An article published by two professors at the University of Chicago should be of some interest to readers of this blog. See, Blowing the Whistle: Which External Controls Best Reveal Corporate Fraud?
The link is to a newsletter distributed by the University of Chicago and not to the paper itself. While the sub-title of the linked article says, “New research suggests that the best way to promote fraud detection is to extend the Federal False Claims Act to corporate fraud.” At the risk of sounding snobby, I would like to point out that is not, strictly speaking, an accurate way to conceptualize what the study says.
The Federal False Claims Act, of course, applies to any person–whether a natural person or a corporation or both–who makes a false claim to the government for money. What the subheading means to say, I think, is that the unique qui tam structure of the Federal False Claims Act–which allows private citizens to prosecute cases on behalf of the government and calls for a percentage of the government’s recovery to be paid to the party who blew the whistle on the fraud–should be extended to the corporate governance sphere.
And thus the article strikes upon one of the themes of this blog: the utility and effectiveness of private law enforcement generally. We do not need to go so far as qui tam to see that private law enforcement is effective.
At any rate, check out the study, and I welcome your comments.
Assessment of penalties against parties liable under the Virginia Fraud Against Taxpayers Act and Federal False Claims Act
It is well known that the Virginia Fraud Against Taxpayers Act–like its counterpart the Federal False Claims Act–provides for treble damages against anyone submitting false claims to a government entity for payment.
Both the VFATA and the Federal False Claims Act also create civil penalties for each violation of the law–that is, for each false claim submitted for payment. These civil penalties are, for all practical purposes, a liquidated damages provision that encourages individuals to blow the whistle, and encourages lawyers to learn about and prosecute these claims, even in cases where the dollar amount of each individual false claim might be very small.
Civil penalties under the VFATA and the FCA are mandatory. A trial court may exercise its discretion as to whether the higher or lower amount of penalties is awarded, but the Court does not have discretion to reduce the number of penalties. See, United States v. Cato Bros. Inc., 273 F.2d 153 (4th Cir. 1959).
Civil penalties have been a feature of the Federal False Claims Act since it was first passed during the American Civil War in 1863. The civil penalties called for in the first Federal False Claims Act were $2,000 per claim. Currently, the VFATA provides for civil penalties of between $5,000 and $10,000 for each false claim submitted to the Commonwealth. The Federal False Claims Act provides for penalties of between $5,500 and $11,000 for each false claim.
As proof of Congress’ intent to add teeth to the FCA by adding civil penalties, consider that after adjusting for inflation, in today’s dollars the original False Claims Act called for penalties of $41,000 for each false claim.
Cook & Kitts, PLLC
One of my stated purposes in starting this blog was to create interest in the Virginia Fraud Against Taxpayers Act and in qui tam practice in general. In order for statutes such as the Federal False Claims Act and the Virginia Fraud Against Taxpayers Act to achieve their goals, it is necessary to build a public-private partnership between qui tam attorneys in private practice and our counterparts in the Virginia Office of the Attorney General and the United States Department of Justice.
Today’s blog will focus on the history of litigation under the VFATA since January 1, 2003 when it became law. I have attached to this entry a Share this on: Mixx Delicious Digg Facebook Twitter
I recommend everyone interested in this blog check out Stewart Weltman’s Lean and Mean Litigation blog. While it does not address qui tam or false claims practice in particular, its focus on efficient litigation practices is invaluable to those interested in qui tam practice.
Weltman’s blog ranges over a wide variety matters relevant to trial practice, from effective deposition techniques to the psychology of litigation, but in my mind one point is woven throughout his blog: in litigation, just like in any other competitive professional endeavor, lawyers who want to win cases focus on the fundamentals, because they know that the case is won or lost on those basic elements of this profession.
By that I mean the following.
People who really know football will agree, I think, that every football team in the NFL has basically equal talent. I know, not every quarterback is Dan Marino, and not every running back is Barry Sanders, but no one gets into the NFL without having a rare combination of skills and abilities, and on any given day, any team in the NFL has the ability to beat the daylights out of any other given team.
On the other hand, if you matched the very worst professional team against the very best Division I college team, I would put my money on the pros, and I think most people would agree with me. The disparity in skill and ability would be too great for the college team to compete.
But in a competition between two professional teams, the side that executes better on the fundamentals will and does win. If an NFL team with 12 straight losses plays an undefeated team, and the undefeated team proceeds to throw three interceptions and fumble the ball twice, they are almost certainly not going to win.
The legal profession, in my estimation, is more like the NFL. There are certainly a wide variety of skill levels present in the legal community, but at the end of the day anyone with a law license and a little experience can successfully get a case resolved against the best there is if they focus on the fundamentals, avoid sloppy mistakes, and work hard.
I have never met a lawyer that was not intelligent enough to handle a case well. I have met many, many lawyers who were too lazy to handle a case well. I have heard that the three most feared words in any lawyer’s vocabulary are “pro se litigant.” I can see the logic behind that, but I submit that the words “lazy opposing counsel” are right behind pro se litigants.
A lazy opposing counsel who fails to take the time to understand his or her case fails to be able to accurately assess the situation, fails to work with the other side in narrowing the issues for trial, and fails to be of any use whatsoever to his or her client. In my view, they also fail to live up to their oath as officers of the Court.
At any rate, if more people litigated cases the way Stewart Weltman describes, disputes between parties would be resolved more efficiently, litigants would spent less money on litigation, our court dockets would be less crowded, and life as a litigator would be much easier. Please check his blog out.
Zachary A. Kitts
Cook & Kitts, PLLC
More Good news to follow!
Senate Bill 2041, also known as the False Claims Act Corrections Act of 2007, has received overwhelming bipartisan support from the Senate Judiciary Committee, which has reported it out to the full Senate for consideration.
“This is common sense legislation that we expect to sail through the House and Senate,” said Jeb White, President of Taxpayers Against Fraud. “This bill has broad bi-partisan support. It’s hard to be opposed to building a better rat trap to catch corporate cheats, chiselers, and con artists.”
Proponents of S. 2041, note that the new bill clarifies the existing scope of False Claims Act liability, while closing a small number of loopholes that have allowed companies to steal taxpayer dollars with impunity. Specifically, S.2041 would:
S. 2041, and its analog in the U.S. House of Representatives, is supported by leadership in both parties, including Sen. Charles Grassley (R-IA), Senator Richard Durbin D-IL), Senator Patrick Leahy (D-VT), and Senator Arlen Specter (R-PA).
More Good news to follow!
An Open Letter to Bob McDonnell and Ken Cuccinelli (as well as all other Potential 2009 Candidates for Attorney General of Virginia)
Now that Senator Cuccinelli (R-Fairfax) has announced his intentions to run for Attorney General of the Commonwealth next year, I figured the time was right for this open letter.
Sen. Cuccinelli has a sterling opportunity before him to embrace the Virginia Fraud Against Taxpayers Act and make it part of his campaign. While Bob McDonnell has silently taken steps to support and strengthen the VFATA and the world-class attorneys in his office that prosecute these matters, he has failed to accept the credit for it publicly for reasons that escape me.
Since taking office as Attorney General, Bob McDonnell has improved upon a Medicaid Fraud Control Unit that was already first-class. The OAG obtained approval for the Virginia Fraud Against Taxpayers Act from the United States Department of Health and Human Services Office of the Inspector General, thus qualifying Virginia to relieve an additional 10% of the recoveries from all Medicaid fraud prosecutions. See my previous post: The Deficit Reduction Act of 2005 and the Virginia Fraud Against Taxpayers Act: One Year Anniversary.
On Bob McDonnell’s watch, Virginia has recovered literally hundreds of millions of dollars using the VFATA, and before his term is out the number will probably have a “b” after it (i.e., a billion dollars).
So why, with his campaign for Governor in full swing and with the Commonwealth pressed for money in this economic downturn, has McDonnell not been talking about the VFATA? I can’t ever remember a politician before Bob McDonnell who failed to take credit for his work, especially when he or she was seeking election to a higher office.
There have been mentions, of course. An excellent /files/116785-109034/CVS_Settlement_Agreement.pdf”>settlement with CVS Pharmacy on the order of $37 million dollars, of which more than $15 million went to several states. One of these states was Virginia.
Press releases by the various state Attorney Generals indicated that Kentucky relieved $1.36 million; California received $3.4 million; and Massachusetts received $3.7 million. States without a False Claims statute certified by the HHS Office of the Inspector General received the following: North Carolina, $900,000; Missouri, $929,987, and Maryland, $830,490.
Noticeably missing from the list is Virginia. On the day the CVS settlement was announced, most state AGs–being the elected officials that they are–did press releases to announce the good job they had done for their respective states. Virginia’s Attorney General, however, did a press release to announce the continuation of an anti-gang initiative in the Shenandoah Valley.
I could not find a press release from the OAG indicating that this settlement even took place. With our OIG-approved Fraud Against Taxpayers Act, Virginia’s share will of course be more than Maryland’s share–which would put the recovery in the seven figures–but my point is something else entirely.
I’m not trying to knock anti-gang initiatives, and I am certainly not trying to knock the Shenandoah Valley. What I am pointing out is that the OAG could and should do a better job of promoting its successes using the VFATA. Such efforts could lead to more interest on the part of the Virginia Bar in the VFATA, and in turn to more information flowing into the OAG.
The OAG did press releases for a Pennington Gap dentist who pled guilty to Medicaid fraud, and also for a Giles County physician who pled guilty to similar charges. Meanwhile, the Commonwealth has recovered tens of millions of dollars from big pharmaceutical companies as part of nationwide settlements, without so much as a whisper.
I find it interesting that McDonnell would want to trumpet small cases against individuals for stealing money from Medicare and Medicaid, and ignore the tens of millions recovered from large pharmaceutical companies who stole money from the Commonwealth.
To do so ignores the hard work and dedication of Virginia’s world-class Medicaid Fraud Control Unit and the entire Office of the Attorney General. But it also ignores the possibilities for the Commonwealth if civil case filings under the VFATA were increased.
It is true, of course, that McDonnell is hostile to trial lawyers, and that he can be said to be in favor of tort reform. I must say, however, that if his hostility to trial lawyers plays any role in his failure to promote the VFATA, he should make it clear now.
Meanwhile, Sen. Cuccinelli, if you are serious about not only winning the Office of Attorney General, but also about fulfilling your duties, you should make the Virginia Fraud Against Taxpayers Act one of your chief campaign planks.
If you don’t, someone else surely will.
Zachary A. Kitts
One issue specific to qui tam practice in Virginia state courts is the structure of the Circuit Courts and the implications of that structure for filing the complaint under seal. Unlike in states such as Maryland, Virginia has no uniform case management system in use in every Circuit Court.
The Clerk of the Court in Virginia is a Constitutional Office. The Clerk is elected every eight years in a county-wide election, and is free to implement whatever case management system he or she feels appropriate, with virtually no oversight from the Virginia Supreme Court. Given the disparities in size and wealth between the various counties in the Commonwealth, it is no surprise that the system that works quite well in Craig County might not work as well in Fairfax County, and vice versa. Given the sparsity of the statute’s use, those preparing to file a case under the Virginia Fraud Against Taxpayers Act should be aware that there almost certainly will not be a mechanism in place for filing a qui tam case under seal.
This is not a problem that should be taken lightly. The case absolutely must be filed under seal in order to comply with the statute, and that automatically makes things like generating a case number (while not publicly disclosing the name of the parties) and generating a receipt for the filing fee (again, without publicly disclosing the names of the parties) fairly complicated. Again, the answer to these problems will be different in each Circuit Court, further complicating the issue.
On the other hand, because the Clerk is an elected officer, they do tend to be more responsive and helpful than a non-elected official might be. When I filed the first Virginia Fraud Against Taxpayers Act case in Fairfax County, I found John Frey and his staff to be extremely professional and helpful. My advice is the following:
(1) Be sure you call the Clerk personally and give him or her a heads up about a week in advance. This gives them time to read the statute and think it over, and consult with Judges, members of their staff, and so forth.
(2) You must file the case with the Clerk in person, and make an appointment in advance to do so. Walk the Clerk’s Office through the whole procedure, and make certain that they understand that the normal procedures for sealing cases are not relevant to this case, because even the names of the parties cannot be made public.
(3) Politely request that the Clerk of Court either become the point of contact, or designate one specific person to be the point of contact. This is crucial, because after the complaint leaves your hands, if one specific contact person is not assigned you may find yourself unable to get any information about the case. Remember that whatever case management system the Clerk’s Office has in place works very well for them, but it is not designed to handle complaints filed under seal.
(4) When the Court order unsealing the case is issued, go back and read direction number (3) above. The standard processes the Clerk’s Office has in place to enter orders signed by Judges will not catch the order unsealing the case, and again, extra follow-up is important. You need to double check that the case is actually unsealed, and I again recommend going there in person and asking to see the file (or searching the information on-line if your Circuit Court is one that is available on-line). I have heard antidotal evidence of a case or two in Circuit Courts being served on the defendants and actively litigated without having been formally unsealed. Don’t let this happen to you.
(5) Once the case is unsealed, make sure the summons are issued. The rules of the Virginia Supreme Court call for summonses to be issued upon request by the plaintiff; the VFATA, on the other hand, calls for summonses to be issued upon a court order. Thus, without follow-up, the summonses may not issue automatically.
Once you have cleared these hurdles, litigation should, in theory, proceed just like any other case in Circuit Court.
Zachary A. Kitts
Cook & Kitts, PLLC
The Deficit Reduction Act of 2005 and the Virginia Fraud Against Taxpayers Act: One Year Anniversary
March 13, 2008 marked the one year anniversary of the Virginia Fraud Against Taxpayers Act’s /files/116785-109034/DRA_regs.pdf”>Deficit Reduction Act of 2005. In a nutshell, the Commonwealth now gets an extra 10% of all monies received in false claims cases brought under the Virginia statute.
This is one of the biggest reasons for Virginia’s jump in recoveries for Medicaid fraud.
Almost immediately, the Commonwealth began to experience the benefits of passing a OIG-approved false claims act. On May 10, 2007, for example, a nationwide settlement of more than $600 million was announced against the Purdue Frederick Company, Inc. Virginia’s cut was a total of $58.8 million dollars.
Next week, we will begin looking at what this has meant for the Commonwealth’s budget in the past year.
Zachary A. Kitts
Cook & Kitts, PLLC
LexisNexis and the National Institute for Trial Advocacy (NITA) to publish new practice commentaries on the Federal False Claims Act
LexisNexis will soon be publishing updated Practice Commentaries for the Federal False Claims Act (31 U.S.C.S 3729 et seq). The Practice Commentaries are published as part of a joint project with the National Institute for Trial Advocacy(NITA), and are designed to assist practitioners without prior experience in technical areas of practice.
I know this because I will be writing them myself. As some of you may know, this past summer I completed the Practice Commentaries on the Fair Labor Standards Act (29 U.S.C.S. 201 et seq.) which are now available electronically and in the print versions of the United States Code Service.
Headquartered at the University of Notre Dame, NITA is a leading provider of legal education programs and materials. In partnership with NITA, LexisNexis also delivers more than a dozen other practice-oriented NITA titles, such as “A Practical Guide to Federal Evidence,” “Arbitration Advocacy,” and “The Effective Deposition: Techniques and Strategies That Work.”
Zachary A. Kitts
Cook & Kitts, PLLC
Qui Tam Practice Example: Documentation of a Qui Tam Claim is not to be taken lightly by potential relators
One does not have to in employment law or qui tam practice very long before being confronted with a situation along the following lines:
An employee comes to the lawyer for representation in a whistleblower situation. The employee provides the attorney with documents from the employer that the employee considers to be confidential. The employee had legitimate access to the documents, but had not sought the employer’s permission to remove the documents. The lawyer’s review of the documents establishes that they contain no information protected by the attorney-client privilege or any other privilege recognized in Virginia. The only sense in which the documents are confidential is that the employer does not wish anyone outside the company to know of the contents of the documents. Were litigation pending, the documents would be subject to discovery. However, at this time, neither party has filed a lawsuit.
a. What are the attorney’s obligations regarding the documents: must he notify the employer, must he return the documents, and may he use the information?
The above hypothetical is from Virginia Legal Ethics Opinion 1786, and any lawyer interested in qui tam practice under the Virginia Fraud Against Taxpayers Act or the Federal False Claims Act should pay careful attention both to this opinion and to this area of law.
In formulating its answer, the Committee identified four factors as important ethical considerations: (1) the nature of the documents, (2) the nature of the sources of the information, (3) the method used by the client to gather the information, and (4) whether the attorney directed the client to gather the information.
The first thing the Committee pointed out is that the attorney can only use the information if Virginia Ethics Rules 3.4(a) and 4.4 are not violated. Rule 3.4(a) provides that
A lawyer shall not obstruct another party’s access to evidence or alter, destroy, or conceal a document having evidentiary value for the purpose of obstructing another party’s access to evidence. A lawyer shall not counsel or assist another person to do any such act.
If the potential relator removed the only originals from his or her employer, Virginia lawyers would clearly have a duty to take corrective measures. Just what those corrective measures are would depend on the specifics of each situation. Where the potential client is still employed by the potential defendant, the first and most obvious step is to have them replace the documents.
A much more difficult situation arises where the aspiring plaintiff/relator no longer has access to his or her former place of employment. The deliberations required in each instance for lawyers practicing in this area must focus on discerning when the duty of confidentiality applies and when the attorney is within one of the exceptions outlined in the rule. It is also important to note that Virginia Ethics Rule 8.4(a) prevents a lawyer from using another person as an instrumentality to accomplish something the lawyer herself could not do ethically.
The attorney must consider both confidences (i.e., information protected by the attorney/client privilege) and secrets (i.e., information the client has asked to be kept inviolate or that may embarrass or be detrimental to the client) in deciding whether the situation presents an exception to the duty of confidentiality.
Where the potential privilege is a creature of statute, one should of course look for a statutory exception. For example, HIPAA–which must be the most feared statute in the medical community, as well as the least understood–provides specific exceptions for whistleblowers who clandestinely copy and remove patient files that prove fraud, provided they have a reasonable belief that fraud is occurring and provided they share the records only with professionals for the purposes of learning whether fraud has been committed. See, 45 C.F.R. § 164.502(j).
The Committee also specifically cited the False Claims Act, and the duty it places on the lawyer and the plaintiff to file the original suit under seal, and keep all information pertaining to the suit confidential for a directed period of time. Where a specific whistleblower statute precludes the lawyer from sharing the information the opposing party, Virginia Ethics Rules 3.4(a) and 4.4 would not require the lawyer to breach that legal duty, the Committee found.
LEO 1786 simply deals with the lawyer’s duties and risks–what risks are there for the clients and potential whistleblowers?
Lest any potential qui tam relator think there is little to no risk to blowing the whistle, he or she should read the recent Virginia case of JDS Uniphase v. Jennings, 473 F.Supp.2d 697 (E.D.Va. 2007). JDSU filed suit against its former employee for breach of contract, breach of fiduciary duty, conversion, and violation of the Virginia Uniform Trade Secrets Act. Jennings had copied documents during his employment in order to provide support, he claimed, for a potential whistleblower claim under Sarbanes-Oxley.
In ruling against Jennings and granting summary judgment to JDSU, the Court’s analysis seemed to focus on the fact that it was a Sarbanes-Oxley-style claim and as a result, the documents could easily be subpoenaed or obtained via a document request once the matter was in litigation. Moreover, Sarbanes-Oxley exists, in large part, to prevent companies from destroying documentation of wrongdoing.
It seems likely that the Court might not make the same ruling in a False Claims Act action. The sorts of materials a whistleblower might want to document and copy in a False Claims case might not be subject to statutory protection like the materials Jennings copied in JDS Uniphase.
Finally, it is quite important to note that Judge Ellis concludes his opinion with the following:
Although summary judgment on JDSU’s breach of contract claim must be granted as to liability, the extent of the breach and the appropriate remedy remains to be determined. In particular, it remains to be determined (i) which, if not all, of the documents Jennings removed are proprietary within the meaning of the PIA, (ii) whether any remedy besides return of the documents to JDSU is appropriate, and (iii) whether JDSU intends to pursue its other causes of action in this matter.
Thus, defendants must still show damages as a result of the breach.
The simple fact is that, in the absence of specific statutory protections such as those provided for in HIPPA, the merits of the underlying claim factor into the level of risk that a potential whislteblower faces for copying and collecting documents during his or her employment.
This writer has yet to see a published opinion in which an employer had a viable counterclaim against a whistleblower who copied and documented actual fraud in the workplace. In other words, employers who have violated the False Claims Act, or the Virginia Fraud Against Taxpayers Act and are sued by an employee armed with enough evidence to support the claim, have bigger fish to fry. Such employers tend to spend little time worrying about the copying of documents.
Despite cases such as JDS Uniphase, employees who feel threatened by the fraudulent activity of their employer are going to continue to take steps to protect themselves and their interests. The fact that there are risks–potentially even severe ones–is not likely to serve as a deterrent, because they understand that they face severe risks either way.
Cook & Kitts, PLLC