Whistleblowers get rich, companies get poor

While stories about large jury verdicts involving McDonald’s coffee and tobacco companies have been well-publicized, little attention has been paid to the enormous sums of money recovered by whistleblowers suing on behalf of the federal government under the Civil False Claims Act.

The penalties for violating this act are severe and could drive a company out of business. Meanwhile, whistleblowers are becoming rich.

Any company that contracts with the United States government should know about the False Claims Act. It was enacted in 1863 in response to concerns about fraud, defective weapons and illegal price gouging of the Union Army during the Civil War. The act permitted a whistleblower (called a “relator”) to bring claims on behalf of the United States in a court of law against contractors who had submitted false claims for payment to the government.

As an incentive, the relator was entitled to collect 50 percent of the damages.

Congress limited the scope of the act in 1943 because too many whistleblowers were simply filing actions based upon information revealed in government criminal indictments and not personal knowledge. In the 1980s, however, public attention turned to allegations that defense contractors were gouging the public. Many news stories focused on $600 hammers, as well as similarly priced toilet seats, screwdrivers and other items purchased by the Department of Defense.

Changes to the act in 1986 made it lucrative again for whistleblowers to file False Claims Act lawsuits on behalf of the government. The act now prohibits various practices, including the submission of false claims to the government for payment, the making of false records or statements to support a false claim and participation in conspiracies to submit false claims.

A company or individual can violate the False Claims Act without intending to do so. To be liable, one must simply have actual knowledge of the information rendering the claim false and act in deliberate ignorance or reckless disregard of the truth or falsity of the information. Although negligence, mistakes or regulatory violations do not, without more, result in liability under the act, it is not always clear where negligence blurs into recklessness.

A company may not even realize a False Claims Act lawsuit has been filed against it. A relator initially files a complaint with the court “under seal.” This triggers a government investigation of the allegations. If the government finds particular merit with the case, it can intervene in the lawsuit and take over primary responsibility for the case.

If it decides not to intervene, the relator can still pursue the case on his or her own. Once the government makes its decision about intervention, the complaint is lifted from under seal, and only then does the defendant learn of the case.

The act prohibits retaliation by the company against employees for pursuing rights under it. If retaliated against, an employee is entitled to all relief necessary to make him whole, including reinstatement, two times the amount of back pay, interest, litigation costs and attorneys’ fees.

The penalties for violating the False Claims Act are severe. The government is entitled to three times the amount of actual damages it suffered as a result of the fraud. In addition, it may recover between $5,500 and $11,000 for each False Claims Act violation by a defendant.

Suppose a defense contractor’s $300 million government contract states that the contractor will “obey all applicable environmental laws.” If the contractor violates environmental laws, a relator may claim the contractor did not deliver what it promised to the government and that its invoices on the contract were therefore false claims.

If the contractor is found to have violated the False Claims Act, he or she may be liable for $900 million based upon the False Claims Act multiplier. In such a case, the per-violation penalty of between $5,500 and $11,000 is comparatively insignificant.

By contrast, imagine a health care provider that submits invoices to Medicare. If that provider has inflated the cost of a service by a nickel on 1,000 invoices, the actual damage to the government may seem relatively small — even if trebled, these damages total only $150. However, each of the 1,000 invoices submitted is a violation of the False Claims Act. The government may be entitled to up to $11,000 for each of those invoices, or $11 million.

Approximately 3,000 False Claims Act cases have been filed since the 1986 amendments, and the number is growing. In 1987, only 33 False Claims Act cases were filed; in 1990, 90 cases; in 1996, 363; and in 1999, 481. In 1999 alone, the government recovered $458 million in False Claims Act cases.

Although the act was designed to combat fraud by defense contractors, its application has been expanded to cover nearly every situation in which federal funds are spent. The potential for large recoveries in False Claims Act cases creates an incentive for employees to allege wrongdoing against their employer, even if there is no such wrongdoing.

There are legal defenses available to defendants in these cases, and sophisticated legal counsel can help save a defendant from liability. Glenn V. Whitaker ([email protected]) and Victor A. Walton Jr. ([email protected]) are partners in the Cincinnati office of Vorys, Sater, Seymour and Pease LLP. Whitaker’s practice emphasizes the representation of individuals and corporations in complex civil litigation and criminal proceedings. Walton specializes in environmental, construction and toxic tort defense litigation. They can be reached at (513) 723-4000.