This article originally appeared in JD Supra.
The Senate Judiciary Committee is currently considering amendments to the False Claims Act, a law originally passed during the Civil War that was modernized in 1986. The debate in the Judiciary Committee is being closely watched because since the 1986 amendments the False Claims Act has become the most effective anti-fraud statute protecting taxpayers from fraud in government contracting and procurement. In fiscal year 2020 alone the U.S. government recovered over “$2.2 billion in FCA settlements and judgments — over $1.6 billion of which is attributed to whistleblower-initiated lawsuits.”
The amendment pending before the Judiciary Committee, formally known as the False Claims Amendments Act of 2021 (S.2428) was proposed by a group of senators led by Senator Chuck Grassley (R-IA) to clarify the statute. The primary reform addresses judicial interpretations of the “materiality” requirement contained in the FCA. The issue arose due to dicta contained in the U.S. Supreme Court case Universal Health Services v. U.S. ex rel. Escobar. The amendment, which is modest in scope, is being harshly attacked by lobbyists supported by industry groups.
What is actually in these proposed amendments and what effects will they have on the FCA?
The FCA “makes liable anyone who ‘knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval,’ or ‘knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.’” The elements required to show a violation of the FCA are “(1) a false statement or fraudulent course of conduct, (2) made with the scienter, (3) that was material, causing (4) the government to pay out money or forfeit moneys due.”
In Universal Health Services v. U.S. ex rel. Escobar the Supreme Court interpreted the definition of “material” in the elements of an FCA claim. In dicta Justice Thomas gave an example of facts that could lead a court to find that a fraud was not “material:” “if 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.” This has led some courts to dismiss cases merely because the government paid claims in full. This has in turn led to “fishing expeditions” in discovery to “see if someone, somewhere, in the government was aware of the fraud.” However, as explained in the Manager’s Section by Section Analysis of the False Claims Amendments Act, there are plenty of reasons, beyond that the fraud is not material, for the government to continue payment despite knowledge of fraud, “such as: national security concerns; potential harm to the public if payment was suspended for a scarce drug or service, or even something as simple as an uninterested government bureaucrat who witnesses fraud but does not care to stop it.”
The False Claims Amendments Act of 2021 (S.2428) is first and foremost seeking to fix this materiality loophole, among other more minor technical fixes to the FCA. The Amendment fixes this loophole by adding the language “[i]n determining materiality, the decision of the Government to forego a refund or to pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such refund or payment.” This language does not make any substantive changes to the law but only provides clarification for courts on the definition of materiality that has been muddled in the courts since the Universal Health Services v. U.S. ex rel. Escobar decision. By specifying that there are reasons for continued payment beyond that the fraud is not material, the Amendment fixes an important loophole that currently exists in the law.
The Amendment also addresses discovery costs for the government in FCA qui tam cases that are brought by whistleblowers rather than by the Department of Justice. This section of the Amendment makes a party seeking discovery from the government in an FCA case pay for the costs of discovery, “unless the party can demonstrate that the information sought is relevant and proportionate to the needs of the case.” This is also meant to address the “fishing operations” that FCA violators have engaged in to find knowledge of the fraud in the government to exploit the materiality loophole. In practice this amendment only restates Rule 45(d) of the Federal Rules of Civil Procedure, which already allows a party “to avoid imposing undue burden or expense” incurred from a subpoena. It is hard to understand how the Senate would oppose an amendment designed to protect the government from abusive discovery tactics.
A further section of the Amendment addresses the dismissal authority of the Department of Justice for a FCA case. This section provides an explanation of what is required at the hearing that is currently required for a dismissal. This resolves a three-way circuit split between the DC Circuit, 9th Circuit, and 7th Circuit. This new definition does not make a substantive change in the law. The current law already permits a whistleblower to seek a court hearing if the Justice Department seeks to dismiss an FCA case. The amendment simply sets forth a standard that must meet in order to prevent the dismissal of a case. This standard is extremely high, and a court cannot prevent dismissal unless the actions of the Justice Department amount to an abuse of the legal process. The proposed fix is narrow and will save all of the parties to these cases litigation fees by resolving a three-way split in the courts.
A third provision in the proposed Amendment will clarify the definition of “employee” in the anti-retaliation provision of the FCA. This section specifies that the anti-retaliation provision applies to “[a]ny current or former employee” rather than just “[a]ny employee.” The U.S. Court of Appeals for the 10th Circuit interpreted the FCA to apply only to current employees, which runs counter to judicial interpretations of similar language in other anti-retaliation laws. For example, the U.S. Supreme Court unanimously held that the term “employee” under Title VII also included former employees. The 10th Circuit’s holding runs counter to this precedent and permits fraudsters to blacklist whistleblowers. This interpretation gives an employer free reign to fire and then engage in retaliatory behavior against the now former employee.
The changes made by the False Claims Amendments Act of 2021 (S.2428) are technical fixes that do not make substantive changes to the law, but instead fix oversights, loopholes, and misinterpreted definitions in the False Claims Act. Senators should unanimously support this Amendment in order to provide fixes to the “government’s most powerful tool in deterring fraud and protecting taxpayer dollars.”