THE NEW YORK STATE FALSE CLAIMS ACT
On April 1, 2007, New York State passed a False Claims Act, NY State. Fin. Law, ch. 13 §§ 187-194. This landmark law allows the state and any local government to bring a civil action to recover three times its financial losses from fraud. It also allows a private citizen with inside knowledge of such fraud to bring a qui tam action on behalf of the government and to receive up to 30% of the proceeds.
While inspired by concerns about fraud in the state’s $47 billion Medicaid budget -- which is estimated to be in the order of 10% -- the legislation covers all kinds of fraud on the state, as well as fraud on local governments. With a total New York state budget of $120.9 billion, and a budget for New York City alone of around $50 billion, the law has the potential to return billions in stolen public funds to the state’s taxpayers.
The Federal FCA
If experience with the federal False Claims Act, 31 U.S.C. 3729 ff. is any guide, it certainly will do so. In the past two decades, more than $20 billion has been recovered under the federal statute, the bulk of it in qui tam whistleblower cases. Qui tam whistleblowers (or “relators”) have become the federal government’s partners in fraud detection and recovery. Hospitals, pharmaceutical companies, home health providers, clinical laboratories, military contractors, securities firms and oil companies have paid nine figure settlements. Qui tam whistleblowers collectively have received more than $1.8 billion for their information and assistance.
The federal FCA was an initiative of the Lincoln Administration. Even in 1863, qui tam was not a novel concept. Ten of the 14 statutes passed by the first Congress contained qui tam provisions, including statutes relating to bank regulation, import duties and copyright infringement. As a California court noted in 1989, the qui tam laws "are firmly rooted in the American legal tradition." U.S. ex rel. Stillwell v. Hughes Helicopters, 714 F. Supp. 1084, 1086 (C.D. Cal. 1989)
In 1986, the federal FCA was overhauled and strengthened in response to reports of pervasive fraud against federal agencies. "[O]nly a coordinated effort of both the Government and the citizenry," wrote the Senate Committee on the Judiciary, "will decrease this wave of defrauding public funds." S. Rep. No. 345, 99th Cong., 2nd Sess. (July 28, 1986), reprinted in U.S. Code Cong. & Admin. News 5266, p.2.
Since 1986, more than half of all federal qui tam cases have involved health care fraud. In New York State, Medicaid and other health care spending will no doubt also be a focus, but coverage extends to other areas of state and local government spending : public construction, education, roads, bridges and transportation, the environment, criminal justice, public housing, and so on. The one major exclusion is tax fraud. While tax fraud is also excluded in the federal False Claims Act, the 2006 Tax Relief and Health Care Act provides rewards of up to 30% for persons reporting fraud on the IRS. New York State has no equivalent.
The Deficit Reduction Act
As the highest-spending state in the nation, the absence of a New York State FCA had been a conspicuous void since states started passing laws similar to the federal statute 20 years ago. Still, New York is amongst the first twenty states to do so -- along with California, Texas, Florida, Massachusetts and Illinois -- and the very first state to do so since the enactment of the federal Deficit Reduction Act (“DRA”) in 2005. Georgia has since become the second state to do so. Ga. Code Ann. §§ 49-4-168 to 49-4-168.6 (enacted May 24, 2006).
Under Section 6031 of the DRA, a state false claims act, in order to receive an additional 10% share of the state’s recoveries in Medicaid fraud cases, must contain provisions that are “at least as effective in rewarding and facilitating qui tam actions” as those in the federal FCA. Medicaid is funded by federal and state governments in proportions varying between states, from about 70-30 to about 50-50. An additional 10% in a 50-50 state such as New York amounts to at least 20% because the DRA incentive transforms a 50-50 share into a 60-40 share.
On August 18, 2006, the Department of Health and Human Services, Office of the Inspector General (“HHS OIG”) released Guidelines for Evaluating State False Claims Acts (“HHS OIG Guidelines”), to guide the HHS OIG in determining whether an existing or proposed state law meets the requirements of the DRA. See Federal Register, Vol. 71, No. 161, page 48552 (August 21, 2006).
Initially, the HHS OIG rejected 7 of the 10 state DRA compliance applications, making a firm statement that it takes a strict construction approach to interpreting the DRA requirement that the state false claims act be “at least as effective in rewarding and facilitating qui tam actions.” For example, the California False Claims Act was rejected because it set a maximum, but not a minimum, for civil penalties. See http://oig.hhs.gov/fraud/falseclaimsact.html. Since then, some of the states with initially rejected false claims acts -- including Texas, Louisiana, California, Florida, and Nevada -- have passed amendments to their statutes in order to bring them into DRA compliance. The New York FCA was judged to be DRA-compliant by the HHS OIG in August 2007.
Important facts about the New York State qui tam law
In the interests of DRA-compliance, the New York State FCA closely tracks its federal counterpart. This has the added benefit of providing some predictability about how courts will interpret its various provisions.
- The scope is broad: The FCA covers almost any false claim or statement that involves a demand for payment from the state or a local government or which deprives it of revenues in some way. Also covered are so-called “reverse false claims,” where an entity fails to pay the government a rebate, royalty or similar sum that it is legally obliged to pay. Sec. 189(1).
- Procedure: A qui tam complaint is initially filed in court under seal to allow the government to investigate the allegations in confidence. A copy of the complaint, together with a statement of facts and documents relevant to the action, are served on the state, which has 60 days (plus extensions of time) to conduct an investigation. Sec. 190(2)(b). Based on federal practices, the state can be expected to obtain numerous seal extensions often extending over several years. At the end of this period, the attorney general decides whether to join the action or to allow the relator to pursue the action alone. The attorney general may “convert” the action into an attorney general civil action, “intervene in” the action “so as to aid and assist the plaintiff in the action,” or decline to participate in the action, in which case the relator may pursue the action. Sec. 190(2)(c). If the relator elects to go forward, the state has the right to intervene at a later date upon a showing to the court of good cause. Sec. 190(5)(a).
In the federal arena, declined cases have accounted for a small fraction of qui tam recoveries. Nonetheless, $400 million has been recovered in such cases since 1986. A declination does not necessarily amount to a vote of no-confidence on the merits. Sometimes it is driven by resource constraints or other considerations wholly unrelated to the viability of the claims. The decision whether to go forward in a declined case must always be made according to the individual circumstances.
- The FCA is a “first-in-time, first-in-right” statute: In order to encourage the prompt reporting of fraud, the FCA bars any qui tam case that is based on the “facts underlying” a pre-existing qui tam action. Sec. 190(4). Federal courts have interpreted this wording broadly, so that qui tam relators with knowledge of the same fraud essentially are in a “race to the courthouse,” even if the second-filer has more detailed knowledge and/or provides the government with more assistance. Similarly, the FCA provides that if a qui tam plaintiff files the same case as a pre-existing civil case filed by government, the qui tam action is barred. Sec. 190(9)(a).
- FCA cases cannot be based on information that is in the public domain: The qui tam law is designed to encourage individuals with inside knowledge of fraud on the government to come forward and report it. Therefore, the FCA prohibits qui tam cases in which the plaintiff seeks to rely on information that is acquired from public sources -- so-called "parasitic" claims -- unless the qui tam plaintiff is an "original source" of the information. Sec. 190(9)(b). An "original source" is defined as someone who has direct and independent knowledge of the information and who has reported it to the government before filing the case. Sec. 188(5).
In general, the "public disclosure" bar operates to ensure that qui tam suits cannot be filed by persons who have contributed nothing substantial to uncovering and reporting the essential elements of the case. Therefore, “public disclosure” is defined in the FCA to include not only information in the news media but information obtained from a civil or criminal hearing and certain types of government investigations. The federal courts have ruled variously on the public disclosure bar and the law is complex. The public disclosure bar in the New York State FCA should escape some of this complexity because of the use of the term “derived from” a public disclosure instead of “based on” one. This effectively adopts Fourth and Seventh Circuit rulings that suits are not barred if the relator did not know of the public disclosure and did not rely on it.
- Factors governing the qui tam plaintiff's share: The FCA provides for a qui tam reward of 15-25% if the government intervenes in, or joins, the case, and 25-30% if the government declines to intervene and the plaintiff pursues the action alone. Sec. 190(6). If the relator relied on “specific information” in certain public or government sources, a 10% cap applies. Sec. 190(6)(a). The FCA provides little guidance on what determines the size of the qui tam reward, stating only that it depends on the extent to which the relator "substantially contributed" to the prosecution of the case. Under the federal FCA, the share usually is negotiated with the Department of Justice pursuant to its internal Guidelines. These provide for relator share to be increased above the 15% threshold according to such factors as promptness in reporting the fraud, whether the relator tried to stop it, the extent of the plaintiff's knowledge of the fraud, and his/her assistance to the government.
- Relators who were involved in the fraud may have their reward substantially reduced or eliminated: The court is authorized to reduce the reward of a qui tam plaintiff who "planned and initiated" the wrongdoing. If the person is criminally convicted for conduct arising from his or her role in the fraud, the person must be dismissed from the case and will not receive any share of the proceeds. Sec. 190(8).
- Employment retaliation: Employees whose employers retaliate against them because of their acts in furtherance of a qui tam action can receive double the amount of back pay plus interest, reinstatement and compensation for “special damages.” Sec. 191.
- Attorneys fees and costs: In a successful suit, both the government’s and the relator's attorney fees and costs are recoverable from the defendant. Sec. 190(7).
- Statute of Limitations and Retroactivity: The New York State FCA is expressly retroactive and thus any claims within the statutory limitations period can be immediately filed. A case must be brought within six years of the violation or within three years of the date the government learns, or should have learned, of the facts material to the violation, but in no event more than ten years after the violation. Sec. 192.
Conclusion
If the track record of the federal FCA is any guide, the New York FCA will have a remedial and deterrent impact on fraud in state and city-funded projects and programs. As the Department of Justice has observed, the sheer volume of recoveries under the federal FCA, "demonstrates that the public-private partnership encouraged by the statute works and is an effective tool in our continuing fight against the fraudulent use of public funds." (Press Release, U.S. Department of Justice, Justice Department Recovers Over $1 Billion In Qui Tam Awards And Settlements, October 18, 1995.)
The New York FCA also should prove to be cost-effective. A 2006 study prepared by economist Jack Meyer for the Taxpayers Against Fraud Education Fund shows how qui tam whistleblowers supplement government enforcement efforts. Meyer looked at total federal health care investigation and prosecution costs, and compared them to the resulting monetary recoveries to the federal Treasury in the five years from 2000 through 2004. After deducting qui tam awards, the study concluded that for every $1 invested in the investigation and prosecution of health care fraud, $15 is returned to the taxpayers. (Fighting Medicare Fraud: More Bang for the Federal Buck, prepared for Taxpayers Against Fraud Education Fund by Jack A. Meyer, President, Economic and Social Research Institute, July 2006. www.taf.org.)
The FCA provides New York with an established framework for uncovering fraud in state government programs and returning defrauded funds to government agencies. It is now up to the people of New York State to give it life.
