Protect the False Claims Act

The False Claims Act is the most successful U.S. whistleblower law, but recent setbacks threaten to damage this critical legislation.

The False Claims Act (FCA) is America’s first whistleblower law and one of the strongest whistleblower laws in the United States. It was originally signed into law in 1863 by President Abraham Lincoln during the Civil War. In the midst of wartime, it had become clear that many suppliers were providing substandard goods and services to the troops. In an effort to counter this, the FCA was passed to target fraud in government contracting and against the government.

Since its original signing, the False Claims Act has seen several revisions and become increasingly powerful, but one aspect has remained since its conception: the qui tam, or whistleblower, provision. This important provision allows any individual or non-governmental organization to file a lawsuit, in U.S. District Courts, on behalf of the United States government.

After the 1986 revisions, whistleblowers can now be rewarded for confidentially disclosing fraud that results in a financial loss to the federal government. Provided that their original information results in a successful prosecution, whistleblowers are awarded a mandatory reward of between 15% to 30% of the collected proceeds. Since 1986, whistleblowers under the False Claims Act have helped the government recover $46.5 billion from wrongdoers and been awarded over $7.8 billion for their assistance.

However, this law has faced recent setbacks with the Department of Justice (DOJ) releasing guidance that they have unfettered authority to dismiss qui tam lawsuits and misapplications of the materiality requirement by the courts.

During his keynote address at the National Whistleblower Appreciation Day 2020 celebration, Senator Chuck Grassley (R-IA) announced he would be introducing amendments to the False Claims Act to remedy these recent setbacks. He reaffirmed this commitment in February 2021 at the Federal Bar Association’s Qui Tam Conference.

The National Whistleblower Center (NWC) firmly supports the proposed amendments to the False Claims Act (FCA), particularly in light of the massive surge of federal funding to provide relief to individuals and businesses amidst the COVID-19 crisis. Opportunities and incentives for fraud are at an all-time high. Deterring this fraud and ensuring accountability and transparency in federal spending requires a strong False Claims Act, one of the nation’s most important whistleblower laws.

Granston Memo

In January 2018, Michael Granston, Director of the Commercial Litigation Branch at the Department of Justice (DOJ), issued an internal memo, now known as the Granston memo, that contained new guidance instructing DOJ attorneys to more aggressively dismiss False Claims Act (FCA) cases that were brought by qui tam whistleblowers (“relators”).  Prior to this memo, the DOJ rarely sought this type of dismissal but rather allowed relators to pursue the FCA cases on their own.

This guidance directly threatens the success of the False Claim Act whistleblower provisions, which has been substantial: qui tam cases are responsible for nearly three quarters of all recoveries under the FCA since 1986, and even qui tam cases in which the government have declined to intervene have recovered nearly $3 billion from wrongdoers. Additionally, whistleblower advocates in Congress like Sen. Charles Grassley – who was one of the drafters of the 1986 landmark amendments – have stated this guidance is directly contrary to the original intent of the law.

As NWC board chairman Stephen Kohn notes in a National Law Review article about needed fixes to the False Claims act, “The Granston memo is extremely troubling insomuch as it permits DOJ attorneys to seek dismissals in FCA cases which may be meritorious (i.e., contain valid allegations that the United States was defrauded).  This policy allows corrupt contractors to defraud the government with impunity.”

Kohn also notes, “Permitting the DOJ to unilaterally dismiss whistleblower qui tam cases also raises the specter of political and corrupt interference with the justice system.  The right of whistleblowers to pursue corruption cases under the FCA was born during the Civil War, when some in the federal government were siding with the Confederacy and undermining the war effort.  Corruption in government contracting goes both ways.  Contractors can be corrupt, but so can government officials who collude with them.”

The Granston memo must be reversed in order to protect False Claims Act relators. As Sen. Grassley stated recently, the government “should be required to present evidence in court to support its stated reasons for seeking a dismissal in order to provide transparency to the public and reassurance to other would-be relators that the government will not arbitrarily dismiss their claims.”

Universal Health Services, Inc. v. U.S. ex rel. Escobar

Even before the Granston memo, the False Claims Act (FCA) had faced a major setback. In 2016, the Supreme Court took up the issue of the FCA’s “materiality” standard in Universal Health Services, Inc. v. U.S. ex rel. Escobar.

This standard refers to the fact that not every act of negligence or failure to comply with a U.S. government contract will necessarily result in liability under the FCA; rather, any violation prosecuted under the FCA must be “material”. In other words, the violation must have “a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property” by the U.S.

However, in the Escobar case, the Supreme Court provided a list of factors that courts could use when determining whether fraud under the FCA was material. One of these factors was government knowledge of the fraud. Regarding this factor, the Supreme Court wrote: “[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”

Effectively, this allows government contractors to escape liability for fraud by claiming that the government had acquiesced to the fraud and it is therefore not material.

Even more concerning, NWC board chair Stephen Kohn states in a National Law Review article that lower federal courts have greatly expanded upon the government knowledge factor that the Supreme Court described in Escobar.

He writes, “Specifically, even though the Supreme Court only discussed “actual knowledge” of the fraud, many courts have used “government knowledge” of mere allegations of fraudulent conduct as grounds to dismiss FCA cases… Specifically, a recent Tenth Circuit FCA opinion relied on the fact that the government was aware only of “detailed allegations” of fraud while admitting the government “may not have obtained ‘actual knowledge’ of the alleged infractions,” as grounds to dismiss a FCA case.” (The Tenth Circuit case was recently overturned for other reasons.)

The FCA materiality standard must be clarified by Congress in order to prevent future lawsuits from being dismissed along these lines.

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