Congress Can Do Better Against Fraud
The U.S. Senate is debating changes to the federal False Claims Act that will increase the likelihood that unintentional mistakes by companies — that are immaterial to a service or product purchased by the government — will result in plaintiffs’ lawyers filing highly questionable, even meritless cases that will be costly and wasteful to defend. This legislation even makes it difficult for the U.S. Department of Justice to dismiss frivolous suits.
No one doubts that fighting fraud against the federal fisc is a worthy goal. The federal False Claims Act, through its qui tam provision, allows private plaintiffs lawyers to file lawsuits on behalf of the federal government alleging fraud against the government. These plaintiffs’ lawyers can obtain a substantial bounty out of any settlement or recovery, up to 30%. In each qui tam, DOJ must investigate and decide, often with another federal agency, whether to litigate the case, decline to intervene and let the private plaintiff litigate the case, or move to dismiss the case.
DOJ intervenes and pursues only about 20 percent of the qui tams filed each year by private plaintiffs’ lawyers. DOJ reports that nearly $60 billion out of the total $64 billion recovered under the False Claims Act since 1986 came from suits brought directly by the government or from the 20 percent of qui tams where DOJ intervened and took over litigating the case.
In stark contrast, in the remaining 80 percent of qui tams where DOJ declined to intervene after investigating the private plaintiffs’ claims, less than $3 billion has been recovered since 1986. These numbers show that DOJ has been effective under existing law at declining cases unworthy of pursuit. It also shows there are thousands of questionable cases brought by private plaintiffs that waste government and private resources.
While the aim of ferreting out more fraud against the government is admirable, this legislation misses the mark and incentivizes parasitic, factually unsupported qui tams. It puts a hand on the scale of justice against companies by limiting their ability get cases dismissed – even when the issue at the heart of a plaintiff’s complaint was not material to the government’s decision to pay a claim.
The bill will also make it harder for judges to dismiss those meritless cases even when the government itself moves to dismiss them. Through more spending on lawyers and meritless cases, this legislation will take money out of the hands of productive companies and instead enrich plaintiffs’ lawyers when those companies are forced to settle rather than waste more money on litigation. The net effect of such a bill will be yet another tax on companies that do business with the federal government, with substantial proceeds going to lawyers.
And this tax is not on a narrow slice of business. Because the government has its hand in so much of the American economy, False Claims Act litigation touches on nearly every sector, including defense, education, banking, technology, and healthcare. As it stands under the current False Claim Act, the costs to a business in defending a case without merit already can be extraordinary. In fact, of the 2,086 cases in which the government declined to intervene between 2004 and 2013 and that ended with zero recovery, 278 of them lasted for more than three years after the government declined to intervene. In one recent case involving a defense contract, for example, the defendant produced over two million pages of documents before the relator’s claims were dismissed on summary judgment nine years after the plaintiffs’ lawyer filed the suit. A survey showed that in qui tam cases the government had declined, it cost defendants fourteen times more in litigation expenses than was ultimately recovered by the government.
Fighting fraud is good and necessary. The proposed changes to the False Claims Act, however, will not help achieve that good. In this time of economic uncertainty, Congress can do better. Instead of putting its thumb on the scale for the plaintiffs’ bar, it ought to fix some of the current unfairness with the False Claims Act. Given the penal nature of the False Claims Act, it should require the government to turn over exculpatory evidence to defendants, reward companies with good compliance programs that disclose potential violations to the government, and limit the time that the government can drag-out investigations while the plaintiff’s complaint remains under seal. These reforms wouldn’t remove all the unfairness with the current False Claims Act, but they would be a good start. And they’re long overdue.
John C. Richter and Jeremy M. Bylund are partners at King & Spalding in Washington D.C.
