Wednesday, March 19, 2008

Taxation By Litigation - A Dubious Proposal To Expand False Claims Act Liability

Neither of us, personally, knows a whole lot about the False Claims Act, but we know a stealth tax increase when we see one. There’s a bill floating around Washington, with the innocuous sounding name of “The False Claims Act Correction Act Of 2008” that isn’t really about “false” claims or “correction.”

Rather, it’s about amending the statute to call “false claims” things that aren’t really false at all. It’s also a revenue-raising scheme for the government, and in our day-to-day vocabulary, that’s called a “tax.”

What’s more, it’s a peculiarly inefficient means of raising revenue, since instead of having anybody fill out a tax form, the tax would be collected by private litigants authorized to sue a broad range of defendants unfortunate enough to fall within these amendments’ extraordinarily expansive definitions. If the amendments pass – not only will whatever the government’s increased collection of dollars be passed along to customers in the form of higher prices (as with any tax), but so will all of the litigation expenses incurred by both sides.

That some members of Congress are willing to tolerate these inefficiencies to get more money is a testament to how far they are willing to go, in the current climate, to avoid calling a “tax” by its proper name. H.R. Gross will surely be spinning in his Iowa grave if this latest Lawyer’s Full Employment Act becomes law.

What is the False Claims Act anyway?

Well, there are whole books (and legal practices – not either of ours) devoted to that subject, but essentially it started out as a statute allowing the government to prosecute contractors who defrauded it by selling, for example, rotten food to the army. So it’s a quasi-penal statute authorizing the recovery of treble damages. That’s OK with us as long as it’s being used to prosecute something that’s really fraudulent. The problem with these amendments is that anything resembling wrongdoing would be defined out of existence.

Historically, the False Claims Act has also authorized private suits on the government’s behalf – which in ubiquitous lawyer-speak are called “qui tam” actions. Don’t ask us what it stands for because we don’t know and we’d have to look it up. In this way, the False Claims Act is sort of like a throw back to the old days at sea when governments, unwilling to pay for their own navies, would let loose privateers to prey on an enemy’s nation’s shipping.

One man’s privateer was, of course, another man’s pirate.

Anyway, under the False Claims Act, privateering plaintiffs don’t have to be injured in any way by the conduct they’re suing over. All they have to do is claim that the government somehow lost money. The privateering qui tam plaintiffs get to keep for themselves as much as 30% of the loot. Once one of these private False Claim actions is filed, the government has the right to take a look and, if it thinks there’s merit to it, the government can take it over. The Feds do that only in a distinct minority of cases – unabashed cherry-picking – and they’re doing the right thing. That minority of government-adopted cases accounts for almost all the money the Feds makes through privateering under the False Claims Act.

So far, so good. But these amendments go way overboard. The privateers would become full-blown pirates.

Throughout the history of the False Claims Act, the privateers have had to be people in the private sector, quite frequently people working at the companies that become targets of suits. One purpose of the Act is to prevent fraud by enlisting would-be violators’ own personnel to inform on them (even though the pending amendments weaken those incentives somewhat, see §4(c)(3)(A)). We have no conceptual problem with that either. We recognize the value of deterrence.

But these amendments would allow most government employees, excepting only those whose job specifically is to investigate possible violations, to file suit for their own private benefit over things that they learn about on the job. §3(6)(a).

We don’t like that.

First, that creates blatant conflicts of interest – given how much money can be at stake, it’s an open invitation for government employees to manipulate their own files to create false impressions of criminality by the persons they regulate, and then to seek to profit from it.

Second, it undermines the government’s own chain of command. Rather than having complaints go through proper channels, government workers can bypass and ignore the decisions of their own agency’s internal controls system, and instead file a private suit for their own gain. §3(6)(A)(iv).

Third, it opens up a new ground for guerilla warfare inside the government, as government employees could use False Claims actions as a vehicle to oppose the policies of their own agency by suing those whom the agency engages to carry out that policy.

These amendments also do away with the requirement that the government actually suffer a loss. §2(a)(1) (way at the bottom of this section). More than anything else, that’s why this amounts to nothing more than a disguised tax increase; only collected by private litigants. The amendments consign actual loss to the dustbin of history. Rather, “damages” now include “the amount of money or property paid or approved because of the act of” the defendant – even if whatever it was that the government the government bought (or paid for) worked perfectly. Id.

That’s a pure windfall in our book – not only for the government, but even more for the privateering litigants and their lawyers. If the government got precisely what it paid for, then there’s no basis to send out the treble damage privateers. If, for example, the government paid for prescriptions that came about because of truthful off-label promotion, and the prescriptions provided the people who used them with precisely the beneficial health effects that were promised, there’s nothing that warrants a False Claims suit, even though off-label promotion is illegal (and, we’ve said, First Amendment protected). There’s no loss to anybody, so any attempt to recoup funds that paid for efficacious drugs is nothing more than a weirdly assessed tax.

Such a broad definition of “claim” also creates political thickets. Say you’re opposed to the government inoculating troops against anthrax. See, e.g., Doe v. Rumsfeld, 172 Fed. Appx. 327 (D.C. Cir. 2006). These amendments to the False Claims Act look broad enough that a politically motivated qui tam plaintiff could sue the contractor administering the shots (or selling the vaccine, or whatever) for treble damages because of the implied “false” claim that the vaccine is safe and effective. Just what we need, another avenue for politically motivated litigation.

Another thing about False Claims actions is that they’re supposed to be based upon real insider tips – not information that’s already publicly known. The one False Claims case Bexis ever was involved in, United States ex rel. Gilligan v. Medtronic, Inc., 403 F.3d 386 (6th Cir. 2005), was decided on that ground (although Bexis tried to argue something more exotic – that the particular claim should be dismissed as an attempt at private enforcement of the FDCA under 21 U.S.C. §337(a)). This bill would gut that restriction (only the government itself, and no longer defendants, could raise it), see §4(b), and let people bring suit over allegations that were already publicly known – and that the government presumably took a look at and decided wasn’t worth it’s time.

That’s simply a license to have litigation for litigation’s sake.

Another piece of potential mischief that these amendments would create is to open up as targets of litigation anybody who got money from somebody else (except individual government employees and some people who receive government benefits), when that somebody happened to use government funds of any sort that s/he received, in order to pay that money to the defendant. See §2(a)(1)(D-E); 2(b)(2)(A).

Think about that. These amendments propose liability for anything bought by a third party where the third party happened to use government funds to pay for it. Hordes of new defendants – none of which ever had direct dealings with the government – would become liable for treble damages for some sort of indirect false claim. Not only that, because they don’t do business with the government, these potential targets don’t even know there’s legislation out there that could affect them. Congress might slip this little nugget through with many of the affected parties never the wiser. Under this bizarre extension of False Claims Act liability to transactions not involving the government, we can see false claim suits by and against colleges and universities (indeed, anybody who gets grants) – against people who don’t pay back their student loans – all kinds of things ... and with treble damages and cost recoupment. There’s likely to be a lot of defendants out there who will never know what hit them.

And with treble damages, the incentive to bring such suits could be pretty high.

Aggravating everything else – this newly expanded liability would be retroactive (one could say ex post facto) to the enactment of the original False Claims Act (§9) (a long time ago, whenever that was). That would be sure to make people liable for actions they couldn’t have known were forbidden at the time, especially since the bill also allows liability without any intent to defraud. See §2(b)(1). And the statute of limitations would be extended to ten years – which is close to forever in litigation terms. §6(b).

Anyway, this proposed expansion of the False Claims Act seems to us like to be spherically bad policy (bad policy any way you look at it). If Congress thinks that it needs to raise taxes, we’d hope they’d just go about it directly. Don’t make us lawyers the government’s tax collectors – or worse, its privateers. Because of the inherent nature of adversary litigation, too much of the money will end up sticking to the fingers of the attorneys for both sides.

2 comments:

David said...

Two things to add about the FCA: 1) in addition to treble damages, there are statutory penalities (of about $10,000) for each false claim. These penalities can often exceed any actual damage to the government.
2) in addition to the up to 30% of the recovery, the qui tam plaintiff's attorneys can recover legal fees.

Beck/Herrmann said...

We're sure your right. That's the disadvantage of boldly going where we've never gone before. We miss stuff we could have used.