A Brief History of the False Claims Act

The False Claims Act originated out of the Civil War as a result of the Union Army’s transactions with unscrupulous companies that provided supplies for battle. These companies, recognizing that their products were in high demand during wartime, and seeing little possibility for accountability, intentionally sold substandard goods at high prices, and often sent less than what was ordered and paid for. Reports of moth-eaten blankets, shoddily constructed shoes, old and diseased horses, and guns missing from their crates began to pop up all over the battlefields of the United States, and the federal government quickly intervened.

In 1862, in the midst of war, Congress started multiple investigations into the procurement fraud happening across the country, and heard from dozens of companies on the ease with which they were able to supply faulty products without repercussions from the government. In order to hold these companies accountable for their actions, Congress passed the original version of the False Claims Act on March 2nd, 1863, signed into law by President Abraham Lincoln. Included in the original legislation was:

• A possible fine of up to $2,000 for violating the FCA
• A possible prison sentence between one and five years
• Relators (or whistleblowers, who are plaintiffs in FCA cases) receiving 50% of what the government recovered
• The government recovering double of what was lost from the fraud
• A “Qui Tam” provision (Short for ‘qui tam pro domino rege quam pro se ipso in hac parte sequitur’ and Latin for ‘[he] who sues in this matter for the king as well as for himself’) to allow private citizens to sue on behalf of the government

For decades, the False Claims Act was left unchanged, but the United States’ entrance into the Second World War would bring about its first revisions. This was due to a legal loophole that opportunistic lawyers were using to the government's detriment. At the time, the United States Attorney General, Francis Biddle, would prosecute those who were defrauding the government through criminal charges, as opposed to civil cases under the False Claims Act, either directly or through a whistleblower's qui tam suit. Upon seeing criminal charges filed against companies defrauding the government, lawyers would quickly file complementary civil suits under the FCA, ensuring easy wins and big paydays. These actions upset many members of Congress, who viewed these lawyers’ actions as private citizens taking advantage of fraud against the federal government, which the False Claims Act was attempting to prevent.

In 1943, Congress passed its first revisions to the False Claims Act, and many of them were designed to limit the financial gains of lawyers and relators, and to limit the scope of the cases brought under the FCA. Most notably, the award to relators was cut in half, to 25% of the government recovery, and even less if the government decided not participate in the suit. In addition, massive restructuring of the qui tam provision occurred in the 1943 revisions, including a restriction against relators filing suits if the federal government already knew any information about the fraud, even in cases when the government opted against acting on the fraud itself. While these restrictions offset the perceived cash grabs by lawyers, it also meant that the personal risks in filing an FCA complaint outweighed the benefits of any financial reward. In addition, the brave individuals who took the risk of filing found their cases outright denied if the fraud had been previously mentioned in any government document. The amount of False Claims Act filings by relator/whistleblowers dropped tremendously. It would once again take an influx of military contracts, and fraud on the government resulting from them, for the FCA to be revisited.

This influx was the result of the Reagan administration’s drastic increases to the defense budget in the 1980s.Hundreds of new military contracts were entered into by the government for everything from vehicle manufacturing to plumbing in new buildings. Defense contractors sought to take advantage of the opportunities flooding through the Department of Defense by jacking up the prices on even the most mundane of objects. Reports of the military having to spend hundreds of dollars to purchase hammers and toilets infuriated lawmakers, who came to recognize that millions of dollars were being lost due to the fraud, and a False Claims Act that had overly deterred whistleblowers from filing new cases. Spearheaded by Senator Chuck Grassley of Iowa, The False Claims Amendment act was passed in 1986.Among its changes were the following:

• Language specifically protecting whistleblowers from retaliation by their employees for reporting fraud to the government
• Penalties were increased to up to $5000 per false claim, and three times actual damages
• Relators were eligible to receive up to 30% of the total recovery by the government, an increase of the previous limit
• The statute of limitations for qui tam suits was extended
• The restrictions set on cases where the government had knowledge were relaxed, and only certain instances of “public disclosures” would prevent a relator from pursuing a case

These amendments are widely seen as a watershed moment for the False Claims Act, as it provided whistleblowers with greater legal and financial incentives to expose fraud and pursue claims on behalf of the government. Since these amendments passed, case filings increased at a rapid rate, as did the size of financial settlements arising from them. Since the amendments in 1986, FCA cases have resulted in the recovery of over 44 billion dollars to the federal government; over 80 percent of those cases were initiated by whistleblowers.

The most recent, material revisions to the False Claims Act came in 2009 and 2010, with revisions centering on how the FCA would apply in the context of financial reform like the Dodd-Frank Wall Street Reform and Consumer Protection Act, or healthcare reform like the Affordable Care Act. The 2009 revisions were made in the Fraud Enforcement and Recovery Act, which clarified wording in the FCA that more closely aligned with the original intent of Congress in its 1986 reforms.

Additional revisions in 2010 were designed to give federal prosecutors new powers, including harsher penalties for kickbacks, a timeframe for Medicare and Medicaid providers to report and return overpayments, and an expansion of the word “claim” to account both for money spent on the government’s behalf as well as money paid by the government.

If you are aware of fraud against the government and have questions about how to proceed with an FCA case, call Goldberg Kohn at 312-284-3258 or contact us online. We are always willing to provide you with a free, confidential consultation to discuss a potential case.