New England Biz Law Update
It can be a bonanza or a bogeyman and, thanks to changes by Congress and the Obama administration, the federal False Claims Act has more teeth than ever.
As the federal government has been doling out billions of dollars to stimulate the economy and stabilize troubled financial institutions, the new administration supported an update to the 23-year-old False Claims Act — a rainmaker law that has recovered roughly $22 billion since 1986 — saying it needs to be preserved as a “potent and useful weapon against the misuse of taxpayer funds.”
With the recently signed Fraud Enforcement and Recovery Act, the government has created a new arsenal of weapons to help it pursue false claims. Attorneys, in turn, are telling their clients to tread carefully.
The act increased the list of people who can file claims, expanded the definition of false claims to include institutions that keep overpayments, and extended the statute to cover payments from government subcontractors and grant recipients.
It also infused cash into the FBI and the U.S. Department of Justice to beef up enforcement efforts while adding mortgage-lending businesses to the federal fraud statutes and making it easier for whistleblowers to pursue companies in court.
“Big money attracts big attention,” said Paul G. Lannon Jr., a partner in the litigation department at Boston’s Holland & Knight and a member of its education practice.
Lannon said colleges and universities need to be extra vigilant; not only do they receive massive amounts of federal dollars, they often do not have the kind of compliance programs found in the private sector.
And with the slumping economy weakening endowments and straining budgets, many schools will find themselves tempted to cut spending on anything that does not directly affect the classroom. A college that keeps extra money from a research grant, for example, could find itself slapped with the act’s treble damages and fines of up to $11,000 per violation.
“The amendments to the False Claims Act increase the likelihood that higher education institutions will be targeted for compliance issues,” he said. “When they get hit, there is big money at stake and there could be big penalties. It behooves them to make sure that they have a compliance program in place that carefully tracks federal funds, accounts for federal funds, and reports them properly.”
‘Staggering’ sums
Any company or institution that does business with the federal government must be aware that more scrutiny then ever could be focused on their books by federal authorities or whistleblowers eager to share up to 30 percent of what is ultimately recovered.
A January settlement between Eli Lilly and the DOJ demonstrates the power of the act. The pharmaceutical giant agreed to pay $1.4 billion to resolve allegations that it promoted the drug Zyprexa for off-label uses not approved by the Food and Drug Administration. That amount included a $515 million fine, which the DOJ called the “largest individual corporate criminal fine in history.” The whistleblowers collected nearly $79 million from the settlement.
In 20 years, whistleblowers have netted about $2 billion in awards. With such a massive possible payday, said Ara B. Gershengorn of Foley Hoag in Boston, pursuing a claim has always been attractive to would-be whistleblowers. Because the revised law has added agents and contractors to the list of potential relators, there are more runners than ever in the race to the courthouse.
“The sums are really staggering,” she said, “and there are just a lot of incentives for the government and individuals to try to bring these cases. It can be a real windfall to an individual, and this is one of the few instances where the government can bring in cash.”
The Fraud Enforcement and Recovery Act now allows the government to share information with whistleblowers more easily; even when federal authorities decide not to pursue a case, citizens will have more access to information that could help them bring a private lawsuit.
“The courts have been willing to say that you need to know enough about a fraud before they will let you go forward. They have dismissed cases because they weren’t pled with enough detail,” Gershengorn said. “Now, the government can share information it gets through its investigation. That makes it easier for the [whistleblower] to include specific details in their complaint.”
Watchword is prevention
With the reach of the False Claims Act expanded, the best defense is careful compliance, attorneys say. From a contractor paving a road under the federal stimulus program to a hospital receiving Medicare payments, tracking the flow of cash is crucial.
For Charlyn A. Feeney, executive director of risk management and compliance at Fallon Clinic, a multi-practice medical group with 250 doctors in Worcester, the watchword is prevention.
“It is something that health care facilities and organizations take very seriously,” Feeney said. “It is much better to invest funds up front because the fines and penalties are staggering.”
Prevention is about more than tracking dollars, she added, and requires a culture of compliance. “When you look at it in theory and idealistically, you want to be doing the right thing for the right reason, anyway.”
Gershengorn said any company dealing with the government “has to make sure it is using federal funds properly and keeping track of the dollars, particularly now for companies with subcontractors involved. Be watchful and careful that statements going to the government and monies coming from the government are correct.”
Lannon agreed that caution is key for clients. “The only way they can protect themselves is
to adopt and implement comprehensive compliance programs,” he said. “They need to spend the time and the manpower to have procedures in place that carefully track and account for federal funds.”
That can be expensive, however, and Lannon said it always comes down to a cost-benefit analysis: How much time and money do you spend playing defense?
“It’s a judgment call,” he said. “Our point is that the penalties are getting so high and enforcement seems to be more intense, so you may want to invest more in compliance efforts than you did previously.”
