As we enter the last few weeks of June, Pennsylvania finds itself in an all too familiar situation. Once again, legislators and the Governor are scrambling to pass a budget before the constitutional authority to spend runs out on June 30. With a projected budget deficit of a billion dollars plus, legislators adverse to raising taxes to cover the budget hole look to other more creative ways to raise revenue. Why would we be discussing this in the context of civil justice reform you ask?
One very bad idea for revenue production that has been introduced in Pennsylvania is House Bill 1027 or a so-called “False Claims Act.” This measure may sound creative and appealing on the surface, but the consequences are fraught with peril.
The original “False Claims Act” came about when fraud in government contracts was pervasive during the American Civil War. Many corrupt contractors sold the army rancid food, defective weapons and weak horses and mules. There were very few law enforcement officers to investigate claims since most were involved with the effort to preserve the union.
In response, the United States Congress passed the False Claims Act on March 2, 1863. In 1986, Congress amended the False Claims Act to increase incentives for individuals to file lawsuits on behalf of the government. Since 1986, legal head hunters, called qui tam plaintiffs, have filed suit on behalf of the federal government to recover money paid based on inaccurate claims.
In 2005 Congress offered incentives for states to enact False Claims Acts by offering 10 percent of any federal recovery to states that have enacted a False Claims Act that meets the onerous federal requirements.
No taxpayer wants to see government pay claims based on incorrect or misleading information. But is a state False Claims Act the right remedy? No!
There are numerous problems with a False Claims Act. First, because many of these claims are related to human services and Medicaid, the Attorney General already has a Medicaid Fraud unit that does this kind of work. If more help is needed, the staff in this unit should be beefed up to handle the problem. Another issue is that the state act MUST conform to federal law or PA does not get an additional 10 percent from federal recoveries. Those advocating for such an act usually reject any attempts to correct the many deficiencies of the federal law for this reason. Chief among those flaws is the fact that fraud does not have to be proven! With millions of dollars and state contractors’ reputations at stake, intent to commit fraud should be proven under the act. Under the theory of implied false certification, a violation of any fine-print regulatory requirement, even though not mentioned in a government contract or invoice, can provide a basis for treble damages and penalties.
The system is also a financial bonanza for plaintiffs’ attorneys. Attorneys not only get their contingency fee percentage but ALSO recover attorney’s fees from defendants. False Claims acts are the only cases in which the contingency fee is not meant to cover all the attorney’s fees and expenses. Instead the attorney recovers the usual 33 percent that would otherwise be paid back to the state AND gets all expenses and fees paid for by the defendant on top of that! This is unheard of in litigation except for False Claims.
The biggest problem is conceptual. A state False Claims Act creates a perverse incentive for the qui tam plaintiffs to bring these suits, even after attorney generals deem them not worthy of filing suit. The qui tam is less interested in stopping so called “false claims” (remember, it doesn’t have to be fraud) than in filing suit to get wealthy!
Finally, no one can credibly predict the revenues a False Claims Act might produce to augment the state budget this year. Anyone who puts a number on it is engaging in pure guesswork!
And that will not lead to deficit reduction.