CHAPTER 9 LITIGATION UNDER THE FEDERAL FALSE CLAIMS ACT

• Jurisdiction: United States

Federal & Indian Oil & Gas Royalty Valuation and Management II
(Feb 1998)
CHAPTER 9
LITIGATION UNDER THE FEDERAL FALSE CLAIMS ACT
Edwin G. Winstead ¹
U.S. Attorney's Office
District of New Mexico
Santa Fe, New Mexico

I. INTRODUCTION

Litigation under the False Claims Act² (the "Act" or the "FCA") involves the investigation and civil prosecution by the U.S. Department of Justice ("DOJ") of false or fraudulent claims for payment submitted by individuals or companies to the Government. Discussion of litigation concerning fraudulent claims may seem somewhat out of place in the context of a special institute which largely concerns the administrative determination of royalty valuation. Inaccuracies in production and sales reports filed by federal mineral lessees have largely been dealt with as administrative matters under the authority granted to the Secretary of the Interior by the Federal Oil and Gas Royalty Management Act of 1982³ ("FOGRMA") and the Federal Oil and Gas Royalty Simplification and Fairness Act ("RSFA") of 1996.⁴ However, the DOJ has taken an increasingly active role in pursuing civil FCA cases for treble damages and penalties. Therefore, filings by federal mineral lessees based on false information which result in losses to the Government, in addition to violating FOGRMA, may constitute a violation of the False Claims Act.⁵

To date, there have been very few actions pursued by the Government against federal mineral lessees under the FCA. However, it is likely that FCA actions in this area

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may be more frequent in the near future. Benjamin Franklin said that "[t]here is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government."⁶ This has proven to be true in the defense and health care industries. It may well be time to discover if this proposition holds true in the mineral industry in its relations with the Government. This paper is intended to provide a brief overview of the history of the FCA, it elements, and how it may be applied to federal mineral lessees.

II. BACKGROUND AND HISTORY OF THE ACT

The FCA was originally enacted during the Civil War in response to a "series of sensational congressional investigations into the sale of provisions and munitions to the War Department."⁷ As part of the original FCA, Congress included a qui tam ⁸ provision which allowed suits by private persons (called "relators") on behalf of the United States in which part of any amount recovered was paid to the relator. The idea was to provide an economic incentive to people who had knowledge of a fraud on the government to turn

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informer.⁹ After the Civil War the Act fell into relative disuse, due in part to several limiting amendments to the Act and Supreme Court decisions.

In the early 1980's Congress was again concerned about fraud committed against the Government. The 1980's saw the largest peace time military expenditures ever.¹⁰ This rapid cold war buildup again presented opportunities for contractors to defraud the Government. Reports of outrageously expensive military equipment, $400 hammers and $7,000 coffee pots, etc., were of grave concern.¹¹ The Department of Justice has estimated that as much as 10 percent of the entire federal budget is lost to fraud.¹² The U.S. General Accounting Office ("GAO"), the legislative branch agency tasked with spotting waste, fraud and abuse in Government programs, has also studied the problem of fraudulent claims submitted to the government. In its report entitled "Health Insurance: Vulnerable Payers Lose Billions to Fraud and Abuse",¹³ the GAO concluded that by 1995, about 10 percent of expenditures for health care would be lost to fraud. In 1982 the Linowes Commission reported on the problems the Department of the Interior had in accounting for mineral royalties.¹⁴

In 1986 Congress made sweeping changes to the Act. The amendments were intended "to strengthen and clarify the Government's ability to detect and prosecute civil

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fraud and to recoup damages suffered by the Government as a result of such fraud."¹⁵ In addition, the 1986 amendments corrected "restrictive judicial interpretations of the Act's liability standard, burden of proof, jurisdiction of qui tam or public informer actions," to provide the Government with a "more useful tool" against fraud.¹⁶

Congress amended the Act to clarify that the Government need not prove specific intent to defraud as is generally required in common law fraud, only that the false claim was submitted "knowing" or "knowingly." These terms are expressly defined to include actual knowledge, deliberate ignorance, or reckless disregard for the truth or falsity of the information. The burden of proof was defined as the normal civil burden of a preponderance of evidence. The Government's potential recovery was increased from double damages and a civil penalty of $2,000, to treble damages and a civil penalty of $5,000 to $10,000 for each claim. The statute of limitations was revised to include an express tolling provision giving the Government up to 10 years to sue. "Reverse" false claims are expressly included which allows the Government to sue when statements or records are used to deprive the Government of payments. Finally, the qui tam provisions were substantially amended, making it easier and safer for whistle blowers to file such actions.

To understand the FCA and all of the situations in which it may be applied, it is important to realize that actions brought under the act are civil and remedial. This means that FCA actions may be brought by the Government independent of, and in addition to, criminal actions for the same conduct. Civil FCA actions may be brought before, during or after a criminal action without violating the constitutional double jeopardy or excessive fines clause.¹⁷

This is also true concerning administrative actions. Since the Attorney General has been given exclusive authority to litigate claims on behalf of the United States,¹⁸ administrative agencies do not have authority to waive claims which may properly be brought under the FCA.

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Congress intended the FCA to be a flexible tool to "protect the treasury against the hungry and unscrupulous host that encompasses it on every side ...".¹⁹ Because the original civil provisions of the FCA were defined in criminal code, there was some question of whether it should be governed by the Rule of Lenity which requires that criminal statutes should be strictly construed.²⁰ In United States v. Neifert-White Co., 390 U.S. 228, 232 (1968) the Supreme Court summarized its treatment of the FCA as follows:

Debates at the time [of enactment] suggest that the Act was intended to reach all types of fraud, without qualification, that might result in financial loss to the Government. In its present form the Act is broadly phrased.... In the various contexts in which questions of the proper construction of the Act have been presented, the Court has consistently refused to accept a rigid, restrictive reading, even at the time when the statute imposed criminal sanctions as well as civil.

The Court summarized that, "[t]his remedial statute reaches beyond 'claims' which might be legally enforced, to all fraudulent attempts to cause the Government to pay out sums of money." Id. at 233.

Congress emphatically endorsed this liberal approach to the use and application of the FCA through its substantial 1986 amendments.²¹

III. THE HISTORY OF THE FCA SINCE THE 1986 AMENDMENTS

Since the 1986 amendments to the FCA there has been a tremendous increase in the number of civil cases brought by the Government. The FCA has become the Government's primary litigative tool to combat fraud and is the centerpiece of fraud initiatives in the U.S. Attorney's Offices. Most of the U.S. Attorney's Offices have formed Affirmative Civil Enforcement (ACE) Units which are tasked exclusively with pursuing civil

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FCA cases. The ACE Units include attorneys, accountant/auditors, investigators and paralegals who are devoted entirely to civil fraud prosecutions. These ACE Units help to coordinate criminal, civil and administrative remedies in parallel and joint investigations.

This effort has made a tremendous difference in both the number of civil fraud cases that have been pursued and in the amounts that have been recovered. In 1987 only 33 qui tam actions were filed by relators nation wide, and no money was recovered. In 1988 the number of qui tam actions had increased to 60 and $355,000 was recovered. Since then thousands of cases have been filed and approximately $4 billion dollars in damages and penalties have been recovered. The amount of taxpayer money that has been saved through the deterrent effect of FCA actions has been estimated to be many times greater than the amounts actually recovered.²²

As each year has passed, the ACE Units have improved their ability to identify and pursue civil fraud cases. The Federal Bureau of Investigation and the Inspector General Offices for each of the federal agencies now review matters not only for evidence of criminal activity, but for civil FCA purposes as well. Cases which previously had to be declined criminally because of the high criminal burden of proof, may now be pursued as civil FCA cases. When this is added to the incentive for individuals in corporations who are aware of fraud to file FCA qui tam suits then it is easy to understand that this area is likely to continue to grow.

As an example, in 1994, the U.S. Attorneys Office for the District of New Mexico did not have an ACE Unit. ACE positions were funded in FY 1995 and by September 1995 the Unit started operations. Since that time the ACE Unit has recovered approximately $15 million dollars and currently has approximately 60 pending cases. New ACE Units are being established in U.S. Attorney's Offices across the country and existing Units are being...