A whistleblower or qui tam action can provide financial rewards to individuals who have information that a company has committed fraud. The primary statutes under which this relief may be sought are the federal and state False Claims Acts, which are not specific to any particular type of fraud. In addition to the FCAs, there are other statutes that apply to tax fraud, securities fraud, and (in California) fraud on private insurance companies.
As a solo practitioner or member of a small firm, being able to recognize a potential whistleblower case, evaluate its potential, and understand the basics of filing a case on your own or who to team up with to do so is an easy, low-cost way to expand into a new practice area.
Federal and State False Claims Acts
The federal FCA is codified at 31 U.S.C. 3729, et seq. The District of Columbia and more than half of the states have passed similar, state-specific FCAs as well. The state and federal FCAs place power within the hands of private citizens, allowing them to become “private attorneys general” and file a lawsuit if they have knowledge of fraud or dishonesty in certain transactions with the government. The citizens who bring a case on behalf of the government are called “whistleblowers” or “relators.” Whistleblowers are provided with a financial reward if the suit is successful. The reward to the whistleblower is normally between 15 percent and 30 percent of the amount recovered by the government.
Any persons or entities with evidence of fraud against federal programs or contracts may file a qui tam lawsuit. A qui tam action must be confidentially filed in camera and under seal. The complaint and its contents must be kept confidential until the seal is lifted. The complaint is not served on the defendant. If the plaintiff violates the provisions of the seal, there could be consequences. A copy of the complaint, with a written disclosure statement of substantially all material evidence and information in the whistleblower’s possession, must be confidentially served on the government (U.S. Attorney and/or Attorney General) as specified by the statutes.
After the qui tam complaint is filed, the government often will seek to interview the whistleblower. The government then investigates the case. If, after the investigation, the government sees merit in the allegations, the government will intervene in the case. At this point, the case comes out from under seal, and the defendant is served with the complaint. Litigation then proceeds as would be typical of other lawsuits. If, on the other hand, the government does not see merit or does not have the resources to pursue the case, the government will decline intervention. After a case is declined, it will come out from under seal and the whistleblower can either voluntarily dismiss the case or pursue the case without government intervention.
It is important to note, however, that only a small percentage of whistleblower cases are successful, and cases under the FCAs can result in prolonged, complex, and expensive litigation. Prior to bringing a case under the FCA, whistleblowers and their attorneys should:
- Consider resources. The whistleblower and attorney must have substantial financial resources and evidence that the defendant committed fraud.
- Consider the amount of damages involved. In order to roughly approximate damages, the attorney should calculate how much the government was cheated or how much money the government paid that it should not have paid.
- Analyze the potential defendant to make sure it is capable of paying the potential damages. If the damages are too high, the defendant may be forced to close down its business or go into bankruptcy before it can pay what is owed.
- Consider the evidence. While documentation is not absolutely necessary, evidence—rather than mere suspicion—should be brought forward. This evidence cannot be solely from public sources, such as media, newspaper, or court documents.
- Analyze the theory of liability. Often, government regulations are unclear; defendants’ interpretations of the regulation are sometimes fair and not always knowingly fraudulent, thus defeating an FCA claim.
- Work with the potential whistleblower to weigh the pros and cons of bringing a case. For example, the financial reward and chances of recovering money should be weighed against reputational harm and ability to obtain gainful employment after the qui tam case is unsealed.
Whistleblowers cannot pursue tax fraud under the federal FCA or and most state FCAs. However, the Whistleblower Law of the Internal Revenue Service (IRS) rewards whistleblowers who lead the IRS to the recovery of unpaid taxes and/or violations of the internal revenue laws.
Section 922 of the Dodd-Frank Act provides rewards to whistleblowers for exposing significant violations of the securities laws. Unlike the FCAs, these frauds do not have to relate to government money. Types of fraud that can be pursued under this statute include bribery of foreign officials in violation of the Foreign Corrupt Practices Act and securities law violations that create an unfair playing field for the investing public.
California Insurance Fraud Prevention Act
California has a unique insurance fraud prevention act modeled after the federal FCA, with one major distinction: The government need not have suffered harm. Instead, the California Insurance Frauds Prevention Act, Ins. Code §§ 1871 et seq. (CIFPA), allows whistleblowers to fight insurance fraud by bringing qui tam cases against any person or company that defrauds private insurance companies.
Rather than bringing the case on behalf of the government and fellow taxpayers, the whistleblower brings the case on behalf of the government and fellow policyholders. The CIFPA operates much like the FCA. Cases are initially filed under seal so that the government has an opportunity to investigate the claims. Like its federal and state counterparts, the CIFPA makes it illegal to knowingly present false or fraudulent claims to insurers for payment of a loss or injury. In addition, the CIFPA forbids people and companies from paying incentives or kickbacks in exchange for obtaining insurance benefits.
Due to the complexity of whistleblower cases, the substantive and procedural peculiarities of the whistleblower laws, and the hidden traps for the unwary and inexperienced, solos and small firms new to this area of practice may want to partner with an attorney experienced in the whistleblower area. By partnering with a whistleblower attorney, you can stay active in the case and expand your practice area while relying on the attorney’s experience and skill to handle the majority of the case.
Published in GPSolo eReport, Volume 9, Number 5, December 2019. © 2019 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association or the Solo, Small Firm and General Practice Division.