Institute for Legal Reform Considers Changes to False Claims Act – Part Two

Yesterday, we introduced a series detailing proposed changes to the False Claims Act. These ideas are purported by the Institute for Legal Reform to be a fairer, more evenhanded approach to the allegedly disproportionate distribution of justice under the current FCA. For instance, the ILR believes in a multiplier system when determining a damages amount – in other words, dishonest companies who are honest about their dishonesty should receive lesser penalties than those who work to cover up their scams.

In today’s piece, we discuss the second of four proposed changes by the ILR, which seeks to address the problem of “parasitic relators.” Specifically, the ILR suggests a jurisdictional bar on qui tam (whistleblower) actions after the defendant has disclosed its misconduct to the government. However, upon further reflection, this particular proposal does not necessarily reward a company for being honest about dishonesty as the qui tam relator’s award comes off the top of the overall settlement or judgment.

However, it surely begs the question,  why would a company facing FCA allegations seek to limit or bar the whistleblower from receiving his or her due percentage merely based on the fact the company had already revealed its dishonesty to the government? Perhaps a further exploration of the proposal will shed greater light on the reasoning behind this seemingly illogical suggestion.

Details of the ILR’s Second Proposed Change to the FCA

Under the current provisions of the FCA, a whistleblower who comes forward with original, non-public information about fraudulent misconduct can receive up to thirty percent of the judgment or settlement amount recouped by the U.S. government. In many cases, these awards are extremely sizable, often in the millions of dollars. The whistleblower, also known as the qui tam plaintiff or relator, receives the award as a cut of the overall penalty, thereby lessening the government’s take. The award is not an additional penalty imposed on the defendant and does not affect the defendant’s final cost.

Under the proposal, the ILR would like to see a complete foreclosure on qui tam awards in any case involving a defendant who has already reported its misconduct to the Inspector General or other government agency. The ILR relies on language from one Fifth Circuit case, decided 14 years ago, which opines that current qui tam procedure allows the government to “purchase” information from private citizens at the expense of the U.S. Treasury.

In an effort to uphold parts of the FCA, the ILR suggests the bar would not apply in a situation wherein the relator filed the complaint prior to the defendant’s self-disclosure. It should also not apply where the defendant disclosed to a government entity other than the handful of those that “count,” to include the Inspector General, SEC, DOJ, etc. ILR similarly supports continued qui tam awards even where a company has already self-reported but the relator comes forward with additional new information.

Proposed Change Could Derail FCA’s Purpose of Incentivization 

One of the main reasons the FCA is so successful, and has since spawned several other similar qui tam provisions for relators of tax, securities and commodities fraud, is due to its ability to incentivize current or former employees, many of whom have been bullied into silence, to come forward and expose fraud committed by the company against the government.

By removing the qui tam incentive in certain scenarios, whistleblowers may be less apt to come forward and may see nothing but “down sides” in reporting their employer’s misdeeds. Aside from the few and far between qui tam plaintiffs who are legitimately out to seek a buck and could not care less about the overall cost of their company’s misgivings to society, most are eager to report what they have witnessed and hope to dissuade others from engaging in similar misconduct.