Courts put limit on parasitic qui tam suits

The courts continue to fine-tune the False Claims Act (FCA) with recent rulings establishing limits on what a judge called "parasitic" qui tam lawsuits and establishing that such suits cannot be brought in situations in which the government did not suffer a monetary loss.

John Boese, JD, an attorney with Fried Frank in Washington, DC, monitors court developments regarding the FCA, which allows private citizens to bring suit against entities that they allege have defrauded the government. In recent years, these qui tam lawsuits have been brought against a number of health care organizations that cheated the government out of health care funds. The individual bringing the lawsuit can recover a substantial portion of the damages.

Inside the False Claims Act

Boese tells Healthcare Risk Management that recent court developments have narrowed down some of the ways in which health care providers can be threatened by the False Claims Act. A recent decision by the Ninth Circuit (Seal 1 v. Seal A, No. 98-56447, 2001 WL 747588 [9th Cir. July 5, 2001]) establishes "common-sense limitations on the types of suits that may be brought by private citizens under the False Claims Act," Boese says. The Ninth Circuit affirmed the dismissal, under the FCA’s "public disclosure bar," of allegations that the relator learned about through the government’s own investigations.

Boese says the Seal 1 case involved two qui tam suits filed by the same relator. In the first suit, the relator alleged that Packard-Bell sold the government computers containing used parts while representing that the computers were new. The government declined its opportunity to get involved in the case, but the U.S. Attorney’s office initiated civil and criminal investigations into the allegations. At the same time, the Air Force Office of Special Investigation also launched an investigation of Zenith, which was one of Packard-Bell’s competitors at the time.

"In the course of these investigations, the U.S. Attorney’s office allowed the relator to review documents obtained under a Department of Defense subpoena," Boese says. "Some of those documents implicated Zenith. The relator used information obtained from documents that he reviewed in the U.S. Attorney’s office and from conversations with government lawyers to file a separate qui tam action against Zenith."

Some time later, the government offered to settle with Zenith, but the relator objected and demanded $8 million dollar share of that settlement. When that dispute was taken to the district court, the judge said no. In fact, the judge dismissed the relator’s suit against Zenith altogether, saying that he was not the original source and had based his claims on publicly available information.

Boese explains that the Court of Appeals made an important refinement to one of its earlier public disclosure decisions. In the earlier decision, United States ex rel. Barajas v. Northrop Corp., 5 F.3d 407 (9th Cir. 1993), the Ninth Circuit held that a person is an "original" source of publicly disclosed information if the person’s disclosure was the trigger, even indirectly, of the investigation that gave rise to the public disclosure. Under those circumstances, the person can still qualify to share in an FCA recovery even if it resulted from public information.

Is the relator an original source?

The Ninth Circuit imposed new limitations on the "Barajas" test, established earlier as the test for whether a relator is an original source. Boese explains that the court outlined several factors to use. They include looking at the degree to which the relator’s information helped uncover the later allegations; the degree to which other private actors helped uncover those allegations; and the degree to which the government played a role in uncovering those allegations; and whether the later allegations are brought against the same entity as the earlier allegations.

"What is most refreshing about this decision is the Ninth Circuit’s common-sense approach," Boese says. "This decision reflects this court’s view, shared by other circuit courts, that the qui tam provisions should be used to recover fraud, not to award parasitic claims. In essence, the court saves Congress from its own poor draftsmanship."

No claim if the government didn’t lose money

In another decision, a panel of the Third Circuit Court of Appeals affirmed the dismissal of a qui tam action based on alleged false submissions to a United States Bankruptcy Court, holding that the FCA "only prohibits fraudulent claims that cause economic loss to the government." In other words, Boese says, if the government didn’t lose any money, you can’t recover any damages.

The case was filed by a paralegal who accused his former employer, a law firm, of violating Section 3729(a)(1) of the FCA by submitting inflated legal bills to the Bankruptcy Court (Hutchins v. Wilentz, Goldman & Spitzer, Nos. 98-6248, 98-6339, 2001 WL 660936, 2001 U.S. App. LEXIS 12833 [3d Cir. June 13, 2001]). Boese says the relator alleged that the firm inflated charges for LEXIS and Westlaw research time, and billed for secretarial services performed by paralegals. The relator alleged that the submission of inflated legal bills could result in economic injury to the United States if, as a creditor to the bankrupt estate, the government was required to pay inflated legal bills.

The Third Circuit panel didn’t buy that argument. That theory would have the effect of expanding FCA liability to reach any false statement made to the government, and that was not Congress’s intent, the court said.

A loss to the United States?

Boese explains that the question of whether damages are required to state a claim under the FCA has taken on increasing importance because a growing number of FCA cases are based on legitimate claims submitted while the defendant may not have been in full technical compliance with federal laws or regulations.

"In such cases, it is often argued that the government suffered no injury," he says.

Courts have split on this issue in the past, but Boese says the Third Circuit panel was unequivocal in its ruling, reiterating several times that "the proper inquiry under the False Claims Act is whether the defendant made fraudulent claims that caused economic loss to the United States Treasury."

State, local governments want to cash in, too

Boese also notes that "a growing number of state and local governments are taking note of the huge recoveries obtained every year under the qui tam provisions of the Federal False Claims Act" and are formulating their own state systems for recovering damages. California, Florida, Illinois, the District of Columbia, Nevada, Hawaii, Delaware, and Massachusetts each have qui tam false claims laws closely modeled on the federal FCA. Several other states have qui tam false claims laws that apply only to health care claims, Boese says.

State laws produce large recoveries

"California has recovered more than $300 million under the California FCA to date in cases involving the financial services industry, and more than $28 million has been recovered under the Florida FCA," he says.

Boese notes that Hawaii and Tennessee, which already had false claims laws on the books, recently enacted laws that build on and expand the reach of the existing laws. He says a $4 million settlement was reached only a few months after the Hawaii FCA was enacted in June 2000, with more than $750,000 paid to the two relators. He says both Hawaii laws are substantially similar to the Federal FCA, but they include some more expansive provisions than those found in the federal law. For example, each of the Hawaii False Claims Laws (like several other state false claims laws, including the new Tennessee law) impose liability upon beneficiaries of inadvertently submitted false claims who subsequently discover the falsity, but fail to disclose it to the state or county government.

Tennessee has had more limited qui tam false claims laws on the books that applied only to health care false claims, but Boese says the new Tennessee False Claims Act applies to any "false claim" to an agent of the state or of any political subdivision, and to contractors and grantees of the state, if any of the funds claimed were provided by the state or political subdivision. It contains seven liability provisions that are essentially the same as those contained in the federal FCA, but Boese says the Tennessee law also contains a ninth provision imposing liability on any person who knowingly "makes, uses, or causes to be made or used any false or fraudulent conduct, representation, or practice in order to procure anything of value directly or indirectly from the state or any political subdivision."