Challenge to False Claims Act Falls Flat at House Hearing

Potential changes to the False Claims Act (FCA), a law that incentivizes whistleblowers to sue those that defraud the government, fell flat at a House Judiciary subcommittee hearing late last month. While everyone at the hearing agreed that prevention of fraud is ideal, industry representatives faced strong resistance when they argued that the government should reduce the punishments for fraudulent companies that have compliance systems in place. The majority of the conversation centered on that argument, but other potential changes referenced in opening statements and written testimony included forcing whistleblowers to report fraud to their boss before being able to file a lawsuit and prohibiting the government from debarring corporations that self-report fraud.

Subcommittee on the Constitution and Civil Justice Chairman Trent Franks (R-AZ) opened the hearing by acknowledging the success of the FCA in recovering huge sums of money—over $3 billion each year for the past six years. But he also pointed out that there was room for improvement, citing a 2015 Government Accountability Office report that found that $125 billion in improper payments had been made in 2014. Used in this context, that number can be somewhat misleading, as it includes any payments that “should not have been made or that were made in an incorrect amount,” whether it is due to contractors deliberately defrauding the government or unintentional government errors.

Ranking Member Steve Cohen (D-TN) defended the FCA as is, vigorously attacking various proposals that had been made to restrict qui tam lawsuits, a provision in the FCA that allows whistleblowers to sue on behalf of the government and claim part of the recovery. With almost 70 percent of all FCA recoveries originating with qui tam lawsuits, Cohen advocated for protecting and encouraging whistleblowers to come forward. Proposals to reduce the whistleblower’s share of the damages or to require whistleblowers to meet a restrictively high standard of proof, he stated, would demotivate the very whistleblowers the law’s effectiveness relies on. However, he saw the most blatant threat to the effectiveness of the FCA to be the idea that whistleblowers should be required to report fraud to their supervisors before being able to file a lawsuit. “Great idea, you gotta go tell your boss that he’s a crook and he’s gonna be caught and exposed… That’s a great way to inhibit the people from coming forward—quieting the whistle,” Cohen said during his opening statement.

During witness testimony, Dennis Burke, President of the Good Shepherd Health Care System, testified that from 2003-2006 his organization was subjected to $1 million in legal costs due to a baseless whistleblower lawsuit. He used this example to push for greater restrictions on whistleblowers filing qui tam lawsuits. While this type of situation is concerning, it is also rare. Protections exist for organizations that have been falsely accused, and the fact that opponents of the law placed a ten-year-old story in the spotlight is telling. This was sharply contrasted by the prime example of effective whistleblower-led lawsuits, where defenders of the FCA’s qui tam provisions had to go back just one day to find a qui tam lawsuit that culminated in a headline-making $785 million fraud settlement from pharmaceutical giant Pfizer.

Other witnesses also pushed for reduced corporate liability. Reducing the liability of companies with strong compliance systems in place, they argued, would incentivize companies to create a culture of integrity that would prevent future fraud. Neil Getnick, Chairman of Taxpayers Against Fraud Education Fund, attacked that proposal, labelling it a “pie-in-the-sky idea with no specifics.”

Allowing companies to escape or face reduced liability from FCA actions because they have “checked the boxes” on how to establish a compliance program is doomed to fail. It will merely encourage companies to game this new compliance regime the same way they game contract and regulatory requirements. Such gaming does not reduce fraud; it enables fraud.

Fraud is profitable, and those that engage in it are unlikely to stop, especially if the penalties are reduced for self-disclosure. Without the threat of qui tam lawsuits, there is nothing to stop companies from continuing to defraud the government, rather than self-disclosing fraud and subjecting themselves to some form of punishment, reduced or not. Furthermore, the FCA “already contains a provision that allows corporations to reduce their liability by one-third if they self-report a fraud within thirty days of becoming aware of it,” Getnick stated in his written testimony. “This is a rarely used provision, and repeat FCA scofflaws abound.”

The statistics back up the importance of preserving the FCA. Over $3.5 billion was recovered under the False Claims Act in 2015 alone, with well over $48 billion recovered over the life of the program. Qui tam cases are responsible for recovering almost 70 percent of the $48 billion recovered. If we restrict the ability of whistleblowers to file cases against their employers, we are sure to see that number fall dramatically.