Trouble at the Source: the Debates Over the Public Disclosure Provisions of the False Claims Act's Original Source Rule - Beverly Cohen

• Publication year: 2009

Trouble at the Source: The

Debates Over the Public

Disclosure Provisions of the False

Claims Act's Original Source Ruleby Beverly Cohen^*

Introduction

The federal False Claims Act (the Act)¹ has long been a major tool in rectifying frauds, including healthcare frauds, perpetrated against the federal government.² One of the most useful aspects of the Act is the ability of private citizens to sue on behalf of the government when they detect a fraud for which the government has not yet commenced an enforcement action.³

Unfortunately, these private citizen suit provisions of the Act are less effective than they could be due to disagreement over how to interpret and apply them.⁴ In particular, the statutory language relating to public disclosure, critical to determining when citizens may sue, is hopelessly vague and has engendered numerous conflicts among courts.⁵

This Article explains the confusion that has resulted from the public disclosure provisions of the Act and suggests logical ways to interpret and apply them.⁶ Ultimately, the Article urges a clarification of the statutory language, such as that provided by Senate Bill 2041,⁷ considered by Congress in 2007-2008, so that the Act will provide clearer guidance to citizens contemplating suing under the Act.⁸ This clarification will encourage citizens to detect frauds against the government and to spearhead collections for violations of the Act, to the benefit of all of us and as the Act was intended.

I. The False Claims Act

The False Claims Act (the Act)⁹ provides that anyone who knowingly presents a false claim for payment to the federal government is liable for a civil penalty of $5,000 to $10,000 per claim, plus three times the damages suffered by the government.¹⁰ While the Act was initially adopted during the Civil War to combat fraud in war procurement contracts,¹¹ since that time it has been applied to a wide range of contracts. Most recently, it has become a valuable tool to combat healthcare fraud in federal programs, such as Medicaid and Medicare.¹²

The qui tam¹³ provisions of the Act allow private parties to sue.¹⁴ Individuals ("relators") with knowledge of false claims submitted to the federal government may file a complaint on behalf of the government against the defendant¹⁵ and share in the financial recovery.¹⁶ The complaint is initially filed under seal to allow the government an opportunity to investigate the allegations and to decide whether it wishes to intervene in the action.¹⁷ Depending upon whether the government intervenes or the relator prosecutes the case on his own, and upon the usefulness of the relator's knowledge of the lawsuit, the relator may collect up to thirty percent of the recovery.¹⁸ When recoveries in healthcare cases can easily run into tens of millions of dollars,¹⁹ the relator's share is an important incentive for private citizens to report healthcare fraud.

II. Historic Development of the Qui Tam Provisions

Since they were enacted, the qui tam provisions of the False Claims Act (the Act)²⁰ have buttressed the government's fraud enforcement efforts. The qui tam provisions have been described as encouraging "'a rogue to catch a rogue' by inducing informers 'to betray [their] coconspi-rators.'"²¹ The original Act allowed a successful qui tam relator to collect one-half of the recovery against the defrauding parties.²²

The Act was underutilized, however, until the 1930s and 1940s, when New Deal and World War II contracting gave more opportunities for dishonest government contractors to defraud the government.²³ But at that time, the Act did not require the relators to allege undiscovered frauds in their qui tam complaints; instead, relators were able to commence a qui tam lawsuit based completely on information already uncovered by government investigators.²⁴ Without any statutory restrictions on these "parasitic" lawsuits,²⁵ many private parties sought the qui tam rewards after doing little more than copying existing indictments or basing their complaints upon ongoing congressional investigations.²⁶

The height of these parasitic qui tam actions was United States ex rel. Marcus v. Hess,²⁷ in which the relator created his qui tam complaint by copying a criminal indictment to which the defendants had already pleaded nolo contendere.²⁸ Despite the fact that the relator had not discovered the fraud, and that the fraud was already publicly known, the United States Supreme Court upheld the relator's right to share in the recovery, holding that nothing in the text of the Act or in its legislative history barred the action.²⁹

In response to the public criticism of the Act following Marcus, President Roosevelt signed a bill in 1943 tightening the qui tam provisions.³⁰ The amendments were a compromise between House and Senate versions of the bill.³¹ The House version sought to repeal the qui tam provisions altogether, while the Senate bill barred qui tam lawsuits "based upon information already in the possession of the government unless the information was 'original with such person.'"³² The Senate's version was adopted, but the original source provision was dropped.³³ The final version barred lawsuits that were "'based upon evidence or information in the possession of the United States ... at the time such suit was brought.'"³⁴

Unfortunately, the amended version of the Act did not preserve the right to bring a qui tam action for whistleblowers who had alerted the government to the fraud before filing suit.³⁵ Therefore, the "government knowledge" standard ultimately frustrated the efforts oflegitimate relators who had acquired knowledge of the fraud on their own but were required by law to report the fraud.³⁶ As a result, use of qui tam lawsuits declined.³⁷

This problem with the government knowledge standard was dramatically illustrated in 1984 in United States ex rel. Wisconsin v. Dean.³⁸ In Dean the United States Court of Appeals for the Seventh Circuit barred a qui tam action brought by the State of Wisconsin because before filing its complaint, the State had reported the fraud to the federal government, as it was required to do by law.³⁹ The court ruled that the plain terms of the Act barred the lawsuit because the federal government possessed knowledge of the fraud prior to the filing of the qui tam complaint.⁴⁰ Moreover, the court refused to find a legislative intent to preserve "original source" relators like Wisconsin because this provision had been dropped from the final version of the bill.⁴¹

Ultimately, the Seventh Circuit barred the lawsuit despite the fact that the State of Wisconsin had conducted an extensive and costly investigation to uncover the fraud and notwithstanding that the federal government had learned of the fraud via mandatory disclosure by the relator.⁴²

After Dean the National Association of Attorneys General adopted a resolution urging Congress "'to rectify the unfortunate result'" of Dean.⁴³ Congress agreed that the qui tam provisions were "out of whack"⁴⁴ and sought to "reinvigorate" them.⁴⁵ The 1986 amend-ments⁴⁶ attempted once again to adjust the balance between the dual goals of encouraging private fraud detection⁴⁷ and discouraging parasitic suits where the relators made no useful contribution to the action.⁴⁸ The "'principal intent' of the 1986 amendments 'was to have the qui tam suit provision operate somewhere between the almost unrestrained permissiveness represented by the Marcus decision, and the restrictiveness of the post-1943 cases.'"⁴⁹ Thus, the amended version attempted to navigate the "'fine line between encouraging whistle-blowing and discouraging opportunistic behavior.'"⁵⁰

To encourage private fraud detection, Congress repealed the "government knowledge" standard for barring jurisdiction over the relator.⁵¹ To discourage the type of opportunism embodied in cases like Marcus, Congress provided that once the fraud had been the subject of a "public disclosure," relators were required to meet fairly stringent circumstances to avoid the jurisdictional bar.⁵²

Ill. The 1986 Amendments: The Current Version of the Qui Tam Provisions

Under the current version of the qui tam provisions of the False Claims Act (the Act),⁵³ no court will have jurisdiction over the relator if the complaint is based upon certain public disclosures⁵⁴ unless the relator is an original source of the information.⁵⁵ The public disclosures that can bar a qui tam action are "allegations or transactions[⁵⁶ ] in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government [General] Accounting office report, hearing, audit, or investigation, or from the news media."⁵⁷ If a relator bases his qui tam action upon public disclosures, he is jurisdictionally barred unless he can show that he is an "original source."⁵⁸ The relator can demonstrate that he is an original source if he (1) "has direct and independent knowledge of the information on which the allegations are based,"⁵⁹ and (2) "has voluntarily provided the information to the Government before filing [the qui tam complaint]."⁶⁰ The basis for the original source rule is to ensure that a relator who files a qui tam case after a public disclosure has occurred has valuable firsthand knowledge to contribute to the action.⁶¹

The United States Supreme Court recently declared that the jurisdictional analysis required by the qui tam provisions must be conducted on a claim by claim basis, assessing each claim separately to determine if the relator is an original source.⁶² Courts require the relator to show that he is an original source of every essential element of each fraud claim that was publicly disclosed.⁶³ Further, the relator must allege specific facts, not merely conclusory statements, showing that his knowledge was direct and independent.⁶⁴

IV. The Stinson Cases: Illustrating Courts' Confusion in Applying the Original Source Rule

Virtually every United States Court of Appeals agrees on one aspect of the public...