False Claims Act overused, reform advocates say

By Jon Campisi | Oct 25, 2013

WASHINGTON, D.C. (Legal Newsline) -- The United States has come a long way since the Civil War era.

A once splintered nation torn apart by infighting is now whole, although an ideological split over hot-button political issues continues to keep the country divided.

Aside from an end to slavery and a patching up of our national identity, another thing to come out of the Civil War, at least on the legislative front, was the passage of the False Claims Act.

The measure was enacted with the goal of fighting profiteering by those who supplied the Union Army with things such as weapons and ammunition.

The measure, also referred to as "Lincoln's Law," allowed the government to hold contractors liable for bad faith dealings.

The False Claims Act came about during a time when contractors took advantage of wartime dependence to defraud the U.S. Government by dealing faulty ammunition and weaponry, sick live stock and tainted food rations, according to a summary of the statute on the website of the law firm Messa & Associates.

Today, however, court reform advocates maintain that the statute is being overused, and at times misused, by both the federal government and those who sue on behalf of the government.

The issue was touched upon this week in the nation's capital during the 14th Annual Legal Reform Summit of the U.S. Chamber Institute for Legal Reform. (The ILR owns Legal Newsline.)

The ILR contends that while the statute was well intentioned, it has since been turned into a "lucrative money machine for plaintiffs' lawyers and their clients," while simultaneously hurting businesses and U.S. taxpayers.

"There's a very compelling case that the False Claims Act needs reform," Peter B. Hutt II, a partner with Akin, Gump, Strauss, Hauer & Feld, said during a panel discussion at the summit.

First, the statute itself doesn't provide companies with incentives when they report fraud.

And the government spends too much time and money on False Claims Act investigations and litigation after the fraud has already been committed, rather than devising a way to prevent the fraud from being perpetuated in the first place, panel members noted.

Hutt said that proposed reform measures to the law aren't intended to completely prevent so-called qui tam lawsuits from being brought in the first place.

(The qui tam provision in the False Claims Act allows third-party whistleblowers to bring suit on behalf of the government, while allowing them to keep a large portion of any award or settlement).

Such litigation, however, should be the last line of defense in such instances of fraud, Hutt said, not the first line of defense.

Panelists such as Hutt also stressed that it would be better to have independent entities determine whether or not a company's practices meet so-called "gold standards" for compliance.

One suggestion made during the discussion was to institute a jurisdictional bar on qui tam actions after a defendant's disclosure of fraud to the government.

As it stands now, if the government is aware of the fraud, a third-party can still go ahead and bring about a lawsuit.

Another panelist participating in the False Claims Act discussion, David W. Ogden, a partner with Wilmer, Cutler, Pickering, Hale and Dorr, proposed that only treble damages are necessary in such cases, not the additional monetary penalties that can be placed on companies.

Ogden also proposed another reform measure - institute a statute of limitations on such actions.

There currently is none, he noted, since the country is technically still in a state of war.

Thomas Moriarty, executive vice president and general counsel for CVS Caremark, who moderated the panel discussion, pointed out that in 2012, the federal government won more than $3 billion in healthcare fraud judgments brought under the False Claims Act.

Statistics show that such court activity has picked up dramatically over the years, Moriarty said.

According to the ILR, the False Claims Act, which allows for additional, potentially "excessive" penalties such as a prohibition on companies or individuals receiving federal contracts, has led to monetary damages in the amount of $272 million in 1992 to a record $4.9 billion in 2012.

"Since the law was expanded in 1986, plaintiffs' lawyers have built a cottage industry around qui tam lawsuits - netting tens of millions for whistleblowers and their lawyers instead of for taxpayers," the ILR states on its website. "In fact, the current application of the law is so unbalanced that some whistleblowers are receiving monetary awards for information on violations that they committed."

The ILR contends that much-needed reforms include providing a safe harbor for companies with strong compliance programs, limiting the government's power to bar companies and individuals from federal contracts as a method to coerce massive settlements, and creating reasonable whistleblower incentives to ensure that legitimate fraud is reported, while preventing outrageous awards to whistleblowers and their lawyers.

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