Statement Of Senator Patrick Leahy (D-Vt.)

Chairman, Senate Judiciary Committee,

Hearing On ''The False Claims Act Corrections Act Of 2007 (S. 2041): Strengthening The Government's Most Effective Tool
Against Fraud For The 21st Century”

February 27, 2008

 

Nearly a century and half ago, President Abraham Lincoln pushed through the False Claims Act in order to combat rampant fraud and war profiteering during the Civil War.  It is fitting that we hold this hearing on legislation to strengthen “Lincoln's Law” the same month we celebrate President Lincoln’s birth. 

 

Today, again in the midst of war and facing reports of billions lost to fraud and waste in Iraq and Afghanistan, we are considering important new improvements to the False Claims Act – not only to punish and deter those who seek to defraud our nation, but also to recover billions in taxpayer dollars stolen from the public trust. 

 

In recent years, the False Claims Act has become the government's most effective tool against fraud.  Since 1986, it has been used to recover more than $20 billion lost to fraud, about half of that coming in just the past five years.  It has been used to punish contractors selling defective body armor to our police, to recover hundreds of millions from oil and gas companies bilking the government on valuable leases on federal land, to thwart major technology corporations from colluding in bids for government contracts, and to uncover massive fraud by insurance companies illegally shifting their losses from Hurricane Katrina to the Federal Government.

 

Perhaps the Act’s greatest success has been to expose complex schemes that have defrauded billions from federal health care programs.  Just this month, the drug company Merck agreed to pay a $650 million false claims settlement for illegally overcharging Medicaid for Vioxx, Zocor, and other drugs.  This settlement was among the largest ever under the False Claims Act, and part of more than five billion dollars recovered in health care cases just this decade. 

 

More than 600 false claims cases are still pending against health care and drug companies, and 150 of those involve overcharging the government for pharmaceuticals.  It seems clear that future false claims settlements will soon dwarf what we have seen so far. 

 

But these recent successes do not tell the full story, as the False Claims Act has yet to fulfill its true potential for combating fraud.  In 1986, Senator Grassley led the effort to reinvigorate the False Claims Act by amending the law to encourage citizens to report fraud against the government.  Since then, citizen whistleblowers have become the greatest source for uncovering complex frauds against the government, and their cases now account for about 70 percent of all the money recovered under the False Claims Act. Yet, opponents of the False Claims Act, those who defend the major defense contractors and big drug companies, have worked hard to undermine the original intent of these amendments, and a series of recent court decisions have placed new, technical impediments on false claims cases.  These court decisions threaten to weaken the law, and undo the successes of recent years. 

 

Today, we consider bipartisan legislation – the False Claims Act Corrections Act of 2007 – that will correct these judicial interpretation problems and strengthen the False Claims Act for the 21^st Century.  In doing so, I want to recognize the longstanding leadership of my friend Senator Chuck Grassley, who recently introduced this bill in order to restore the original intent of his 1986 amendments.  Senator Grassley has worked tirelessly over the years in defense of the False Claims Act, and I am proud to join with him, as well as Senators Durbin, Specter, and Whitehouse, in support of this bill.  I look forward to working with all these Senators and the Committee to make the False Claims Act even more effective, and to provide important, new protections for the citizen whistleblowers, who are so vital to uncovering these frauds.  

 

At our hearing today, we will ask important questions of the Justice Department, about its failure to dedicate sufficient lawyers and investigators to pursue these fraud cases.  The Justice Department has a backlog of more than 1,000 false claims cases, which at its current pace would take nearly 10 years to resolve, even if no new cases were brought.  When one considers that a recent study found that for every dollar spent enforcing the law in health care cases, the government recovered 15 dollars on behalf of the American taxpayer, there’s no excuse for failing to pursue these cases aggressively. 

 

In light of the politicization of the Bush Justice Department, many wonder whether it has resisted pursuing certain false claims cases for political reasons – most notably those involving contracting fraud related to the war in Iraq and Afghanistan.  Over the past five years, the Justice Department has participated in more than 600 false claims settlements nationwide and recovered more than $10 billion.  Yet, during that same time, the Justice Department participated in only five cases involving contracting fraud in Iraq and Afghanistan and has recovered a mere $16 million –  that's less than two tenths of one percent of the overall total.  Since 2002, our government has spent nearly $500 billion on the wars in Iraq and Afghanistan, much of it on government contracting, and billions of taxpayers’ dollars have been lost to fraud, waste, and abuse.  The False Claims Act was designed to attack such rampant war profiteering, and it is just as necessary today, as it was during the Civil War.  Iraq Study Group Chairman Lee Hamilton said in testimony to this Committee that nothing undermines our efforts in Iraq more than abuse and fraud in the reconstruction of the country.  I share these concerns with Chairman Hamilton and others who have recognized the tremendous harm this conduct causes.  Yet, this administration has apparently decided that pursuing unscrupulous defense contractors would be embarrassing and aggressively pursuing these frauds is not their priority. 

 

This morning we will hear from a courageous citizen whistleblower, who will tell us how she used the False Claims Act not only to hold one of our nations’ largest defense contractors to account, but also to keep the Justice Department honest.  Tina Gonter was a quality engineer was working for a submarine parts supplier in Ohio when she discovered the valves produced at her plant were faulty and could lead to catastrophic failure for our nation’s submarine fleet.  She reported the problem to her superiors, but they did nothing. After contacting a lawyer, she reported her observations to criminal investigators, she agreed to volunteer as an undercover informant, and wore a secret tape recorder gathering evidence against her bosses.  After the criminal investigation was complete, she filed a False Claims Act case, but even after her immediate bosses went to jail, the Justice Department refused to join her case against the defense contractors who also knew about and benefited from the fraud, and she pursued the case alone, until a judge scolded the Justice Department for not taking action and they joined in the settlement at the last minute.   

 

Ms. Gonter is a testament to the courage of citizen whistleblowers.  She risked her job and was retaliated against but she took on the powerful, moneyed defense contractors anyway.  These whistleblowers should be recognized as “citizen soldiers,” as President Lincoln called them when the False Claims Act was first passed so many years ago.  They keep government contractors honest and are responsible for returning billions to the American taxpayers.  Her story demonstrates how the False Claims Act works for all Americans, and why new protections for citizen whistleblowers in the bill we consider today are necessary to encourage others to come forward and tell their stories.

 

I expect that some may suggest that citizens should not be allowed to bring these cases against their employers, or that this law creates unnecessary incentives for lawsuits against defense contractors and drug companies.  But no one can deny that these citizen whistleblowers are now the single, most important source for uncovering fraud against the government, and their cases have returned tens of billions to the American taxpayers, money that the government would never have recovered without them.

 

I hope all Senators will join us to honor the legacy of Lincoln’s Law and take action now to strengthen and improve the False Claims Act for the next century.

 

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Witnesses Testimony: The False Claims Act Correction Act (S. 2041): Strengthening The Government’s Most Effective Tool Against Fraud For The 21^st Century

 

Michael F. Hertz, Deputy Assistant Attorney General, Civil Division; U.S. Department Of Justice, Washington, D.C.

Tina M. Gonter, Jacksonville, Fla.

The Honorable John. E. Clark, Of Counsel; Goode, Casseb, Jones, Riklin, Choate & Watson, P.C., San Antonio, Texas

John T. Boese, Partner; Fried, Frank, Harris, Shriver & Jacobson LLP, Washington, D.C.

Pamela H. Bucy, Bainbridge Professor of Law; University of Alabama School of Law, Tuscaloosa Ala.

 

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For Background

 

Summary of the False Claims Act Corrections Act of 2007

 

1.         Presentment Requirement/Trust and Administered Funds

 

            The bill corrects an erroneous interpretation of the FCA that was decided in United States ex. rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004).  In Totten, the D.C. Circuit Court of Appeals held that liability under the FCA can only attach if the claim is “presented to an officer or employee of the United States Government.”   Known as the presentment clause, the DC Circuit Court of Appeals interpreted this clause to limit recovery for frauds against the government by a contractor when the funds are expended by a government grantee, such as Amtrak or Medicaid.  This interpretation was also used, in part, to deny recovery in the Custer Battles Iraq contracting fraud case, where the money was entrusted to the Coalition Provisional Authority (CPA) in Iraq.  See U.S. ex rel. DRC., Inc. v. Custer Battles, L.L.C., 2006 WL 23887790 (E.D. Va. Aug. 16, 2006).

 

            As the dissent noted in Totten, the decision adopting the limiting interpretation, “where a grantee receives federal money in advance and then pays its contractors directly  the FCA will no longer provide an avenue to recover for false claims.”  The new language in this bill extends liability for any person who knowingly presents, or causes to be presented, a false or fraudulent claim for Government money or property for payment or approval.  With this change, false claims are covered whether made to the government itself or to an organization that receives federal funds.  With this change, the FCA would clearly apply to entities such as the Medicaid and the CPA.

 

2.         Government Whistleblowers

 

            The False Claims Act was originally designed to be an avenue for any individual to bring a claim for recovery when the predicate elements for the offense were met.  Government employees, however, are generally expected to report information regarding false claims up the chain of command before filing a FCA claim.  Recent court decisions have created a circuit split regarding whether and under what circumstances government employees can act as qui tam relators.

 

            The bill would eliminate any legal confusion by making it clear that government employees can file qui tam suits in narrow circumstances after following a clear procedure.  If the proper procedure is not followed, the Government has the right to dismiss the relator from the case.  If a person learned of the information that is the basis for the FCA claim in the course of their government employment, the person must disclose such information to their supervisor and to the agency’s designated Inspector General (or to the Attorney General directly if there is not an Inspector General).  If the Inspector General or the Attorney General fails to bring a claim based on the disclosed information within a year, the employee is free to bring the claim as a qui tam relator.

 

3.         Public Bar Disclosure

 

            The public disclosure bar was designed to prohibit FCA claims from being brought based on information that was already made public by government or media sources.  However, the bar has been interpreted broadly and the Supreme Court has held that a qui tam relator cannot share in a recovery when the facts that the relator presents to initiate the case are not the facts the defendant is ultimately convicted upon.  See Rockwell International Corp. v. United States, 549 U.S. ___, 127 S.Ct. 1397 (2007). Such an interpretation potentially precludes almost all relators from being awarded recovery and creates a disincentive for whistleblowers to file FCA cases.  This was not the spirit or the intent of the 1986 amendments to the FCA.  The bill would amend this section of the FCA to bar only cases where the relator provided no new information and to allow recovery where the relator provides independent information.  The bill would also make it clear that information obtained from a FOIA request or in exchanges with government employees does not constitute a public disclosure.   

 

4.         Relief from Retaliatory Actions

 

            The FCA was intended to protect all whistleblowers or individuals who assist in any stage of the process for bringing a charge of fraud.  Recent court decisions have interpreted the term employee narrowly such that agents, affiliates, and contractors were not protected.  This section replaces the term "employee" with the term "person" so that anyone who assists in an investigation is protected from retaliatory actions regardless of whether or not they are employees of the organization that is being charged with fraud.  Additionally, this section adds individuals associated with whistleblowers and people who attempt to stop violations of the False Claims Act to the list of persons who can claim relief from retaliatory actions under this section.

 

5.         Statute of Limitations

 

            The FCA currently has statute of limitations of 6 or 10 years given certain circumstances; the bill would amend the law to make the statute of limitations 10 years in all cases.  This would be important for longer term fraud investigations, such as those related to the Iraq war and reconstruction.

 

6.         Civil Investigative Demands

 

            The FCA has a Civil Investigative Demand (CID) provision which allow for federal lawyers to obtain information with the approval of the Attorney General.  The bill would allow the Attorney General to delegate this authority to the Deputy Attorney General, or an Assistant Attorney General, which would allow it to be used more effectively.  Also, the bill would clarify that, with approval from an Assistant Attorney General, information from a CID may be shared with a relator, which can be important to allow government investigators to interpret documents and understand a case (currently, DoJ does not allow this to happen).   

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