Face-Off Over Fraud

A push to expand the False Claims Act stirs up an age-old clash between whistleblowers and contractors.

If you listen to government contractors who have been sued under the False Claims Act, prepare for a lecture on injustice and overreaching. Whistleblowers and their attorneys, of course, sing a different tune. In their view, the False Claims Act is the most effective deterrent ever invented to prevent contractors from defrauding the government.

Whatever the case, the legislation should be of keen interest to government contractors and agency personnel overseeing deals with companies. The number of cases filed under the law jumped from 60 in 1988 to more than 400 last year. Awards rose from less than $1 million in 1988 to more than $1 billion in 2003, with some cases now yielding judgments in the hundreds of millions. Health care cases, typically involving Medicare or Medicaid payments, and Defense contracting cases predominate.

"It's very difficult for auditors in the government to really grasp fraud," says James Moorman, president of Taxpayers Against Fraud, a group that supports the False Claims Act and is funded by plaintiffs' attorneys. "Without the whistleblowers, the government is dead in the water."

The False Claims Act was passed during the Civil War at the request of the Lincoln administration, which wanted to punish military contractors that cheated the government. In 1986, Sen. Charles Grassley, R-Iowa, spearheaded a successful effort to toughen the legislation. Under the new provisions, whistleblowers (who usually are company employees) can file cases against government contractor for fraud.

Under the act, nearly any violation of federal law can result in a false claim. The Justice Department investigates the cases and can decide to work with the whistleblowers' attorneys. If Justice declines a case, the whistleblower can move forward on his own. If a court finds that false claims were made or if the contractor settles, the government splits the award with the whistleblower, who can receive as much as 30 percent of the judgment, depending on his level of involvement. For some, it has meant multimillion-dollar payouts. Companies found to have violated the False Claims Act pay back treble damages to the government, in addition to fines for each false claim.

The biggest judgment came in 2000, when Columbia HCA, the largest for-profit hospital chain in the United States, agreed to pay more than $840 million, partly for making false claims.

According to Taxpayers Against Fraud, Columbia HCA billed the government for lab tests that were not medically necessary, exaggerated medical conditions to get higher reimbursements, and billed the government for advertising that it called community education.

This year, Grassley wants to extend the rules to the one major area where they do not now go: tax cases. He is pushing legislation that would require the IRS to reward corporate whistleblowers who expose tax violations with up to 30 percent of the take in any government recovery. The provision would not allow whistleblowers to move forward with cases that the government declines, however.

The Treasury Department, which now can pay whistleblowers at its discretion, has opposed the provision, according to Moorman. Treasury officials did not respond to requests for comment.

Opponents of the law say that expanding it would make companies more reluctant to make deals with the government. They say it already is having an impact on the willingness of small businesses to seek government contracts. "I've seen smaller companies literally run out of any kind of government contracting simply because it doesn't make sense," says Glenn V. Whitaker, a partner at the Columbus, Ohio-based law firm Vorys, Sater, Seymour and Pease.

That's a sentiment shared by Alan Chvotkin, senior vice president of the Arlington, Va.-based Professional Services Council, a trade group representing contractors. "The consequences fall disproportionately on the small companies," he says.

Whitaker recently represented a small printing company that worked with the Government Printing Office. Its contract did not allow subcontracting, but the company overlooked the provision. The firm was sued and ultimately hit with $850,000 in penalties. The printer now is out of the government contracting business. Whitaker declined to name his client, but remains angry about the fines. "The government couldn't show a single dollar of damage," he says.

More recently, Whitaker successfully defended Allison Engine Co., a Navy contractor and subsidiary of Rolls-Royce, in a case that originated in the mid-1990s. The company was accused by two former employees of overbilling the military and providing faulty generators for Navy ships. The company says the generators were fixed before installation.

The Justice Department declined to take the case, but it has dragged on for years as the two employees, with the help of Cincinnati attorney James B. Helmer Jr., have carried on. It has cost defendants millions in legal fees. A federal district court judge in Ohio found in the company's favor in March, determining that Helmer had not demonstrated that false claims were submitted to the government. The whistleblowers have appealed to the Federal Circuit Court.

Whitaker argues that the case, and all False Claims Act cases, should not go forward without Justice Department involvement. He also says the government should have to demonstrate damages to win large fines. Cases where laws are violated inadvertently, but no damages are incurred, should receive lesser penalties, Whitaker says.

The American Hospital Association and the Pharmaceutical Manufacturers of America, the industry trade group for drug makers, also seek reform. Still, industry has found it difficult to make headway, according to the Professional Services Council's Chvotkin. "Many of us in industry have made efforts to modify the False Claims Act. . . . But frankly, the politics are such that there is greater fear of opening up the law for change because we might get something worse than we have today," he says.

Nonetheless, last year, then-PhRMA President Alan F. Holmer wrote to Grassley arguing that the law provides disincentives for company employees to alert management to inadvertent billing problems, and forces companies to settle cases for fear of losing the ability to compete for government contracts, one of the law's possible penalties.

Grassley rejected Holmer's claim. In a return letter, he wrote, "The deck is in fact stacked against U.S. taxpayers, investigators and prosecutors, not corporate America. The lasting legacy of the [False Claims Act] is its ability to discourage fraud."