False claims law: What employment attorneys need to know

The Federal False Claims Act, 31 U.S.C. § 3729 - 3733 allows individuals, known as Relators, to file actions on behalf of the government to combat fraud by federal contractors. Those who knowingly submit, or cause another person or entity to submit, false claims for payment by the government are liable for three times the government’s damages plus civil penalties of $5,500 to $11,000 per false claim. 31 U.S.C. § 3730(g). According to Taxpayers Against Fraud, Relator actions resulted in a total of $5.6 billion in recovery in fiscal year 2009. <http://www.taf.org/total2009.htm>. In rare instances, billion-dollar recoveries have occurred. See Justice Department press release (1/15 2009) announcing a $1.45 billion settlement with the federal government and certain States based on Eli Lilly’s pervasive practice of marketing Zyprexa for off-label purposes. <http://tinyurl.com/y95g6wg>. The total amount collected from Lilly ended up being much greater because several States settled with Lilly later in 2009. Although most recoveries on behalf of the government are much more modest, by labor and employment law standards, the Relator’s fee and statutory attorneys’ fees are usually at the upper-end of recoveries.

These cases are referred to as qui tam cases, which is Latin for referring to the Plaintiff/Relator as one who sues as much for the state as for himself or herself. False Claims statutes have been enacted by many States including Illinois. 740 ILCS 175/1 et seq. Also, the City of Chicago has adopted its own False Claims ordinance. <http://www.taf.org/chicagofca.htm>. The Illinois Act and the Chicago ordinance are similar to the federal Act and mainly mirror the provisions of federal law.

The number of False Claims cases have increased dramatically since the 1986 Amendments which revitalized the Act. However, even though it is estimated that cases brought under the Act bring in $15 for every dollar allocated for enforcement by the federal government, the number of Justice Department officials, Assistant United States Attorneys and investigators who work with Relators are spread too thin.

At first glance, the procedures for this special kind of whistleblowing may seem alluring and straight-forward. File a case under seal on behalf of the government together with a disclosure statement before the case is filed. 31 U.S.C. § 3730(b)(2). Be the first to file. Id. § 3730(b)(5). (More about “first to file” infra.) It helps to be an original source or the Relator may face the public disclosure bar. Id. § 3730(e)(4)(A).1 Convince the government to intervene in your case. “Pass Go” and collect a Relator’s fee of somewhere between 15 to 30% of the amount recovered on behalf of the government plus attorneys’ fees. Id. § 3730(d). If only it were that simple.

Labor and employment law lawyers who represent employees should have sufficient knowledge of the Act to be able to spot potential qui tam Relator cases. Employees are most likely to be in the know about fraud committed by government contractors. Qui tam cases arise most frequently out of healthcare fraud. Also, military procurement is a sector of the economy where traditionally the Act has been used to combat fraud. However, qui tam cases are not limited to these areas and the statute applies to just about any situation where false claims are submitted to the government. The Act, though, does not apply to securities fraud and tax evasion. However, there is a separate whistleblower statute for federal tax fraud. 26 U.S.C. § 7623.

Another reason that it is important, if not essential, that plaintiff employment lawyers recognize false claim actions is that a general release may prohibit a Relator from recovering a Relator’s fee. The Seventh Circuit has not squarely faced this issue. However, the recent decision in U.S. ex rel. Radcliffe, et al. v. Purdue Pharma L.P., 600 F.2d 319 (4th Cir. 2010) serves as a warning that a Relator may, as a matter of law, waive his or her Relator’s fee if a general release is signed. Radcliffe observed that the general release does not affect the government’s ability to collect under the Act. But realistically, a potential Relator who does not have a financial interest is quite unlikely to pursue such an action.

The Seventh Circuit, applying Illinois law, has a history of construing general releases broadly. E.g., Hampton v. Ford Motor Co., 561 F.3d 709 (7th Cir. 2009). This line of cases suggests that the Seventh Circuit might agree with the Fourth Circuit decision in Radcliffe. However, a recent Seventh Circuit case, U.S. ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849 (7th Cir. 2009) held that a private employment suit under the retaliation provisions of the Act does not preclude a later suit under the qui tam provisions of the Act and is not res judicata of a Relator claim. The court specifically observed that the “United States needs protection ... from lawyers whose expertise lies in employment cases, and who without thinking omit qui tam claims from their clients’ personal suits.” Id. at 852. Nevertheless, unless and until the Seventh Circuit squarely holds that signing a general release does not waive a relator’s right to a recovery, employment lawyers should be hesitant to stand by while clients, with potential qui tam claims, sign general releases which could have the effect of waiving a Relator recovery.

Tension exists between presenting a well thought out qui tam case to the government and winning the race to the courthouse. One of the maddening aspects of qui tam litigation is that because cases are filed under seal, it’s not an ordinary race where the results of the race (not counting “photo finishes”) are instantly known. Instead, the Relator may not learn whether he or she is first to file until months or even years after the lawsuit is filed. If another qui tam lawsuit is earlier filed against a defendant, after the case is unsealed, the defendant may argue that the material facts of the claims are sufficiently related to the allegations of the first filed case so that the later case is barred by the first filed case. Chovanec v. Apria Healthcare Group Inc., 606 F.3d 361 (7th Cir. 2010).

Whether the government intervenes is a key juncture in a qui tam case. If the government decides to intervene, it means that the government will take over primary responsibility for the case. As a practical matter, many if not most qui tam cases settle at this point because defendants fear being declared ineligible to continue receiving federal contracts. This is especially true for healthcare fraud where Medicare and Medicaid reimbursements are at stake. Another reason why the government’s intervention decision is so important is that it establishes the credibility of the case. Even though there is nothing in the Act that declares non-intervened cases are to be treated as second class claims, many judges perceive them that way.

Another reason why non-intervened cases have a rougher path is that qui tam complaints must meet the heightened pleading requirements of F.R.C.P. 9(b). E.g., U.S. ex rel. Gross v. AIDS Research Alliance-Chicago, 415 F.3d 601 (7th Cir. 2005). With some exceptions, courts require Relators to plead the “who, what, when, where, and how” of the fraud. Id. at 605. It is generally not enough to plead the scheme; the Seventh Circuit has required Relators to plead a specific instance of a false claim being submitted. U.S. ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730, 741-42 (7th Cir. 2007). (Overruled on other grounds Glaser v. Wound Care Consultants, Inc.).

Conclusion

In the labor and employment setting, attorneys who represent employees need to have sufficient knowledge to recognize potential False Claims Act cases as they advise their clients. ■

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1. A discussion of the “public disclosure bar” is beyond the scope of this article.