A Step Ahead of the Whistle-Blower: How to prevent a claim under the False Claims Act

Tuesday, June 26, 2012

By John McCauley, Attorney, Bingham Greenebaum Doll LLP

Imagine this: Your company is a defendant in a lawsuit seeking tens of millions of dollars in penalties – and you don’t even know the case has been filed. The case could have been filed months or years ago regarding conduct that happened well before then, and the government could be conducting an investigation and gathering evidence against your company. It is possible you could remain unaware of the lawsuit until the government decides to unseal the complaint and announce the results of its investigation at a press conference.  Does this sound like something out of a movie?

This scenario is actually fairly common, playing out thousands of times every year. If your company does business with the government, participates in any type of federally-funded program, or sells to companies that supply the government, you could be liable under the False Claims Act (FCA). Companies in a wide variety of industries – whether they think of themselves as traditional government contractors or not – can find themselves facing allegations that they submitted false claims or made false statements to the United States government.

Initial development of the FCA

The FCA was enacted by President Abraham Lincoln in 1863 in response to unscrupulous defense contractors selling sickly horses and mules to the Union army. It was expanded in 1986 after it was reported that defense contractors were charging the Pentagon $435 for ordinary hammers and $640 for toilet seats. The FCA was expanded further in 2009 after courts had limited its scope and Congress anticipated widespread fraud in relation to the Troubled Asset Relief Program (TARP). The FCA presently provides for the recovery of:

  • treble damages; 
  • civil penalties ranging from $5,500 to $11,000 per false claim (with each individual invoice potentially qualifying as a separate claim); 
  • the government’s costs of bringing suit; and, in egregious cases, 
  • criminal penalties.

Whether treble damages or civil penalties predominate often depends on the industry involved.

The FCA in its present form

When filing an FCA lawsuit, typically a disgruntled employee hires an attorney and files a claim against a contractor or a company under seal to the government. If there is a verdict or settlement, the employee can receive between 15 and 30 percent of the recovery. At this stage, the company is rarely aware of the claim. Next, the relevant government agency will review it, and the case may be joined by attorneys from the Department of Justice. The government may send auditors to the company’s office for a “routine” audit, or send subpoenas to determine the validity of the claims. At this point the government can take control of the case and unseal it, allowing the investigation to begin in earnest. The company then knows a claim has been filed in the court system and the process begins. Even if the government does not intervene, the employee can pursue the case. However, government intervention brings the full power of the government to the investigation at no cost to the former employee. In the event the claim is upheld, there is the risk of losing government business and being barred from further government contracts. Therefore, there are substantial incentives for companies to settle these claims quickly.

The Fraud Enforcement and Recovery Act of 2009 modified the FCA, giving it more teeth, and expanded the definition of “major fraud” beyond procurement fraud to include mortgage fraud, commodities fraud, and fraud involving TARP and the American Recovery and Reinvestment Act funds. Essentially, in keeping with the new era of oversight, the definition of fraud has been expanded to include false claims related to government spending in whatever form it may take.

What can a company do to prevent an FCA claim?

Although more could be said on this subject, a few best practices follow:

  • Institute a compliance program and name a compliance officer. Companies that regularly do business with the government or participate in federally-funded programs should have a formal compliance program and a person or department responsible for implementing it.

     

  • Conduct periodic audits.Periodic audits focused on government contracts or funds sourced from government projects can help to uncover fraud. If something arises in an internal audit, work with the general counsel’s office to determine if it is a reasonable concern that should be disclosed.

     

  • Require all employees to report non-compliance.Rather than just simply being encouraged to report non-compliance, employees should be required to report any potential non-compliance, first to their supervisor, but also to the compliance officer if the supervisor’s response is inadequate. They should be advised that failure to do so may result in disciplinary action, including termination.

     

  • Require all managers to certify compliance.Similarly, having management-level employees execute regular certifications of compliance can be an effective way to remind them of their and their employer’s obligations and potential liabilities under the FCA.

     

  • Document the company’s response to reports. An employer should thoroughly investigate an employee’s report of potential non-compliance and should document its investigation (and any remedial measures taken).

With the changes to the FCA in the last year and the recent recession, companies are more likely to confront FCA claims in the coming years. Companies should prepare in advance to manage these risks more effectively and should consider the above steps as key areas for preparation. Companies should also monitor developments and trends in FCA litigation.

If you have questions about FCA claims or compliance, please contact a member of the Litigation Practice Group at Bingham Greenebaum Doll LLP.

DISCLOSURE REQUIRED BY CIRCULAR 230.  This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service.  If this article, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.  Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party.  Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this article. Thank you.

 
 
 

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