Thirty-six years ago, Congress decided to take a novel approach to fighting widespread fraud against the government. Defense contractors, healthcare providers, and others were draining the U.S. Treasury through well-hidden fraud schemes that the government lacked the resources and expertise to pursue. So Congress, on a bipartisan basis, resuscitated a Civil War–era law that empowered whistleblowers to pursue cases of fraud against the government. Congress rewrote the statute to strengthen and modernize it, offering rewards and protections for whistleblowers.
That legislation, the False Claims Amendments Act of 1986, has been transformative. Whistleblower cases filed under the False Claims Act have helped the government recover more than $47 billion plus tens of billions more in related criminal fines and state recoveries. In return, whistleblowers in those cases have been awarded over $7.8 billion. The False Claims Act has become the government’s main weapon for fighting fraud—about 80 percent of all government fraud recoveries since 2017 are attributable to qui tam cases brought by whistleblowers under the False Claims Act.
By offering an incentive to whistleblowers to expose fraud against the government, the law has helped protect patients who might be harmed by unnecessary surgery or wrongly prescribed medications, troops who are provided with faulty weapons, nursing home residents who are abused or neglected, U.S. manufacturers that are undercut by illegal imports, students who are ripped off by college loans, and many others.
The False Claims Act demonstrated that financial incentives are essential to creating a successful whistleblower program and motivating people to act for society’s benefit. Although some people will report wrongdoing without the promise of a reward, many more will step forward if there is one. That’s primarily because they have seen how people are retaliated against when they speak up and because of a “culture of silence” that dominates the corporate workplace. Whistleblowing entails serious risks to a person’s job, career, and personal life. The promise of a reward if a case is successful helps balance those risks.
Not surprisingly, the success of the False Claims Act and the high profile of many of those cases have helped change attitudes toward whistleblowers. Whistleblowers are more likely to be considered heroes these days than “rats” and “snitches” by the general public. This greater appreciation of whistleblowers has encouraged more people to step forward to report fraud and other wrongdoing.
Whistleblower cases also have raised awareness of how insidious and prevalent corporate fraud is and have fueled a push for transparency and accountability in business practices, not just in the United States but around the world. Companies now are deterred from wrongdoing because of a greater likelihood wrongdoing will be reported to enforcement agencies under a whistleblower program.
Additional Whistleblower Programs
The success of the False Claims Act inspired Congress to create an array of additional whistleblower reward and protection programs and to increase rewards for existing programs, such as the Internal Revenue Service (IRS) whistleblower program. The most effective of those so far has been the Securities and Exchange Commission (SEC) whistleblower program, which was created as part of the Dodd-Frank Act in 2010. Successful enforcement actions ordering more than $3.1 billion in sanctions have resulted from information and assistance whistleblowers have provided to the SEC. Out of that total, $760 million has been returned or is scheduled to be returned to harmed investors. Since it issued its first whistleblower award in 2012, the SEC has issued $942 million in awards. Dodd-Frank also created a similar whistleblower program at the Commodity Futures Trading Commission.
The pace of adopting whistleblower programs as a way for the government to enlist whistleblower assistance to expose wrongdoing has accelerated. Recent laws have included provisions to establish whistleblower reward and protection programs for those who report violations of anti-money-laundering laws as well as motor vehicle safety violations by manufacturers and auto dealers. In addition, more than three dozen states have adopted false claims laws based on the federal False Claims Act to provide an incentive to whistleblowers to report Medicaid fraud and other false claims involving state and local funds. Meanwhile, a number of countries have adopted new or stronger laws protecting all kinds of whistleblowers. Many also have considered adopting the U.S. approach of rewarding whistleblowers to help with government enforcement.
The U.S. approach has some key features that make it successful. Statutory minimums provide whistleblowers with certainty that they will get a reward if funds are collected as a result of their case. Before 1986, the government had discretion on whether to make whistleblower awards even if the government recovered funds. Before the amendments, whistleblowers in government programs could end up with nothing but unemployment. Whistleblowers now also are protected by significant penalties for retaliation and the government’s willingness to enforce the anti-retaliation provisions. In addition, the United States has a strong, professional, and collaborative whistleblower bar. The government often relies on the private bar’s resources to investigate and litigate whistleblower cases. It also is important that there has been long-standing and bipartisan support in Congress for whistleblower reward programs.
History of Whistleblower Laws
Benjamin Franklin succinctly summarized the cavalier attitude many have about cheating the government when he said, “There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government.”
Qui tam laws were used in the Middle Ages to recover funds for a cheated monarch at a time when there was no organized police force to maintain law and order. “Qui tam” is short for a Latin phrase, qui tam pro domino rege quam pro se ipso in hac parte sequitur, which translates to “he who brings an action for the king as well as for himself.”
During the Civil War, profiteers were cheating the government by selling the Union Army lame mules, worthless weapons, and other items that didn’t meet contract specifications. At President Lincoln’s behest, Congress enacted the False Claims Act in 1863 and included qui tam provisions that authorized private citizens to sue those who were defrauding the government and rewarded them with 50 percent of the funds they recovered for the Treasury. Liable defendants could be assessed double damages as well as a $2,000 penalty for each false claim. This history is why the False Claims Act also carries the moniker “Lincoln Law.”
The False Claims Act was little known and little used for more than a century. In 1943, Congress made major changes to the law that weakened it. The changes included drastically cutting the reward percentage and making it harder to bring a qui tam case.
In the early 1980s, outrageous billing practices of defense contractors—such as charging $640 for a toilet seat and $435 for a hammer—garnered big headlines. Huge amounts of public funds were being lost to fraud that the government didn’t know about, and the government lacked the resources to prosecute most cases of fraud even if the fraud was reported. Government investigators said it was difficult to get witnesses to talk because they were afraid they would get fired from their jobs for doing so.
The Amended False Claims Act
Spurred by these concerns, Congress amended the False Claims Act in 1986 with strong bipartisan support to make it much more effective to pursue cases of fraud against the government.
The amended law has some unique aspects. It created a public-private partnership to pursue fraud against the government by giving whistleblowers standing to sue in the government’s name. Whistleblowers, known as relators, can file qui tam cases to recover funds on the government’s behalf and have standing to pursue them on their own if the government decides not to intervene.
The False Claims Act requires that qui tam complaints be filed under seal to give the government time to investigate the allegations without alerting the target of the investigation. The rewards are structured to encourage whistleblowers and their counsel to invest their own resources in a case. If the government intervenes in the case, the reward ranges from 15 percent to 25 percent of the funds recovered, depending on the contributions the whistleblower and the whistleblower’s attorneys make to the case. If the government declines to intervene, the whistleblower could get as much as 30 percent of the funds recovered. To convince private attorneys to pursue qui tam cases, the False Claims Act says losing defendants must pay attorneys’ fees to the relator.
Qui tam cases cannot be based on publicly known information, but Congress eliminated in 1986 the overly restrictive bar against cases based on information the government already had in its possession.
Proof of specific intent was no longer required after the amendments. Entities that defraud the government could be liable if they act in “deliberate ignorance” or “reckless disregard” of the truth. The standard of proof reverted to a preponderance of the evidence, the norm for civil cases, rather than clear and convincing evidence as in the previous iteration of the law. Liable entities can be required to pay as much as treble damages and thousands of dollars in penalties for each false claim.
With such steep damages and penalties, court judgments and settlements can be huge. That means whistleblower rewards also can be large. The largest individual federal reward in a qui tam case was to the relator in a case against GlaxoSmithKline (GSK) that alleged one of its drug manufacturing facilities had serious deficiencies, including product contamination. GSK paid $750 million to settle the case and criminal charges; the whistleblower was awarded $96 million based on the civil settlement with the federal government.
The promise of redress against job retaliation also has encouraged whistleblowers to come forward. Anyone who files a qui tam lawsuit or is considering filing a qui tam lawsuit—whether that person is an employee, contractor, or agent—is protected from employment retaliation under the federal False Claims Act. The law says that “if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment,” then that individual can seek compensation.
Employees who suffer retaliation are entitled “to all relief necessary to make the employee . . . whole,” according to the law. This can include reinstatement, two times the amount of back pay, interest on back pay, reimbursement of litigation costs and reasonable attorneys’ fees, and compensation for special damages.
The False Claims Act also has a strong deterrent effect. Qui tam cases expose practices that could be industrywide and have a positive effect in deterring those fraudulent practices. In addition, companies are aware that any employee could become a whistleblower, increasing the risk that a company will get caught if it cheats the government.
Even though the government usually takes the lead in litigating successful whistleblower cases, lawyers for whistleblowers are often indispensable to the success of a case.
Attorneys for Whistleblowers
First, whistleblower attorneys generally vet allegations before a case is filed to ensure that there is a violation of the relevant law and that there is sufficient evidence to prove it. By screening potential qui tam cases, whistleblower attorneys help discourage cases that lack merit, are not appropriately brought under the False Claims Act, or fall outside the statute of limitations. Based on our experience, we estimate only 10 percent of the people who have contacted a lawyer proceed to file a qui tam complaint. For the past 10 years, more than 600 federal qui tam cases have been filed annually.
There are many reasons vetting reduces the number of qui tam cases that otherwise might get filed. Many concerns people have are not covered by the False Claims Act, such as sexual harassment and discrimination or frauds that do not involve harm to the government. The government must suffer a financial loss for there to be grounds for a qui tam lawsuit. The defendant must have knowingly submitted a false claim, caused others to submit a false claim, or avoided paying money owed to the government.
Others who want to file qui tam cases may have suspicions of fraud, but they don’t have sufficient evidence to back that up. To convince the government to pursue a qui tam case, a whistleblower generally has to allege a significant fraud or one that is of a heinous nature, such as causing harm to patients, and provide strong evidence to support the allegations.
Unlike in qui tam cases, whistleblowers are not required to have attorneys file reports under other whistleblower reward programs, such as those at the SEC and Commodities Futures Trading Commission. Those agencies require whistleblowers to work with an attorney to file claims only if they want to do so anonymously and receive a reward. Many whistleblowers choose to hire attorneys anyway so that they can file the most effective and informative report to the relevant agency to convince it to investigate and to protect their rights to an award.
Second, attorneys for whistleblowers can persuasively explain in a whistleblower’s complaint or submission exactly what law or regulation was violated and how that was done. This makes it much more likely that the allegations will get the attention they deserve. Faced with thousands of whistleblower submissions each year, government attorneys don’t have the time to analyze each one to determine what the violation was or whether there was a violation. Both Department of Justice and SEC officials have said that many whistleblower submissions lack that basic information, much to their consternation.
Third, effective whistleblowers’ counsel do much more than write up a complaint or agency submission based on their client’s information alone, and then sit back and wait for the Justice Department or other government agency to take over the case. Before writing a complaint or whistleblower submission, the whistleblower’s attorney gathers as much evidence as possible. This means sometimes hiring experts to analyze billing patterns or conduct other analysis that would be helpful to proving a case. After filing a qui tam complaint or a whistleblower submission, experienced whistleblower attorneys know to seek an opportunity to present the case in great detail to convince the government attorneys that the allegations merit an investigation that is likely to result in a successful case or enforcement action.
Fourth, whistleblower counsel can play important roles in qui tam cases during litigation, depending on the government’s needs. Working in effect as co-counsel with the government, whistleblower attorneys help level the playing field for under-resourced government attorneys to take on defendants who have teams of lawyers.
In a landmark case that our law firm brought on behalf of two whistleblowers against the for-profit hospital chain HCA, we pulled together six law firms to help the government pursue the litigation. More than 40 private attorneys put in over 75,000 hours and spent nearly $30 million in legal and accounting resources in a case that alleged HCA engaged in significant Medicare billing fraud for years. HCA settled that case and others for a total of $881 million, which was part of a series of Medicare fraud settlements by HCA that totaled more than $1.7 billion.
Fifth, for qui tam complaints, whistleblower attorneys can litigate cases on their own if the government declines to intervene or doesn’t make an intervention decision in time to meet a court-ordered deadline. The latter is happening more frequently than in the past as judges come under increasing pressure to clear their dockets. Qui tam cases pursued without the government’s intervention have recovered over $2.9 billion.
Sixth, whistleblower lawyers and their successful pursuit of certain types of qui tam cases have opened new areas of fraud enforcement that the Department of Justice was initially skeptical of pursuing under the False Claims Act. These include “off-label” marketing cases against pharmaceutical companies for promoting drugs to doctors for uses not approved by the Federal Drug Administration (“off-label” uses) that then were prescribed to Medicare and Medicaid patients; cases against pharma companies for submitting inflated benchmarks (the “average wholesale price”) used to set the prices Medicare and Medicaid pay for drugs; and “yield-burning” by investment banks that charged excessive prices for U.S. securities sold to municipalities in connection with certain types of tax-exempt bond refinancings. Just these three new areas recovered billions of dollars for the United States—a staggering sum by any measure.
Since the first off-label marketing case was brought by a whistleblower, the government has collected many billions from pharma companies alone in off-label marketing cases, and it stopped a practice that was endangering countless people who were wrongly prescribed medications for off-label uses, including dangerous opioids. Pharma companies have paid hundreds of millions for charging government healthcare programs inflated prices based on false benchmark data. The yield-burning case brought by a former banking insider stopped the practice and recovered more than $200 million in qui tam settlements from two dozen Wall Street banks.
Seventh, attorneys help maximize awards for their whistleblower clients through negotiations with the government or by going to court to challenge the government’s decision. For instance, a court ordered the Justice Department to increase one client’s reward by $7.5 million based on our arguments, enhancing the $13.7 million awarded to him originally. More recently, we convinced the SEC to increase an award to a client—who originally pursued her claim without legal counsel—to $3.6 million, well over twice the amount SEC staff recommended in a preliminary decision.
The success of whistleblower reward programs ensures that they are here to stay and may be used in other areas of government enforcement. Whistleblower programs are an efficient and effective enforcement tool, with insiders providing detailed information and evidence about fraudulent practices. On average, 13 qui tam lawsuits are filed each week. The SEC also is flooded with whistleblower submissions, with 5,200 whistleblower submissions in fiscal year 2019—a typical year.
The False Claims Act would benefit the public fisc even more if the law were amended to allow whistleblowers to recover tax funds through qui tam cases. Although the IRS has a whistleblower program, it lacks a qui tam option. Whistleblowers can only submit information to the IRS and hope the IRS will act on it. The IRS is woefully understaffed and under-resourced. If qui tam cases were allowed in tax matters, whistleblowers and their qui tam counsel working with the IRS would help make a dent in the estimated $1 trillion annual tax gap—the difference between the amount of taxes owed and the amount collected.
When New York adopted its False Claims Act, it allowed individuals to bring qui tam lawsuits against those who knowingly or with reckless disregard fail to pay taxes they owe the state. There have been a number of New York state tax recoveries totaling hundreds of millions of dollars as a result, proving that a qui tam law is a successful mechanism to pursue tax fraud or other tax violations.
Congress and whistleblower advocates will continue to look for new areas of enforcement that would benefit from whistleblowers’ assistance. After withstanding assaults on its constitutionality over the years, the False Claims Act has become the pillar of fraud enforcement and a model for the world. Its impact will continue to grow.