Interpreting the False Claims Act

 

Today I want to talk about some troubling developments in the courts’ interpretation of the False Claims Act. To understand these developments, we need to review a little history.

 

In 1943, Congress gutted the Lincoln-era law known as the False Claims Act. At the time, the Department of Justice said that it needed no help from whistleblowers to fight fraud. The Department said that if the government already knows about the fraud, no court should even hear a whistleblower’s case. So, Congress amended the False Claims Act to bar any whistleblower from bringing a claim if the government knows about the fraud.

 

That was a mistake.

 

The bar led to absurd results that only hurt the taxpayer. It basically meant that all whistleblower cases were blocked, even cases where the government only knew about the fraud because of the whistleblower.

 

In 1984 the Seventh Circuit barred the State of Wisconsin from a whistleblower action against Medicaid fraud. Wisconsin had already told the federal government about the fraud—because it was required to under federal law. So, because of the so-called “government knowledge bar,” whistleblower cases went nowhere and neither did prosecution of wrongdoers.

 

In 1986 I worked with my colleagues to make it possible for whistleblowers to be heard again. That included eliminating this so-called “government knowledge” bar. Since then, what the government knows about a fraud has still been used by defendants in False Claims Act cases, as a defense against their own state of mind.

 

Courts have found that what the government knows about fraud can undercut allegations that defendants knowingly submitted false claims.

 

The theory goes something like this: If the government knows about the defendant’s bad behavior, and the defendant knows the government knows, then the defendant did not knowingly commit fraud. Once you wrap your head around that logic puzzle, I’ve got another one for you.

 

In 2016, the question of what the government knows about fraud in False Claims Act cases began to take center stage once again. In Escobar, the Supreme Court rightly affirmed that a contractor can be liable under the “implied false certification” theory. That just means a contractor can be in trouble when it doesn’t make good on its bargain. And it doesn’t matter whether the contractor outright lies. A misleading omission of its failures is enough.

 

Unfortunately parts of the Court’s ruling are getting some defendants, and judges, tied in knots.

Justice Thomas wrote that the false or misleading aspect of the claim has to be material to the government’s decision whether to pay it. Thomas said that one of several ways you can tell whether something misleading is also material is if the government knows what the contractor is up to and pays the claim anyway.

 

At first glance, I suppose that makes sense. If someone gives you something substantially different in value or quality than what you asked for, why would you pay for it? But if the difference really isn’t that important, you might still accept it.

 

Even if that is true, the problem here is that courts are reacting the way they always have. They are trying to outdo each other in applying Thomas’ analysis inappropriately or as strictly as possible – to the point of absurdity. In doing so, they are starting to resurrect elements of that old “government knowledge” bar I worked so hard to get rid of.

 

This is what the Justice actually wrote:

 

“[I]f 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. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.”

 

He did not say that in every case, if the government pays a claim despite the fact that someone, somewhere in the bowels of the bureaucracy might have heard about allegations that the contractor may have done something wrong, the contractor is automatically off the hook.

 

Think about it. Why should the taxpayer pay the price for bureaucrats who fail to expose fraud against the government?

 

That’s why the False Claims Act exists, to protect taxpayers by rewarding whistleblowers for exposing fraud.

 

Justice Thomas said that the government’s actions when it has actual knowledge that certain requirements were violated are evidence of whether those requirements are material—or not.

 

What does it mean for the government to have actual knowledge? Would it include one bureaucrat who suspected a violation but looked the other way? Would that prove the requirement was material?

 

Courts need to be careful here.

 

First, this statement about government knowledge is not the standard for materiality. The standard for materiality is actually the same as it has always been. The Court did not change it in Escobar.

 

Materiality means “having a natural tendency to influence, or being capable of influencing, the payment or receipt of money or property.”

 

The question of the government’s behavior in response to fraud is one of multiple factors for courts to weigh in applying the standard.

 

Second, courts and defendants should be mindful that Justice Thomas limited the relevance here to actual knowledge of things that actually happened. There are all sorts of situations where the government could have doubts—but no actual knowledge of fraud.

 

Maybe the government has only heard vague allegations, but has no facts. Maybe the rumors are about something that may be happening in an industry, but nothing about particular false claims by a particular defendant. Maybe an agency has started an inquiry, but still has a long way to go before it’s finished. Maybe someone with real agency authority or responsibility hasn’t learned of it yet.

 

There are a lot of situations where the government might not have actual knowledge of the fraud.

 

Third, even if the government does pay a false claim, that is not the end of the matter. Courts have long recognized there are a lot of reasons why the government might not intervene in a whistleblower case.

 

And, there are a lot of reasons why the government might still pay a false claim. Maybe declining to pay the claim would leave patients without prescriptions or life-saving medical care.

 

Paying the claims in that case does not mean the fraud is unimportant. It means that, in that moment, the government wants to ensure access to critical care. That payment cannot, and does not, deprive the government of the right to recover the payment obtained through fraud.

 

Can you imagine if that were the rule, though? Can you imagine if providers could avoid all accountability because the government decided not to let someone suffer? Then fraudsters could hold the government hostage.

 

They could submit bogus claims all the time with no consequences because they know the government is not going to deny treatment to the sick and vulnerable.

 

That is just not what the False Claims Act says. Courts should not read such a ridiculous rule into the statute.

 

Fourth, courts should take care in reading into the Act a requirement for the government to immediately stop paying claims or first pursue some other remedy. There could be many important reasons to pay a claim that have nothing to do with whether the fraud is material.

Further, there is no exhaustion requirement. The False Claims Act does not require the government to jump through administrative hoops or give up its rights. And that would be an unreasonable burden on the government in any event.

 

We have decades of data showing that the government cannot stop fraud by itself. I also know from many years of oversight that purely administrative remedies are very time consuming and often toothless.

 

The government should be able to decide how best to protect the taxpayers from fraud. The FCA is the most effective tool the government has. The government should be able to use it, without the courts piling on bogus restrictions that are just not in the law.

 

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