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Posted: June 27, 2016

Client Q&A: A Competitor Is Cheating The Government, Which Hurts Me And Taxpayers Too. What Can I Do?

A Competitor Is Cheating The Government, Which Hurts Me And Taxpayers Too. What Can I Do?

By Niall D. O’Murchadha

If you discover that someone—perhaps your employer or a competitor—is cheating the federal government, there are several things you can do.

One option is provided by a statute called the False Claims Act (“FCA”). If you become aware of fraud that falls within the FCA, you can file a lawsuit in the government’s name against the person or entity engaging in the fraud, known as a qui tam action. The FCA applies to any fraudulent claims for money that are submitted to the federal government, as well as any actions that falsely reduce the amount of money a person owes to the federal government. There also is a New York version of the False Claims Act.

Qui Tam Actions

An FCA qui tam action can be very lucrative to the person filing it (known as the “relator” rather than the “plaintiff”) because the FCA provides for triple damages as well as a civil penalty of up to $11,000 for each instance of fraud. These are calculated on the damages the government suffered, not the individual relator, so a large fraudulent scheme can give rise many millions of dollars in damages. Although the government keeps most of the recovery, the relator is entitled to a share of the recovery, which can go as high as 30%. Relators also get protection in the form of anonymity rights and anti-retaliation protections.

The downside of qui tam suits is that they are very complicated—the issues described in this document are just the tip of the iceberg:

First, although the relator brings the action, the government is the party in interest, so it has great influence over the proceedings. A qui tam case must be filed with the court under seal (in secret) and a copy must be sent to the applicable United States Attorney’s Office so that they can decide whether to pursue the case themselves. Having the government take over the case is very helpful to a relator, as it communicates to the judge (and the defendant) that the government thinks that the case has merit. However, the relator’s recovery is reduced if the government intervenes. Regardless of whether the government intervenes, it retains veto power over any settlement, and it decides—within statutory ranges—what final award a relator is entitled to. And although the government is supposed to decide whether to intervene within 60 days, as a practical matter that deadline is generally, and repeatedly, extended by the courts. Sometimes, the government can spend a year or more deciding whether to intervene, and the action cannot proceed until a decision has been made.

Second, a well-drafted qui tam complaint is very different from the usual complaint in a private action. Because securing government intervention is very helpful to the relator, the complaint should include not just allegations, but also all of the evidence available to the relator.

Third, not all frauds can give rise to a qui tam action. If the essential facts of the alleged violation are already public knowledge, if the government has already commenced an action against the defendant arising from the same conduct, if another qui tam action concerning the same conduct has been filed, or if the relator was convicted of a crime arising from their role in the fraud, the action cannot proceed. There are also bars against using evidence obtained by a breach of trust. For example, if the relator is an attorney, and learned of the fraud while representing the defendant, or the relator’s proof depends upon privileged documents, the entire action can be dismissed or the privileged evidence can be declared inadmissible.

Fourth, qui tam actions can last a long time and be expensive to prosecute. To be worth filing, these actions usually involve an entity that has submitted many false claims, and each one of these claims must be documented carefully. A demanding standard of proof also applies. It is not enough that the claim be inaccurate—the relator must show knowledge of falsity, or willful blindness or reckless indifference to the truth (applicable to say, a company that forwards false claims prepared by a rogue employee).

Fifth, the FCA does not apply to tax fraud or securities fraud, so qui tam suits cannot be brought in such instances. The IRS, SEC, and CFTC all have their own whistleblower programs that replace the qui tam remedy. They are similar in some ways, except that no action is filed—the whistleblower files a complaint with the relevant agency, and the agency then decides whether or not to investigate further or to begin an action. If money is recovered in excess of $1,000,000, the whistleblower is (usually) entitled to an award. As with qui tam actions, some people cannot receive awards—depending on the particular agency, these can include some attorneys, corporate executives, and persons who participated in the alleged fraud. The “public knowledge” bar also applies. There are also state-law False Claims laws, which cover fraud against state and local governments, and these vary from state to state.

Conclusion

In short, a successful qui tam or whistleblower action requires the relator to (a) marshal all the admissible evidence of fraud it can discover, (b) file a complaint that alleges as many specific fraudulent claims as possible, (c) if at all possible, persuade the United States Attorney to intervene in the action, (d) protect their anonymity for as long as possible, (e) litigate the action to a successful conclusion, and (f) persuade the government to award the highest amount possible. Furthermore, although retaliation against whistleblowers is prohibited by law, a relator may have to (g) enforce their rights if they are retaliated against.

Although a successful qui tam action can be very lucrative for the relator, an experienced lawyer is essential to achieving these goals and avoiding the many pitfalls outlined above. Schlam Stone & Dolan has significant experience in litigating qui tam actions and submitting whistleblower complaints, and we’d be happy to answer any of your specific questions.

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