Arbitration disarms the U.S. government of its greatest weapon in the war against fraud: The False Claims Act.

Author:Baldwin, Christopher D.
 
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  1. INTRODUCTION

    During the Gettysburg Address, President Abraham Lincoln proclaimed our government to be "of the people, by the people, [and] for the people." (1) The Battle of Gettysburg marked the turning point of the Civil War and it was during this war that President Lincoln ratified the False Claims Act ("FCA"). (2) Now--over 150 years later--the FCA proves "to be the government's most effective civil tool to ferret out fraud and return billions to taxpayer-funded programs." (3) The FCA is able to uncover fraud because it permits private individuals to bring suits on behalf of the United States when those individuals have knowledge of a person or company defrauding the government. (4)

    Punishing and deterring fraud against the government is vital in keeping federal tax-funded programs intact. The tax pool funds many essential programs such as our healthcare and national defense programs. Therefore, when individuals defraud the government, they are not just stealing from the government, but also stealing from the tax pool itself. For instance, money set aside to provide healthcare is being spent on procedures that either never occurred or were unnecessary; (5) funds meant to further our national defense and protect United States citizens are being spent on shoddy equipment or extended lunch breaks. (6) This not only harms those programs, but it causes those taxpayer-funded programs to lack the funds needed to operate effectively, thus resulting in the government having to raise taxes.

    The FCA has proven to be a powerful weapon in the government's war against fraud. On December 3, 2015, the Department of Justice ("DOJ") announced that the Department recovered over $3.5 billion from FCA cases in Fiscal Year 2015 ("FY2015") alone, the majority of which were brought under the FCA's qui tam provision. (7) Meaning, in one year alone, $3.5 billion was added back to the tax pool. The DOJ also announced that, since January 2009 to the end of the FY2015, the government recovered $19.4 billion as a result of FCA cases. (8)

    The FCA replenishes billions of dollars to the tax pool each year. As federal courts continue to compel whistleblowers to arbitrate their claims, arbitration threatens to disarm the government of this significant weapon in the war against fraud. The purpose of this Note is to provide an overview of the arbitrability of qui tam cases under the FCA. This Note argues that qui tam cases should not be subject to arbitration because compelling arbitration undermines the purposes of the FCA, harms the American public, and stifles the government from prosecuting an action because of an arbitration agreement signed by a third party.

    In Part II., the Note addresses the FCA, including whistleblower laws that led to its formation, how the Act was formed, the purposes of the Act, and how the Act is being used today. Then, in Part III., the Note switches topics and addresses arbitration, specifically the Federal Arbitration Act, including what it is, its purpose, and the federal policy favoring arbitration. In Part IV., the Note addresses the arbitrability of cases brought under the FCA's qui tam provision. Next, in Part V, the Note addresses policy concerns with the direction precedent has taken in regard to the arbitrability of FCA cases. Part VI. proposes a solution for dealing with the arbitrability of FCA cases in the future, followed by a conclusion in Part VII.

  2. THE FALSE CLAIMS ACT

    Benjamin Franklin once said, "[t]here is no kind of dishonesty, into which otherwise good people more easily and frequently fall, than that of defrauding the government." (9) The FCA forces civil liability on "any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval" to the federal government. (10) Moreover, the FCA provides an avenue for ordinary citizens to "blow the whistle" on fraud and bring a claim on behalf of the United States Government. (11) A private individual is provided this opportunity under the FCA's qui tam provision. (12) Qui tam is Latin for "who as well" and short for the Latin phrase "qui tam pro domino rege quam pro se ipso in hac parte sequitur" which means, "[w]ho as well for the king as for himself sues in this matter." (13) Qui tam actions existed before the FCA codified the provision. (14) In fact, qui tam litigation can be traced back to King Henry VI--who was King of England in 1422. (15) But it was not until after President Lincoln signed the FCA into law on March 2, 1863, that qui tam litigation became prevalent in the United States. (16)

    The FCA was ratified as "[a]n Act to prevent and punish Fraud upon the Government of the United States." (17) President Lincoln pushed for the FCA because, during the Civil War, Congress was receiving reports of companies severely defrauding the government. These acts of fraud included: selling ships to the United States Navy that had rotting hulls but were painted to look new; selling infantry boots made of cardboard; and selling gunpowder barrels to the Union that contained sawdust instead of gun powder. (18) Though the FCA has gone through many changes, the most drastic changes occurred as a result of the 1986 Amendments. These Amendments were Congress' answer to fraud slipping through the cracks of the FCA, which included the government paying $600 apiece for toilet seats and $660 apiece for two ashtrays. (19)

    "The 1986 Amendments expanded the FCA's scope, increased the penalties, lowered the requisite standard of knowledge and intent, revised the process for a qui tam relator to file suit, and expanded the number of qui tam relators permitted to sue." (20) As it stands today, the FCA provides incentives for ordinary people to step forward and do an extraordinary thing--blow the whistle on fraud. These incentives include protection against retaliation and a monetary incentive of fifteen to thirty percent of the government's recovery. (21) The government provides these incentives because the United States is a government of the people, by the people, and for the people. It is the citizen's money that is being defrauded and it is the citizen who is in the best position to detect the fraud. Of the $3.5 billion recovered from FCA cases in FY2015, eighty percent, or $2.9 billion, was the result of whistleblowers. In return, whistleblowers received $597 million for their roles in uncovering the fraud. (22) The FCA uses the ordinary citizen to detect fraud against the federal government. It also uses large civil penalties and trebled damages to deter other companies from committing the same fraud. (23) Though companies could draft arbitration agreements to include large civil penalties and trebled damages, it is highly unlikely a corporation would do so. Therefore, an arbitration agreement signed by a relator is unlikely to contain the same incentives and protections as the FCA.

    The typical FCA claim starts when a citizen uncovers fraud against the federal government. For example, it could be a nurse discovering a hospital billing Medicare for procedures that were never performed. This private person, known as a relator, initiates the action by delivering a complaint--along with supporting evidence--to the government. The government then decides if it wants to intervene. Intervention means the government pursues the action itself along with the relator. Thanks to the incentives provided by the FCA, the relator is protected against retaliation from his or her employer and is entitled to receive a percentage of the funds received by the government. If the government declines to intervene, the relators can still bring the action themselves on behalf of the government. And if they so choose to pursue the action, the relators still receive the monetary incentives, and the tax pool is still replenished.

    Let us assume the nurse files the suit and brings the case in a court of law. Assume further that the nurse wins the suit and the jury renders an award of $90 million in damages. The DOJ then awards the relator, the nurse, $27 million as a reward for her part in the case, thus returning $63 million to the tax pool. The published opinion then discourages other hospitals from committing the same fraud. This example illustrates the purposes of the FCA: to detect, punish, and deter fraud against the federal government.

  3. THE FEDERAL ARBITRATION ACT

    Arbitration is "[a] method of dispute resolution involving one or more neutral third parties who are usually agreed to by the disputing parties and whose decision is binding." (24) Those neutral parties are known as arbitrators; therefore, during arbitration, one does not appear before a judge, but instead appears before one or more arbitrators. Dispute resolution can be seen as a spectrum beginning with avoidance, where the parties merely ignore the issue, and ending with terrorism or self-help, where the parties take matters into their own hands. In between these two extremes, we find negotiation, mediation, arbitration, and litigation. Figure 1 provides an illustration of this spectrum. (25)

    [FIGURE 1 OMITTED]

    The main differences between arbitration and the other dispute resolution tactics listed on the spectrum (minus avoidance and war, generally) (26) are that there are no juries in arbitration and the decisions are binding. In negotiation, if one is unsatisfied with the result, they may resort to litigation. That is, they have the opportunity to bring a suit in front of a judge, and possibly a jury, if questions of fact exist. The same is true with mediation: if one is unable to reach an agreement through mediation, they may pursue the matter in court. Even with litigation, if one is unsatisfied with the outcome there is a possibility of appeal. However, this is untrue with arbitration. As mentioned above in the definition of arbitration, the decision of the arbitrators is binding with very limited grounds for vacation. Therefore, if individuals are...

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