reckless disregard for the truth is basis for liability under the Act. The Act:

"[a]ttempts to reach what has become the 'ostrich' type situation where an individual has 'buried his head in the sand' and failed to make simple inquiries which would alert him that false claims are being submitted. While the Committee intends that at least some inquiry be made, the inquiry need only be 'reasonable and prudent under the circumstances,' which clearly recognizes a limited duty to inquire as opposed to a burdensome obligation. This phrase strikes a balance which was accurately described by the Department of Justice as 'designed to assure the skeptical' both that mere negligence could not be punished by overzealous agency and that artful defense counsel could not urge that this statute actually require some form of intent as an essential ingredient of proof."

"Reckless disregard" is basically an extension of the "gross negligence" standard. Thus, a doctor who lets her office manager simply "presume" how much time is spent with a patient is liable for a false claim. In United States v. Aerodex manufacturers were not relieved of liability when they failed to disclose a product substitution to the Navy, even though all military and factory publications treated the two products as interchangeable for their intended use. The failure to disclose the substitution was held to indicate an intention to deceive.

The law prohibits "submitting or causing to submit" a false claim, meaning a contractor may be liable for the subcontractor's fraud. It also prohibits "conspiring to obtain a false claim" (§3729(a)(3)) and "[m]aking or using false records to obtain a false claim" (§3729(a)(2)). This subsection creates liability for a separate $5-10,000 civil fine for each record falsified.

The Court has no statutory discretion to reduce the amount of the penalty per claim no matter how great the ratio is of the amount of fraud to the statutory penalty, unless there has been a prior criminal conviction. In one case the court imposed $19 million in civil judgments for a $140,000 fraud. However, there have been cases in other arenas which the Supreme Court has characterized similar fines as "grossly disproportionate to the offense in question" and thus violative of the Eighth Amendment's excessive fines clause.

The whistleblower receives anywhere from 15-30% of this money, depending on the posture the government takes.

2. EXTENT OF FRAUD WHICH ATTRACTS WHISTLEBLOWER ATTENTION

A U.S. Senate report estimates that there is $100 billion in fraud each year, and that Medicare and Medicaid fraud cost $31 billion per year. Defense Department estimates run even higher. Fraud extends into every conceivable aspect of government contracting:

• General Electric paid over $100 million in bribes to the head of the Israeli air force to guarantee they would purchase GE planes. General Electric then charged those bribes off to U.S. taxpayers under a military supply contract.
• In 1994 one single health care chain (National Medical Enterprises) had to repay the United States nearly $379 million for illegal and fraudulent bills.
• Between 1995 and 1998, four nationwide clinical laboratories have repaid the government over $800 million for fraudulent billing.
• In 1998 Blue Cross/Blue Shield of Illinois (Health Care Services Corporation) paid $144 million for falsifying records, shredding records, and failing to review claims Medicare had paid it to review.
• National Medical Care, owned by W.R. Grace, has just paid $386 million and another $101 million in criminal penalties for kickbacks and unnecessary kidney dialysis treatments.
• Columbia/HCA is facing an anticipated $1 billion in liability for fraudulently reporting its costs to Medicare. The hospitals are alleged to literally have had two sets of books, one set marked "Confidential – Do Not Show to Medicare Auditors."
• Vocational schools have had to repay millions in illegally procured student loans.

False claims act cases have been brought by the government against:

• New York City's Department of Social Services for falsely claiming it was providing services to foster care families who never got any help at all;
• Military contractors for rigging their bids on competitive contracts;
• Suppliers for furnishing products inferior to those they contracted to provide;
• Aerospace and munitions manufacturers for failing to adequately test their products before they were installed in rockets and aircraft;
• Workers alleging they were not paid prevailing wage, in violation of the Davis-Bacon Act.

Over $3.4 billion has been recovered in qui tam actions since the 1986 amendments, and the number of cases filed has rocketed from 33 in 1987to 433 in 1999. Originally only a small percentage of the cases, health care fraud now exceeds 60% of the total cases filed.

3. A Brief History of False Claims Litigation

The Constitution's framers must have thought highly of qui tam litigation, since the Continental Congress enacted nearly a dozen separate qui tam statutes for various kinds of government fraud. The laws were consolidated and strengthened during the Civil War, when Union troops suffered horrible losses when war profiteers supplied them with defective ammunition and rotten food. President Lincoln wanted to strike back at this massive fraud and in 1863 secured passage of the False Claims Act, then popularly known as the Lincoln Law. Interest in the law was renewed during World War II as war profiteers once again sought to palm shoddy goods off on the defense effort. As originally written, the law permitted someone learning that a war profiteer had been criminally indicted to then race to the courthouse and file a civil suit. In 1943 Congressional disgust over these "parasitic claims" led to amendments which effectively eliminated any role for whistleblowers. But the need for them was far from eliminated. By 1985, nine of the ten leading military contractors in the nation were under criminal indictment, and Congressional interest in the law was renewed.

In 1986 a bipartisan effort by conservative Republican Senator Charles Grassley and liberal Democratic Congressman Howard Berman breathed new life into the act by increasing its scope -- and by dramatically improving recovery for whistleblowers. In the ten years before the 1986 amendments, fewer than twenty false claims cases were filed. In the eleven years since, over one thousand have been filed. Four key changes in the Act have made it the weapon of choice for striking back at corporate wrongdoing:

• Whistleblower rewards have been dramatically increased giving the whistleblower a 15-30% share of the recovery.
• Whistleblower protections have been strengthened -- giving employees a clear statutory right to a wrongful discharge suit with all tort remedies, including back pay, front pay, general damages, and punitive damages.
• The scope of the act has been broadened to include cases of fraud, even if the government has not actually been financially damaged by the fraud.
• The intent standard has been lowered from deliberate fraud to "deliberate ignorance", or "reckless disregard" for the truth.

4. PRACTICAL ASPECTS OF A FALSE CLAIMS CASE

When a hospital falsely bills Medicare $400,000 a year for costs not incurred here is what the potential damages look like:

$400,000 x six years x treble damages 4 false cost reports x $5-10,000 The hospital's liability The whistleblower's share (15-30%)

$7,200,000 $20-$40,000 $7,220,000 - $7,240,000 $1,083,0000 - $2,172,000

Cases usually settle for approximately 2½ times the single damages, rather than treble damages. The average recovery in all qui tam cases where there has been a recovery is $5.8 million, with $1.0 million as the average relator's award.

Average whistleblower share where the government intervenes 17.87%
Average whistleblower share where the government does not intervene 28.00%

5. POPULAR AREAS FOR LITIGATION

Typical cases involve product substitutions, failure to inspect or test products, illegal contracting practices, or falsely certifying compliance with government requirements (where the requirements are a condition of reimbursement). The most popular areas for litigation have been defense contracting and health care fraud involving federally funded programs.

In the realm of defense contracting, cost mischarging and defective pricing schemes are common, as are violations of Truth In Negotiations Act (TINA), 10 U.S.C § 2306(g). TINA requires a contractor to truthfully disclose all relevant cost information and provide a certification to that effect to the government. Intentionally inflating costs to obtain a higher price may violate the FCA.

We have also seen suits over fraudulent loan applications, phony attestations of eligibility for minority contracting set-asides, and illegal schemes between contractors and subcontractors to inflate the charges to the government for goods or services.

Proprietary vocational schools have been sued for falsely representing student qualifications, enrollment, or the nature and amount of instruction received.

In health care, the scams are innumerable. They include charging for services not provided, claiming services which were provided were more intense and expensive than they truly were (upcoding), furnishing medically unnecessary services, lying to the government about the cost of treating Medicare and Medicaid patients, and bribes or kickbacks to induce referrals. Targets have included for-profit hospitals (Columbia/HCA, Tenet, Charte), dialysis centers (National Medical Care), pharmaceutical manufacturers and distributors (Eckerd, Walgreens), clinical laboratories (SmithKline, LabCorp), and insurers the government contracts with to run the Medicare program (Blue Cross, Transamerica, etc.)

The list of the top ten recoveries on the following page offers some idea of the scope of these cases.

TOP 1997 QUI TAM RECOVERIES

6. ELEMENTS OF A FALSE CLAIMS CASE

Although each type of case is unique, they all have certain basic elements: A claim, falsity, and knowledge that the claim is false. 31 U.S.C. §3729(a) prohibits, inter alia, four distinct acts:

• Knowingly presenting (or causing presentation of) a false claim to the United States;
• Knowingly using (or causing use of) a false record or statement to get a claim paid;
• Conspiring with others to get a false claim paid; and
• Knowingly using (or causing to be used) a false record or statement to avoid having to pay money owed to the United States. (Known as a "reverse false claim," this does not include tax fraud.

A. What is a Claim?

The law defines "claim" quite broadly. A defendant may be liable if it submits a claim to a party other than the federal government so long as the government must eventually provide reimbursement for the claim, or so long as the Government helps fund the entity to which the claim is submitted. This includes claims to universities or to local government agencies. Because the statute also covers false records or statements "to get a claim paid" a defendant's false promises to the government, or false certifications that a thing had been done, may create liability. A claim may include a progress report and voucher. It may include information on organizational status and practices related to eligibility for contracting. Thus, falsely alleging that none of the Medicare reimbursement claims involved kickback-type transactions between economically related parties or organizations may trigger liability. A claim may include false contract progress reports. Administration of a federally funded program in violation of the conditions for federal funding constitutes a false claim.

Even false representations of compliance with environmental regulations may be a false claim. Note, however, that some circuits occasionally may take a more restrictive view of false certification cases. The Ninth Circuit has held that merely accepting federal funds while not in regulatory compliance does not trigger False Claims Act liability unless there is a knowingly false representation made with the intent that the false claim will cause the government to pay funds. The whistleblower, Sheila Hopper, was a special education teacher who had repeatedly protested the defendant school district's refusal to comply with rules on how to evaluate children eligible for special education programs. Ms. Hopper had previously filed numerous complaints with local and state regulators over the district's failure to comply. Federal money is assigned to states on a per student basis and the state then assigns the funds to local districts based upon criteria which the United States has approved. Since the school district actually spent over thirty times more on special education programs than it got from the federal government, Ms. Hopper could not persuade the court that the district's false certification of compliance with federal regulation was really a false claim:

"Violations of laws, rules, or regulations alone do not create a cause of action under the FCA. It is false certification of compliance which creates liability when certification of compliance is a prerequisite to obtaining a government benefit ... A violation of a regulatory provision, in the absence of a knowingly false or misleading representation, does not amount to fraud." (Id.)

However, even the Ninth Circuit has begun to retreat from this extreme position, holding in a recent case that certification of compliance is sufficient. In Local 38 a union local sued a public works contractor for violating the Davis Bacon Act which requires contractors to pay the prevailing wage. The panel hearing Local 38 distanced itself from the requirement of "a knowingly false or misleading statement" enunciated in Hopper. Instead, it held that:

While some of our cases may contain extraneous comments that might be read out of context to suggest that the FCA requires an intentional lie to trigger liability, those cases almost invariably reiterate the controlling statutory language that is determinative of their outcome. As the FCA provides, to rise to the level of "knowing" presentation, all that is required is that the party:

(1) has actual knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information, and no proof of specific intent to defraud is required.

Debate rages about whether situations where a reverse false claims case exists where a defendant "attempts to avoid a penalty." In addition to Pickens, supra, United States ex rel. Sequoia Orange Co. v. Oxnard Lemon Co., (N.D. Cal. 1992 WL 795477 also upheld the viability of a reverse false claims action. Nonetheless, this principle has been rejected in a number of recent cases.

Other bidding or contracting cases are readily accepted by the courts. Contracting procedures which violate federal law or regulations will create liability where contractors engage in collusive bidding practices. Non-competitive bidding can also lead to a theft of government money. In sole-source contracts the Truth in Negotiations Act (TINA) requires the contractor to disclose to the government what kinds of discounts they give to private sector, and what competitors charge for comparable products. Concealing this information will create FCA liability.

In any of these cases, each bill or false record submitted may be a false claim. The phrase "submit or cause to submit" means that an employer will be liable for the acts of employees, and a general contractor will be liable for acts of a subcontractor. Thus, a store clerks' acts in allowing nonfood items to be paid for with food stamps would be attributable to the corporate principal since the clerks were acting within the scope of their employment. The head cashier's lack of knowledge of wrongdoing in certifying that the food stamps had been properly used was irrelevant. The general rule is that a corporation which profited from one who acted for its benefit would be liable.

Similarly, retaining money erroneously paid by the federal government has been treated as a claim within the meaning of the FCA . In Savaree, the government inadvertently continued depositing checks in a beneficiary's account after the beneficiary died.

B. What is Falsity?

In United States v. Oakwood Downriver Medical Center 687 F.Supp. 302 (E.D. Mich. 1988), the defendant failed to disclose economic relationships it had with other health care providers to which it referred patients. The government successfully argued that these misstatements created a false claim each time the center applied for an interim payment under the Medicare program.

In United States ex rel Pickens v. Kanawha River Towing, et al. 916 F.Supp. 702 (S.D. Ohio 1996) two towing contractors working on a federal project dumped hazardous substances into the Ohio River. This was enough to trigger False Claims Act liability. First, when the towing contractors submitted their invoices to the federal government they impliedly certified that they were in compliance with federal requirements. An affirmative statement is not necessary to state a claim under §3729(a)(1). Second, the vessel's log was relied on by the government for regulatory review. If the log excluded major events such as dumping hazardous materials, the Court reasoned, it could only be to avoid a penalty under the Clean Water Act. Thus, the defendants were held to have submitted a false report to avoid a payment owed to the United States.

C. What is Knowledge of the False Claim?

Most notably, although the Act is often thought of as an anti-fraud statue, it will create liability in situations far from what the common-law recognizes as fraud. The 1986 amendments eliminated the "intent" standard. Thus, in United States v. Oakwood Downriver Medical Center, supra. summary judgment for the defendants was denied even where plaintiff could not prove the defendants intended to defraud the government by submitting false Medicare claims. Thus, a doctor who lets her office manager simply "presume" how much time is spent with a patient, is liable for a false claim. Reckless disregard of the truth or falsity of a claim is an extension of "gross negligence". n.6, supra. Specific intent to defraud is not required.

The mere fact that a regulation or application may be unclear or ambiguous does not relieve the defendant of potential false claims liability. The issue is whether the material submitted is actually false, and arguments about regulatory ambiguity go not to the question of truth or falsity, but merely to the question of whether or not the defendant had the requisite state of mind. This question typically should not be decided on summary judgment and is a jury question. A defendant's reliance upon a third party's expertise is not grounds for summary judgment for the defendant as the defendant's failure to conduct a proper investigation before making false statements may itself be reckless. "One who signs a certification cannot choose to remain unaware of the veracity of that certification like the proverbial ostrich who buried its head in the sand so as to see no evil, hear no evil and speak no evil. Thus, a failure to conduct a proper investigation before making a false statement may be sufficiently prevalent to yield False Claims Act liability."

However, other courts have also dismissed False Claims Act suits on the basis that government regulations were so convoluted that knowing falsity would have been virtually impossible. Similarly, disputes over the government's failure to follow its own procedures in propounding regulations or contracting requirements may affect the viability of an FCA case, at least insofar as the scienter requirement is concerned.

7. DAMAGE CALCULATIONS

Once liability is established, the damages are three times the economic value of the claims, and a $5– 10,000 fine for each false claim. The prospect of treble damages, however, begs the question: "Three times what?" Although damages are relatively easy to calculate where the government is billed for goods which are not provided, the issue becomes murky when substandard products or services are provided, -- and murkier still where the products may be acceptable -- but were not properly tested. How are damages valued when contractors have rigged bids, or when the "false claim" is that the party receiving the contract or government benefit falsely certified that it was eligible?

Since the Supreme Court has stated that the statute's purpose is to provide "complete indemnity" to the government, all damages flowing from the false claim should be recoverable. Similarly, the legislative history teaches that:

"No single rule can be, or should be, stated for the determination of damages under the Act. ... Fraudulent interference with the government's activities damages the government in numerous ways that vary from case to case. Accordingly, the committee believes that the courts should remain free to fashion measures of damages on a case-by-case basis. The Committee intends that the courts should be guided only by the principles that the United States' damages should be liberally construed to effectuate the remedial purposes of the Act and that the United States should be afforded full and complete recovery of all its damages."

The complexity of these issues is apparent in a typical military contract case where the defendant has not tested key components of an on-board computerized navigational system. "False testing" cases commonly arise where contractors fail to meet contractual obligations to test products to certain levels of specification, and conceal this failure from the government. Even though testing is only one phase of manufacturing and delivery, and the products were actually delivered, testing cases are still false claims.

A true "benefit of the bargain" measure of damages would require one to subtract the value of the inferior product from the amount paid by the government. But how many of the components are actually faulty? Is it reasonable to wait until they fail and people die before we know the answer?

Obviously not. Which means that the planes would need to be taken off line, the navigational systems removed, and the suspect components tested. That this expense is an inevitable consequence of the contractor's malfeasance in the first place should be obvious. Although consequential damages are not recoverable, direct damages are. Thus, in BMY-Combat Systems v. United States the court held that damages in a case where a contractor failed to perform tests should include the costs of inspection and repair incurred by the government.

In U.S. ex rel Roby v. The Boeing Company, 1999 U.S. Dist. Lexis, 20079 (S.D. Ohio 1999), Judge S. Arthur Spiegel tackled the consequential damages question head-on, with logic, a commitment to justice, and careful legal scholarship. While agreeing that under the statute, consequential damages are not recoverable, Judge Spiegel finally inquired into exactly what consequential damages are, noting that Black's Law Dictionary defines them as: "such damage, loss or injury as does not flow directly and immediately from the act of the party ... damages which arise from the intervention of special circumstances not ordinarily predictable." In contrast, direct damages are those "which arise naturally or ordinarily from a breach of contract; they are damages which in the ordinary course of human experience can be expected to result from a breach."

In the Roby case, the government contracted with Boeing for the purchase of CH-47(D) Chinook Army helicopters. Boeing then subcontracted with SPECO, which manufactured defective transmission gears for the helicopters. In 1991, during the Gulf War, one of the SPECO-made gears failed in flight while a helicopter was over Saudi Arabia. Just 56 hours into operation, the defective transmission gear exploded, causing the Chinook to crash and catch fire. The fire consumed the entire helicopter, a Humvee truck, ammunition, equipment, a howitzer and its tow vehicle. Several servicemen were injured.

Although the overall replacement cost exceeded $12 million dollars, Boeing maintained that its liability was limited to the $4,874 it paid SPECO for the defective gear. The relator and government pointed out that the United States had not contracted to buy a gear, but an entire helicopter, of which the gear was an integral part. This set the stage for the decision about the proper measure of damages under the False Claims Act.

Faced with a conflict between the "benefit of the bargain" measure, enunciated in United States v. Bornstein, supra, and the "out of pocket" measure used in U.S. ex rel Marcus v. Hess, supra, Judge Spiegel returned to first principles. He began by reviewing Hadley v. Baxendale, observing that the first rule of Hadley is that "certain damages will so naturally and obviously flow from the breach that everyone is deemed to contemplate them." This is to be distinguished from "consequential damages" which arise only where there are special circumstances.

Noting, that the United States was buying helicopters, not gears, the court sought to apply this principle, turning to a long line of cases in which direct damages were held recoverable. In United States v. Aerodex, n.7, supra, a defendant delivered 300 non-conforming ball bearings at the price of $90.00 each, for a total contract price of $27,000.00. In assessing damages, the District Court included not only the contract price, but also the $160,000.00 in repair costs. This was consistent with Toepleman v. United States, 263 F.2d 697, 700-701 (4th Cir. 1959), holding that the United States may recover double the loss it suffered "but for the fraud." This was found to be consistent with the teachings of Marcus and Bornstein that damages should completely indemnify the government for the injury done it. Thus, the relator and the government argued that when the helicopter crashed and burned and the servicemen were nearly killed, the government could recover "damages that naturally and proximately resulted from the fraud." As BMY-Combat, supra, concluded:

Because each case under the FCA involves unique types of damage to the government, a formula for calculating damages must be created for each case that will provide the government with its damages directly caused by the filing of the false claim.

As the 11th Circuit explained in United States v. Killough, n. 35, supra

[n]o single rule can be, or should be, stated for the determination of damages under the Act ... fraudulent interference with the government's activities damages the government in numerous ways that vary from case to case. Accordingly, the [Congressional Committee] believes that the court should remain free to fashion the measure of damages on a case by case basis.

There are two further policy arguments supporting this approach:

An economic analysis of the false testing cases is that the Government loses the "insurance value", a concretely valuable aspect of quality control, inherent in a fully operative product testing and certification system. The government loses something it pays competing producers to provide; the fraudulent producer frees itself from something its competitors would have counted as one of their costs to provide. There is economic loss to the government if it cannot trust contractors' disclosure of their internal accounting. The loss is created by additional needs for government auditing.

From a regulatory analysis, the FAR contracts include self-inspection clauses, both General Inspection requirements and Higher Level Contract Quality Requirement Clauses. The false testing cases involve loss of a governmental interest as specified by those clauses. Thus, one court held that where defective parts were supplied in an indeterminate number, the entire value of the contract was the measure of single damages, since it was impossible to ascertain which parts would have to be replaced. This court rejected the defendant's argument that a lower price, the "market value," was the proper measure of damages.

Whatever damages are finally computed will be trebled, and the defendant will be also be subject to a $5-10,000 penalty for each such claim, subject only to the challenge of the Eighth Amendment's excessive fines clause. (See n.10, supra.).

Materiality The uproar over materiality stems from the failure to distinguish damages from penalties. Although proof of harm would be necessary before damages could be recovered under the FCA, the false claim need not result in any economic harm to the government for the United States to obtain penalties under the FCA. This is because liability attaches to anyone who "knowingly presents or causes to be presented ... a false or fraudulent claim for payment or approval."

This is not novel, and should be unsurprising to students of the Act. Ten years ago a court held that a medical center which falsified a cost report by concealing that it was doing business with economically related entities could be liable under the False Claims Act. Although Oakwood Downriver Medical Center was not, strictly speaking, a kickback case, all of the legal prerequisites were present. The government relied upon a false statement in a cost report, without any reported evidence that the false statements had been coupled with overcharges, concealed costs, or any economic injury other than the hospital's false certification by the Center that it was eligible to receive Medicare money because it had honestly reported its organizational status.

Eight years ago a court permitted use of the FCA in an anti-kickback case. Kensington cited to controlling Supreme Court and Third Circuit precedents reaching back more than fifty years which hold that the government need not show actual damage in order to prove a violation of the False Claims Act. In Marcus electrical contractors submitted fraudulent bills to the government for work on numerous projects. In some instances, the government discovered the fraud before payment was made. This did not, however, preclude recovery under the False Claims Act.

In determining what misconduct is actionable under the FCA the Supreme Court, in U.S. v. Neifert-White instructed that the Act is to be read broadly, and extends "to all fraudulent attempts to cause the Government to pay out sums of money." Such a conclusion may only be buttressed by the legislative history of the 1986 amendments which teaches that:

The False Claims Act is intended to reach all fraudulent attempts to cause the Government to pay out sums of money or to deliver property or services. Accordingly, a false claim may take many forms, the most common being a claim for goods or services not provided, or provided in violation of contract terms, specification, statute, or regulation.

Administering a federally funded program in violation of funding conditions was also held to constitute a false claim in United States v. Village of Island Park. Village of Island Park involved a community that defrauded HUD's Community Development Block Grant Program by pre-selecting only white applicants for subsidized housing. The court found that the defendants, in obtaining grant funds, falsely stated that persons would not be excluded from the program on the basis of race.

In concluding that the False Claims Act was intended to include those situations in which the claimant engaged in fraudulent conduct in order to receive payment, the court considered the legislative history of the False Claims Act, which demonstrates that the False Claims Act was intended to cover "each and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, or in violation of any statute or applicable regulation...." In addition, the legislative history indicates that "claims may be false even though the services are provided as claimed if, for example, the claimant is ineligible to participate in the program, or though payments on the Government loan are current, if by means of false statements the Government was induced to lend an inflated amount."

It should be clear that the False Claims Act was intended to cover not only those situations in which the claims themselves are false but also those situations in which a claimant engages in fraudulent conduct with the purpose of inducing payment by the government. Recently, the U.S. Supreme Court addressed the issue of materiality when the term does not appear in a statute. In United States v. Wells, the Supreme Court refused to add "materiality" as an element where the defendant was charged with knowingly making false statements to a federally insured bank and, thus violating 18 USC § 1014. The Supreme Court noted that the statute itself does not require that the subject of the false statement be a fact which is material to the fraudulent scheme. The same conclusion has been reached with respect to the False Claims Act. The Sixth Circuit has recently rebuffed a defendant's attempt to add materiality as an element to a statutory claim which, like the FCA, did not contain such a requirement.

Penalties Without Damages.

The government need not even prove that it was damaged since "forfeiture is automatic and mandatory for each claim which is found to be false. The United States is entitled to recover such forfeiture solely upon proof that false claims were made, without proof of any damages."

8. SCRUTINIZING POSSIBLE SUBSTANTIVE DEFENSES.

The defendant may allege (and sometimes with some truth) that the government knew about the defendant's practices and approved them or, at least waived any objection to them. This defense, akin to laches or estoppel, is sometimes successful. However, there are important limitations. The estoppel defense failed in Killough, n. 35, because the official upon whose "permission" the defendant relied was a relatively low level functionary acting well beyond the scope of his authority. Government knowledge does not always mean government acquiescence, and is not an automatic waiver.

Also, suits have been lost or dismissed where courts have found government regulations too confusing or ambiguous to follow. In the health care arena, this often means following a twisted path of regulations from the Department of Health and Human Services, letters from DHHS to insurance companies which act as contracted administrators of the Medicare program to review and pay claims, and bulletins published either by DHHS or by these insurance companies to alert doctors, hospitals, and other providers to interpretations of Medicare requirements.

Another defense now making its way into the civil arena has long been familiar to criminal prosecutors -- the SODDI defense. (Some Other Dude Did It.) This typically involves an attempt to blame "rogue employees" or independent contractors for whatever false claims have been submitted. This defense typically fails.

As in employment law, procedural defenses are more common (and often more successful) than substantive ones. Defendants frequently invoke Rule 9(b) to insist that the false claim, like fraud, be plead with particularity. Although this attack is often successful, it should be met head on. Some courts have recognized an exception to Rule 9(b) pleading requirements applies wording information is in the exclusive hands of the defendant. This is especially so in false claims cases

9. COUNTERCLAIMS

As a matter of policy, courts have refused to permit counterclaims against relators. Where one or more persons are liable for an FCA violation, that liability is joint and several. In Mortgages, Inc. v. United States District Court, for example, the Ninth Circuit issued a writ of mandamus ordering the district court to vacate a decision requiring qui tam relators to answer third-party complaints, since the entire principle of qui tam lawsuits is "setting a rogue to catch a rogue." Similarly, many states have anti-SLAPP laws which may be invoked to suppress counterclaims in False Claims Act suits. However, the Ninth Circuit has permitted counterclaims for breach of fiduciary duty, breach of good faith, libel, trade libel, and interference with prospective economic advantage on the theory that they were for damages independent of the qui tam action.

10. A PRACTITIONER'S SURVIVAL GUIDE TO FALSE CLAIMS ACT PROCEDURE.

A searching analysis of the factual and legal bases for the case is critical. The growth of interest in this field has placed an increasing demand on the civil prosecutors charged with evaluating qui tam cases. Practitioners owe it to themselves, and to the justice system to carefully evaluate cases before bringing them, and not to simply ‘dump' an ill-analyzed set of facts on DOJ's doorstep.

It is equally important to screen potential clients very carefully about how they learned of the false claims, and whether any aspect of them has been disclosed in any way. Complete and exhaustive cross-examination of your client in this area is essential, as more cases come to grief over a public disclosure bar than any other provision of the law.

A. Who May be a Whistleblower?

A major jurisdictional problem is called the "public disclosure" bar.

"No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

The effect of this is leavened (and somewhat confused) by the "original source" exception to the bar:

"For purposes of this paragraph, 'original source' means an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information."

Analyzing this problem calls for a four-pronged test -- and then consideration of some non-legal practical considerations imposed by the court's biases:

1. Has there been any public disclosure about the alleged fraud?
2. Was the disclosure in a criminal, civil, or administrative hearing, in a congressional, administrative, or GAO report, hearing, audit, or investigation, or from the news media?
3. Did the disclosure concern the "allegations or transactions" of the fraud?
4. Is the qui tam suit based on publicly disclosed information?
Sadly, this close statutory analysis is often missing from opinions on this heavily litigated issue. Courts may make the logical leap from information being in any government document (even one merely distributed through the Freedom of Information Act) to the conclusion that there has been a public disclosure.

Some courts go even farther (and farther afield.) In a recent decision Judge Wald, writing for the District of Columbia Circuit, held that even though the particular facts of the fraud in the case at bar had not been previously disclosed, there had been previous public disclosure of this type of fraud, in a 1952 Comptroller General Opinion, a federal circuit case dealing with similar types of fraud, etc. According to the court this was enough information to reveal the allegation that government employees were improperly maintaining vending machines on federal property. The court also added a new requirement that to qualify as an "original source", the relator must have brought significant new material to the government's attention before there was any public disclosure.

This contrasts with United States ex rel Ramseyer v. Century Healthcare Corporation 90 Fed.3d 1514 (10th Cir. 1996) in which the Tenth Circuit joined the Ninth in holding that mere theoretical availability of a report is not enough to constitute public disclosure. That a report is potentially available to a member of the public who knows to request it under FOIA does not make it publicly available. The actual disclosure rule is superior, because it encourages citizens to come forward and expose instances of fraud. To hold that government possession of knowledge is a bar negates the intent of the 1986 amendments which changed the focus of the jurisdictional bar from mere government possession of knowledge to actual disclosure of the information to the public.

Nonetheless, in United States ex rel Fine v. MK-Ferguson Company 99 F.3d 1538 (10th Cir. 1996) a divided Tenth Circuit panel barred a qui tam suit filed by a former government auditor which, in their eyes, was substantially identical to a government audit. The auditor filed the suit just four (4) months after resigning from his position with the office of the Inspector General for the U.S. Department of Energy. Fine followed United States ex rel Ramseyer v. Century Health Care Corp. 90 F.3d 1514 (10th Cir. 1996) which held that the public disclosure occurs when the allegations upon which suit is based are affirmatively disclosed.

Fine held that disclosure occurred when DOE sent the audit to the State of Oregon without any restrictions. Thus, even though it was only theoretically available, this was held to be public disclosure. The defense argued that mere theoretical accessibility of a report via FOIA was not enough.

The court also ruled that Fine was not an original source under (e)(4)(B) because he lacked requisite "direct and independent knowledge" since he had not actually performed the investigation. This decision followed on the heels of another case which was barred when Fine filed suit less than one month after he resigned as an auditor, for the Office of the Inspector General because he had himself made the allegations public when he disclosed them to an AARP representative while consulting about a possible age discrimination action.

To add to the confusion, the Seventh Circuit has held that the mere disclosure of information to a competent public official about a false claim would constitute public disclosure. In Farmington, the relator had alleged that a bank had submitted two loss reports for the Farmers' Home Administration without disclosing the fact that the relator herself had guaranteed the loans. When a federal official was subpoenaed in a state court action regarding this matter, the official called the bank to inquire. The resulting disclosure of information was held to trigger the "public disclosure bar." In stark contrast to this, the Fourth Circuit has held that "the list of methods of ‘public disclosure' is specific and is not qualified by words that would indicate that they were only examples of the types of ‘public disclosure' to which the jurisdictional bar would apply."

There are some practical general rules which may be derived from all this:

1. Cases brought by whistleblowing lawyers don't survive. No False Claims Act suit brought by a lawyer has survived (Kreindler, op. cit.) Kreindler gained knowledge of false claims through litigation in which he represented a plaintiff, and then developed collateral or background knowledge through his own investigation. The Second Circuit treated him as lacking direct knowledge. This provision was "designed to preclude qui tam suits based on information that would have been equally available to strangers to the fraud transaction had they chosen to look for it as it was to the relator. Information gleaned in litigation and on file in the clerk's office falls in this category."
2. Cases brought by government auditors are apt to be rejected outright, as their job duties require them to bring these matters to government attention. However, claims by in-house corporate watchdogs or "compliance officers" are apt to be permitted.
Although no court has ruled that government employees are, per se bared from bringing whistleblower actions, many courts have held that government employees cannot satisfy the "original source" exception when there has been a public disclosure.

B. May Wrongdoers be Whistleblowers?

Absolutely. Congress anticipated and encouraged "close observers" or participants in the wrongdoing to serve as relators. Many whistleblowers have been involved in the fraud to some degree, although they typically have not been the ones who conceived of and planned the fraud. A whistleblower who did not plan or initiate the fraud may expect to fully share in the proceeds.

Officially, the Justice Department will offer only transactional immunity for that information with which the whistleblower comes forward. As a practical matter, and may be reluctant to extend even that. As a practical matter, whistleblowers are very unlikely to be prosecuted unless they were the intellectual author of the scheme. Even a relator who "planted initiated the violation" may well recover. The law permits a court to reduce the bounty to a wrongdoing relator "to the extent the court considers appropriate." 31 USC § 3730(d)(2). In U.S. ex rel Barajas v. Northrop Company a wrongdoing relator who made only a small contribution to the qui tam case, was nonetheless awarded 10.8% of the recovery.

C. Statute of Limitations

31 U.S.C. §3730(b) provides a six year statute of limitations with a three-year provision once the fraud is known by the responsible government official. But who is that? Many courts have held that the responsible official is in the Department of Justice, since only DOJ may bring suit. However, the Ninth Circuit has gone its own way, holding that the relevant "official" is the qui tam "plaintiff" herself.

Although the Seventh Circuit in Neal, supra, treated the six-year statute of limitations for false claims suits under §3730(b) as applying to §3730(h) whistleblower retaliation claims, California practitioners should be aware that one unpublished Central District case limited the plaintiff to the one-year statute of limitations available under state law.

D. Tactical Advantages of Early Filing.

Although plaintiff's counsel must carefully investigate and weigh the claims before filing, one must still move swiftly. First, the court may only take jurisdiction over the first qui tam suit filed. Undue delay could lead to a situation where another whistleblower has filed first. Second, if the whistleblower is still employed, they can play an active role in the investigation. Although some state laws prohibit civilians from surreptitiously taping conversations, this does not, of course bar law enforcement agencies from covert recording by asking civilian informers to wear "wire". One recent qui tam action in Virginia was settled for over $24 million after one of the whistleblowers, at the FBI's request, taped business meetings in which illegal kickbacks were arranged.

E. Jurisdiction and Venue.

Venue is proper wherever the defendant resides, transacts business, or is "present". The venue provision is actually jurisdictional, so counsel should avoid filing in the wrong location on grounds of convenience. Cases have been dismissed because trial courts have found that they lacked jurisdiction over the defendants.

F. Federal Preemption

Section 3730(h) states that the successful plaintiff is entitled to "all relief necessary to make the employee whole", including double back pay, interest, other special damages, reinstatement, litigation costs, and attorney's fees. The federal law leaves open the question of punitive damages. Since some state laws law permit recovery of punitive damages for termination in violation of public policy, defendants in federal false claims actions may argue that state law remedies are preempted by the federal statute, and thereby attempt to preclude punitive damages awards.

The best practice is therefore to file the false claims case, also alleging a whistleblower retaliation cause of action under §3730(h), and to also plead a state law claim for termination in violation of public policy.

G. Filing the Suit

A unique facet of qui tam litigation is that the complaint is filed under seal -- and remains under seal for months -- or even years. The purpose of the seal is to give the United States time to evaluate the case and see if it wants to prosecute the action. Some local rules require that the relator simultaneously file an application to seal the complaint. The sealed complaint, along with a disclosure statement (infra) is then served on the local United States Attorney and on the Department of Justice in Washington, D.C.

H. The Disclosure Statement

Something else makes these filings unique: Before (or at least simultaneously with) the filing of the complaint, the whistleblower must file a disclosure statement, furnishing material evidence of the false claims. This is not some bureaucratic requirement to be cursorily hurdled like a government tort claim or EEOC filing. Drafting a complete and effective disclosure statement may be the single most important thing relator's counsel can do to further the case. Although the government takes only 22% of False Claims Act cases that are filed, those 22% amount to 97% of the monies recovered. This disclosure statement should be the whistleblower's trial brief based on everything you and she have learned about the particular facts, and about the law. The statement should contain the following:

1. Introduction and Overview
2. Estimated Size of the False Claims, and How the Estimate is Derived
3. Who the Relators Are, and How They Can Help the Case
A. What the Relators Have Done to Help Expose the Fraud
B. How Counsel's Own Experience or Expertise Will Help the Case
4. Who the Defendants Are
5. The Nature of Defendants' Scheme
A. Examples of the Varieties of Defendants' Schemes, With an Annotated Summary of Documents Being Disclosed.
B. A detailed timeline
C. A detailed "cast of characters" with background information and explanations as to how they fit into the case.
6. A summary of the documentary evidence.
7. A review of the government program which has been defrauded, and the legal authority which shows that these are false claims.
8. Draft subpoenas and suggested discovery.
Beyond the specific facts of your case, you want to convey that:

• The Relator and relator's counsel are good, trustworthy, concerned people whom the government can rely upon for accurate information and candid analysis.
• The case is potentially worth a lot of money. (Each USAO will have its own single damages threshold.)
• No matter how complex the facts of the case may seem, you can break it down and explain it step by step, so that the AUSAs can readily understand the sometimes arcane aspects of government programs with which they may have little familiarity.
• Relator and counsel can be counted on to help gather and interpret evidence.

I. The Importance of Careful Case Selection.

Bear in mind that your case may languish for months or even years while it is evaluated by the United States. Many frustrated U.S. Attorneys have complained that they spend more time evaluating (and weeding out) ill-thought out and unsupported qui tam cases than they devote to prosecuting the good ones. Some overworked AUSAs have publicly grumbled over the time they waste in this area. To avoid a backlash against these cases, counsel seeking government intervention have an ethical obligation to ensure that they are carefully conceived and well supported by evidence.

It is important to note that once the complaint is unsealed and served, the disclosure statement, with all the whistleblower's legal theories and analysis, may be discoverable. Many trial courts have failed to treat this required communication between relators' counsel and the United States Attorney as confidential. This flies in the face of the principle of joint prosecution or joint defense agreements. One precaution currently being tried is to provide the United States with two separate documents: A disclosure statement which is merely a recitation of raw facts and evidence, which is all the statute requires, and a separate (and hopefully privileged) letter explaining the theories of the case, and the legal significance of the facts.

J. Dealing with the Government

"Relators'" counsel often spend as much time and energy "relating" to the government as they do dealing with the defendant. Working with the United States Attorney's office is altogether unlike working a lawyer representing another plaintiff in a tort case. There are several areas of direct and indirect conflict of which relators' counsel must be aware of. First, although both the whistleblower and the government are interested in extracting as much as possible from the defendant, the United States may ultimately have an interest in limiting the relator's share of the recovery. The whistleblower, of course, would like 25% of the recovery, while the AUSAs argue for much less.

Remember that the AUSAs have a set of institutional interests that drive decisions independently of what might be best in any given case. The government has its own timetable for doing things, and its own limits on resources. Significantly the United States Attorney and the Justice Department receive no part of the recovery in these cases -- the money all goes to Treasury. In the U.S. Attorney's office, deadlines and resource demands created by whistleblower cases are always balanced against demands other cases place on government attorneys and investigators. Although the statute requires that cases be sealed for only sixty days, the government inevitably asks for more time. Twelve and eighteen month extensions of the seal are common. The best practice is to counsel patience and stipulate to it, as a case brought with the government is much stronger than one brought without one.

Once the government opts into the case, the complaint is unsealed and served on the defendant. Relators' counsel may participate in discovery, settlement negotiations, and trial. Where the whistleblower believes the settlement the government is proposing is inadequate, the relator may object to the settlement and request an evidentiary hearing. At least one court has overturned a proposed settlement, leading to a much larger recovery.

11. PURSUING CASES WITHOUT THE GOVERNMENT.

When the government declines to take a case, the whistleblower's incentive to settle is strong. First, many of these cases are technically complex and involve thousands -- or tens of thousands -- of documents. Second, at least in the Ninth Circuit, the losing whistleblower may be assessed costs. Despite these daunting prospects, some aggressive qui tam counsel are rewarded for their persistence. In 1998 a California whistleblower won a $90 million qui tam trial against a defense contractor. In June, 1997, a whistleblower in Ohio settled a case which the government had declined for $3,700,000. The whistleblower's share was 29%. Quite recently, a trial against a vocational school resulted in a $2.1 million judgement under the FCA.

Even settling these cases can be tricky. Whenever the government does not join in a false claims suit that includes a whistleblower retaliation claim, the question of how to allocate the settlement arises. Both prudence and a sense of propriety argue against allocating settlement proceeds in a way which shortchanges the government. There is something unseemly about a whistleblower who is trying to protect the public fisc joining in an effort to loot it. More practically, a recent Ninth Circuit decision puts plaintiff's counsel at risk where there is suspicion of a collusive settlement.

In United States ex rel Killingsworth v. Northrop the whistleblower brought a retaliation charge along with his false claims action. In settling the case for $4.2 million, he sought to allocate $2.7 million to his employment claim, and only $1.5 million to the actual false claim. Although the court rejected the government's argument that it could, without intervening, veto the settlement, the Ninth Circuit afforded the government the right to a hearing on whether the settlement, including the allocation, was fair and reasonable.

The Ninth Circuit has also made it clear that the lawyer who tries to creatively structure a settlement to deprive the United States of its share does so at his or her peril. In United States ex rel Gibeault v. Texas Instruments, the government objected to a $300,000 settlement labeled as legal fees, when $124,500 of that money was turned over to the relators. The district court was upheld on appeal when it found that the $124,500 was actually proceeds of the qui tam action, to which the government was entitled to a 70% share. Relators' counsel was ordered to pay $87,152, or 70% of the "proceeds", to the government.

12 WHISTLEBLOWER RETALIATION CASES

Not surprisingly, whistleblowers often develop employment-related problems. The Congressional history of the anti-retaliation provisions is quite clear:

"The Committee recognizes that few individuals will expose fraud if they fear their disclosures will lead to harassment, demotion, loss of employment, or any other form of retaliation ... the Committee seeks to halt companies and individuals from using the threat of retaliation to silence 'whistleblowers', as well as assure those who may be considering exposing fraud that they are legally protected form retaliatory acts."

The Committee stressed that the whistleblower protection is patterned after other similar statutes, and includes "make whole" relief, including all applicable tort damages, and that having made out a prima facie case, the burden shifts to the defendant:

"[P]rotection should extend not only to actual qui tam litigants, but those who assist or testify for the litigant, as well as those who assist the Government in bringing a false claims action. Protected activity should therefore be interpreted broadly."

"Additionally, as in the Safe Drinking Water Act, Clean Air Act, and Federal Water Pollution Act, the employer would not have to be proven in violation of the False Claims Act in order for this section to protect the employee's actions. However, the actions of the employee must result from a 'good faith' belief that violations exist."

A. When is a Whistleblowing Employee Entitled to Protection?

"Any employee who is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment by his or her employer because of lawful acts done by the employee on behalf of the employee or others in furtherance of an investigation for, initiation of, testimony for, or assistance in an action filed or to be filed under this section, shall be entitled to all relief necessary to make the employee whole." Analyzing whistleblower protection requires the answer to three different questions: What is false claim? What is a protected whistleblower activity? How can an employee prove that retaliation is for a protected qui tam-type activity? An employee who is retaliated against is entitled to double back pay, interest, attorney's fees, general and punitive damages, and reinstatement. Because the employee's interest in correcting the wrongdoing is so important to these cases, the rest of the statute is equally important.

B. What is a Protected Whistleblower Activity?

We know that investigating or reporting 'traditional' false claims is protected. But how far does this protection extend? In Hopper v. Anton, n. 19, supra, the Ninth Circuit rejected the plaintiff's claim that her firing was in retaliation for steps in "furtherance of an action" under the FCA, pointing to over a hundred letters and phone calls she had generated just trying to get the school district to comply with federal law. In arriving at this conclusion Hopper did not even mention a Northern District of California case which arrived at the opposite conclusion. The plaintiff in Clemes was a schoolteacher who discovered that his school district was taking federal funds for educating mostly female Native American students, but then not delivering services to them, in violation of Title VI and Title IX of the Civil Rights Act. Clemes first complained to his immediate supervisor, and then took his complaints to the county district attorney, the school board, and the Department of Justice. The district maintained that these complaints did not qualify Clemes for protection under §3730(h). Judge Patel wisely concluded that:

"[S]uch a narrow reading would be inconsistent with the purposes of the False Claims Act. Congress enacted the False Claims Act in order to discourage fraud against the government and to encourage persons with knowledge of fraud to come forward. (cite omitted.) It would be inconsistent with these dual goals to impose upon section 3730(h) some sort of exhaustion requirement, as defendants appear to urge." (Id., at 595.)

Clemes was in keeping with an Eastern District decision in which the defendant owned publicly assisted senior citizen's housing which was managed by the relator's employer, United States ex rel Kent v. Aiello, Ms. Kent filed a whistleblower action alleging false records were used to submit bills to the government, and also alleged that she was fired in retaliation for her testimony about this before a grand jury. The Kent court astutely observed that 3730(h)'s list of protected activities was nonexclusive: the law protects a wide range of conduct, "including investigation for, initiation of, testimony for, or assistance in an action filed or to be filed.") (Id., at 724, emphasis in text). The court found Ms. Kent's grand jury testimony worthy of protection.

Clemes and Kent are in line with Neal v. Honeywell, 826 F.Supp. 266 (N.D. Ill. 1993), aff'd 33 F.3d 860 (7th Cir. 1994). Dr. Judith Neal had been working at Honeywell's Joliet, Illinois plant for less than two years when her supervisor asked her to investigate low morale in the PVC department where ammunition was tested to see if it met military requirements.

While interviewing PVC employees, she learned exactly why morale was low -- the results of the ballistic tests were being falsified. Dr. Neal informed her boss, who immediately told her she wasn't supposed to have "found out" and that Management would handle it. When Management did nothing, Dr. Neal reported it to Honeywell's corporate office on an employee hotline. Although promises anonymity by Honeywell's in-house legal department, within three days at least half a dozen executives in Joliet and in Honeywell's corporate suites knew what she had done.

One manager threatened to "get" her, and she was asked if she wanted physical protection. The main perpetrator, who made repeated threats against Dr. Neal, was promoted. He was made Director of another Honeywell plant, twice the size of the Joliet facility, and, six months later, received a $10,000/year salary hike. Dr. Neal, in contrast, was stripped of virtually all of her responsibilities. She was isolated from other employees suffered insomnia, nightmares, and severe depression.

After she was ultimately forced to quit, Dr. Neal sued under the FCA for her employer's retaliation against her. The court held that whistleblower protection statutes "should be broadly construed so as to include internal or 'intracorporate' whistleblowing, even where the conduct involved did not come under the literal terms of the statute." (Id., at 270.) Since the Act is intended to end fraud against the government, Neal concluded that "public policy demands that internal whistleblowers like the Plaintiff in the present case be protected from retaliation." (Honeywell settled with the U.S. for $2.5 million.) The Court went on to observe:

"The False Claims Act is intended to put an end to fraud against the government by encouraging those with knowledge of such fraud to come forward. In order to further that purpose, public policy demands that internal whistleblowers like the Plaintiff in the present case be protected from retaliation.

"...It would make little sense to protect an anonymous qui tam plaintiff who filed an expensive and time-consuming lawsuit while ignoring someone like the Plaintiff, whose bold conduct led to a quick, voluntary and efficient disclosure of the fraud and reparation to the government. Thus we hold that the whistleblower protection provision of the False Claims Act forbids discrimination against an employee who has made an intracorporate complaint about fraud against the government." (Id., at 272-273.)

Honeywell moved for summary judgement on the issues of retaliation and constructive discharge. The first issue before the Court was how to weigh Dr. Neal's retaliation claim. Honeywell argued that it should be treated as a "constructive discharge" claim under a Title VII analysis. Under this analysis, Honeywell could not be liable unless it "created working conditions so intolerable that they would cause a reasonable employee in Neal's position to immediately depart.

Dr. Neal pointed out that her claim arose under a very different statute: 31 U.S.C. § 3730(h). The Court denied summary judgment, holding that any retaliation is forbidden by the statute, and not merely constructive discharge, and that Dr. Neal's complaint that she was threatened and harassed was enough to make out a retaliation claim, even though management had offered her a different job:

"There are three elements to a claim under § 3730(h): (1) the plaintiff was engaged in conduct protected under the False Claims Act; (2) the employer must have known that the plaintiff was engaging in such conduct; and (3) the employer must have discriminated against the plaintiff because of her protective." Neal v. Honeywell, Inc. 942 F.Supp. 388, 396 (N.D. Ill. 1996).

The Court went on to hold that the defendant's evidence of "reasonable and timely remedial measures" is for the trier of fact, and that the employer can prevail only if the plaintiff's evidence "is so inadequate as to bar this part of her claim as a matter of law". Id. at 397.

However, the district court initially granted summary adjudication on the constructive discharge claim itself, since there was no evidence that a reasonable employee would have turned down the offers of alternate employment. Although Dr. Neal was interviewed for and was offered positions at two other Honeywell facilities, she did not take them because these intracorporate transfers involved no salary increase. Initially, the trial court did not consider this grounds sufficient to sustain a claim of constructive discharge. On plaintiff's motion for reconsideration, however, the court reversed itself, and allowed Dr. Neal to proceed with her constructive discharge theory as well. Crucial to this was the deposition testimony of a senior Honeywell vice President that Honeywell had an unwritten policy of terminating managers who were not promoted within two years of their hire. Neal stressed that she should have gotten a promotion after two years, that she had reported the fraud just a bit before her two-year period expired, land that she had expected to receive a promotion. Thus, lateral transfers were in fact punishment -- the denial of an expected promotion.

The Court contrasted the lenient treatment of the plant manager, who received a transfer (actually a promotion) and a salary increase with how Dr. Neal was treated -- a one month paid leave when the investigation results were announced. This was enough, according to the Neal court to raise an issue for the trier of fact. Ultimately a jury awarded Dr. Neal $550,000.00 for emotional distress (she accepted a remittitor to $200,000.00) and $40,000.00 in back pay, which, when statutorily doubled and with interest added, became $150,000.00. In addition to the $350,000.00 in damages, the judge awarded Dr. Neal $1.46 million in attorneys' fees and $147,000.00 in costs, which was upheld on appeal.

Childree v. UAP/GA AG Chem, Inc. 92 F.3d 1140 (11th Cir. 1996) also expanded the rights of whistleblowers to bring retaliation claims under the False Claims Act even if they never br0ught a qui tam suit in the first place. Childree stressed that the whistleblower protections are available whenever a qui tam action is a "distinct possibility", even if one is never filed by the plaintiff or the government. Denise Childree worked for a company she believed was submitting false bills to the U.S. Department of Agriculture. She refused to cooperate in the fraud, and reported it to her supervisors. One month later, when a USDA representative visited the office and asked about the bills, Childree informed her of the fraud. She then made copies of the false bills and took them home. Mrs. Childree did nothing to pursue a false claims suit or to press the government to act on her claim. However, when she was subpoenaed to a government hearing four years later, she testified and turned over her documents. She was fired two weeks later.

After she filed suit under the §3730(h) retaliation protections, the district court granted summary judgment, finding that Mrs. Childree had never performed any affirmative act to expose the fraud, had merely responded to questions asked of her by an investigator, and testified after being served with a subpoena duces tecum. The court concluded that Childree had failed to show a nexus between her conduct and the furtherance of a potential False Claims suit.

In reversing, the Eleventh Circuit followed Neal, and held that Childree was protected because she assisted in what could have been a False Claims action. In reaching this decision, the court relied on the statute's plain language that protects any employee who has been punished for assisting "in an action filed or to be filed" (emphasis added.) (Id., at 1146.)

C. Are Protests to the Employer Enough to Trigger Protection?

Neal identified the policy interest in protecting employees who protest to their employers:

"...It would make little sense to protect an anonymous qui tam plaintiff who filed an expensive and time-consuming lawsuit while ignoring someone like the Plaintiff, whose bold conduct led to a quick, voluntary and efficient disclosure of the fraud and reparation to the government. Thus we hold that the whistleblower protection provision of the False Claims Act forbids discrimination against an employee who has made an intracorporate complaint about fraud against the government." (Neal v. Honeywell, 826 F.Supp. 266, 272-273.)

The Fourth Circuit has agreed, holding that the whistleblower need not expressly state an intention to bring a qui tam suit, so long as she engages in some action which a fact finder could conclude put the employer on notice that there might be a reasonable possibility of this. Such actions could include, but not be limited to, characterizing the employer's conduct as illegal or fraudulent, or recommending that legal counsel become involved.

This principle was also followed in Mikes v. Strauss, Ambinder & Friedman, 889 F.Supp. 746 (S.D.N.Y. 1995). Dr. Mikes found that the medical group she worked for was running up the bills of Medicare patients with needless tests. After complaining to her employers, she was fired. In her retaliatory discharge suit, she filed an affidavit outlining the misuse and overuse of these tests, asserted that many of the patients were Medicare beneficiaries, that the defendants billed Medicare, and that plaintiff was fired for her whistleblowing. The affidavit was held sufficient to overcome a summary judgment motion.

The court ruled that Dr. Mikes need only prove that she was (1) engaged in protected conduct, (2), the defendants knew of it, and (3) she was terminated in retaliation for it.

D. When is a Whistleblower at Risk?

A former assistant U.S. attorney discovered that the greener grass of private industry is not always so tasty. When he became house counsel for a company which sold computer equipment to the government he worried that sales of rebuilt equipment violated federal regulations. He even warned a member of X Corp's management committee that it faced possible qui tam liability and circulated articles and memos on qui tam actions. After being forced out, he sued for retaliatory discharge. The court held that since his position as house counsel required him to raise relevant legal issues, this did not mean that his employer had reasons to suspect that he was planning to bring a qui tam action. Since his employer did not know that his action was in the works, his firing could not have been in retaliation for such activity.

The Fifth Circuit takes a similarly dim view. In Robertson v. Bell Helicopter Textron, Inc., a former contracts administrator sued for retaliatory discharge alleging he had been fired for protesting million dollar overcharges to the government. Robertson had complained to Bell officials, and had told the government contracts officer not to process a $1.6 million request because it had not been verified. Bell fired Robertson, contending that he had simply been part of a general reduction in force. After a verdict for the plaintiff, the trial court entered JNOV for Bell, and was upheld on appeal. The Fifth Circuit acknowledged that several district courts have held that the FCA protects internal whistleblowers, but stressed that Robertson had failed to use the terms "illegal", "unlawful", or "qui tam" to his employers when he protested these activities. It remains to be seen whether the "Simon says" defense will spread to other circuits.

Of course, Mr. Robertson was a contracts administrator whose duty it was to ensure compliance with federal law, and Mr. Doe was house counsel, with a duty to warn and educate senior management about these problems. Thus, the defendants were able to argue that they did not know that these individual employees were investigating or pursuing cases. (This has the perverse effect of allowing an employer to fire a whistleblower who is conscientiously doing her job, but not one who goes "beyond the call of duty".) The 'garden variety' whistleblower case where there are no such job duties imposed on the plaintiff should fare much better.

E. The Case of the Purloined Letters -- Can the Whistleblower Keep and Copy Employer Documents?

Qui tam defendants have occasionally gone to the police, alleging that documents have been stolen or other crimes committed. Usually a conversation with police investigators explaining the underlying facts (without disclosing the pendency of sealed litigation) will resolve the problem. Although I am unaware of any law enforcement agency actually opening a formal investigation (much less seeking criminal charges) is it an unnerving experience for the client.

The specious cry of theft is often raised whenever an employee, especially a whistleblowing employee, stands up for her rights. These matters do not press so heavily upon Relators and their counsel. First, if the case is taken on by the government, there is typically little opportunity for the defense to raise this argument since government subpoenas rapidly acquire the same material. Second, counterclaims are expressly disallowed. The one trial court to confront this issue reasoned that so long as the originals are returned, and so long as there is no risk of further dissemination, a court order compelling return is inappropriate as no discernible public interest exists in returning the documents. This decision is especially noteworthy since the Relator had previously signed a confidentiality agreement with his employer. Third, there is a strong argument to be made that the defendant has no right to throw a proprietary veil of secrecy over the instrumentalities of a fraud.

In some cases, the best way to defend the whistleblower from such charges is a good offense. 18 U.S.C. §1518, for example, declares it a federal offense to obstruct any criminal investigation into health care fraud against federal programs. In the early stages of your communications with the Department of Justice, Relators will have no way of knowing whether their false claims complaint may be referred for criminal prosecution, the employer's counsel should be warned that their demand for return of the documents may be exposing them and their clients to a separate criminal offense.

F. Settling the Employment Case While Preserving the Qui Tam Case

Generally, your client can settle her independent employment tort cases without jeopardizing her qui tam case. This is because public policy prohibits enforcing a broad release executed by relator before qui tam is filed. "Settle and sue" cases are permitted employees under United States ex rel Green v. Northrop, 59 F.3d 953, 963-967 (9th Cir. 1995). Green was a criminal investigator at Northrop who uncovered fraud, reported it, and was fired. After settling his state court wrongful termination suit for $190,000, he filed a qui tam action. When the government declined to intervene, Northrop sought to have the action dismissed on the grounds that it was encompassed in the general release Green signed. The Ninth Circuit disagreed, holding that the prefiling release of a qui tam action without the knowledge or consent of the government was against public policy, and therefore unenforceable. (Accord, United States ex rel DeCarlo v. Kiewit/AFC Enterprises, Inc., et al. (S.D.N.Y. 1039);

However, in United States ex rel Hall v. Teledyne Wah Chang Albany (1997 WL 121153 (9th Cir. Mar. 19, 1997) the same circuit enforced a release under only slightly different conditions. In Hall the government had investigated relator's allegations before the wrongful termination settlement, and had decided not to intervene in the action. The Ninth Circuit ruled that, under these circumstances, the public interest underlying FCA enforcement by private citizens did not outweigh the public interest of encouraging settlement of private disputes. And another unpublished decision from west coast California has further muddied the waters. In Chandler the relator had reported the fraud to the government, which had originally taken no action. Chandler then filed and settled an employment suit, including within it a general release of all claims. The district court held that since the government had already reviewed and rejected the allegations forming the basis of Chandler's qui tam suit, the general release affected a release of the qui tam allegations as well.

If possible do not file a separate retaliation case before filing your qui tam action. At least one court, expanding on the Findley analysis (supra, n. 72) granted summary judgement and dismissed a qui tam action on the grounds that the transactions had been disclosed -- in the Relator's own, previously filed whistleblower retaliation suit! The Sixth Circuit ruled, in keeping with Findley, that even though the plaintiff had direct and independent knowledge of the fraud, she was not an "original source" since she could not establish that she had provided the knowledge to the government before filing her qui tam action.

13. THE CARE AND FEEDING OF WHISTLEBLOWERS

A whistleblower practice is unique. Although the clients typically have a contingent fee agreement, their legitimate needs and their involvement in the case is more like that of an hourly commercial client. They may expect and rightfully deserve a great deal of time and attention. Counsel should bear in mind that for the whistleblower the trauma and anxiety of taking major risks with job and career is ongoing. Unlike the tort victim who has already been hurt when she arrives in your office, the whistleblower's trauma is relived daily. Unlike the employee who has been wrongfully fired or harassed, the whistleblower frequently reflects upon having "brought this on myself", and is prone to wonder if she has done the right thing.

14. RETAINER AGREEMENTS

Many qui tam retainer agreements were originally patterned after civil rights and employment agreements, providing that where there is a contingency and the potential award of statutory hourly attorneys fees, counsel has the right to elect either (a) adding the statutory fee award into the gross recovery and accepting a fee based upon the aggregate recovery, or (b) taking the court awarded statutory fees. At least in the Ninth Circuit, this practice has had to change. The Ninth Circuit has held that any agreement which de facto increases the relator's share works a wrong upon the government, and the fees must therefore go directly to the attorney. The agreement should also include a provision for re-evaluating the case economics if the United States does not join. Some cases are still economical to prosecute independently, even if the United States does not become involved. Others may not be amenable to private prosecution unless a consortium of lawyers join as co-counsel, sharing time and investment. The agreement should also warn clients that if the Court finds the action was frivolous, unreasonable, groundless, or litigated in bad faith merely to harass or oppress the defendant, the whistleblower may be responsible for the defendant's attorney's fees. Also, in a case of first impression the Ninth Circuit has held that F.R.C.P. 54(d) trumps the False Claims Act, and that costs may be assessed against the losing whistleblower even if the action is not frivolous.

15. IS THERE SAFETY IN NUMBERS? REPRESENTING MULTIPLE PLAINTIFFS

When two or more employees have information which makes the case, there is a strong temptation to have multiple relators split the recovery. The ethical conflicts here are generally the same as those facing counsel when we represent multiple plaintiffs in a harassment, discrimination, or wrongful termination action. But there is one key difference: The False Claims Act contains a "first to file" rule: "When a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action." This provision gives apparently exclusive priority to the first relator to reach the Courthouse door. Clients seeking to include their co-workers must be clearly warned about the potential implications of this statute. It is often best to file first, and plead the matter as broadly as possible, and to take full advantage of the preclusive effect of this statute -- and, if necessary, to narrow the complaint's scope before it is served.

16. CONCLUSION

It is rare for the Congress to encourage and reward plaintiffs and their lawyers. That this bill was co-sponsored by a conservative Republican and signed by Ronald Reagan speaks volumes for the gravity of the problem and the bipartisan nature of support for the fight against corporate criminals. Although some of the legal issues may appear daunting, this field offers employment lawyers a tremendous opportunity to uphold the public interest in highly significant cases.

Where to get more information 

Taxpayers Against Fraud

1220 19th St. N.W. Suite 501

Washington, D.C. 20036

202 296-4826 fax 296-4838

www: http://www.taf.org/taf

TAF is a non-profit foundation established by leading qui tam attorneys. It provides legal and policy research, advice, consultation, and legislative advocacy. Its highly experienced legal staff is eager to help lawyers in the field. TAF also publishes the False Claims Act and Qui Tam Quarterly Review at no charge.

There are currently only two books on this burgeoning area. A serious student of the field needs them both, as they have very different emphases:

False Claims Act: Whistleblower Litigation by Helmer, Lugbill, and Neff (Michie Publications) is a hands-on plaintiff's guide with tactical tips and extensive sample forms and appendices.

Civil False Claims and Qui Tam Actions by John T. Boese (Aspen Law & Business Publications) has a marked defense bias to its analysis, but it's more scholarly and systematic approach to the legal issues makes it essential reading.

markkleiman@earthlink.net