The Department of Justice (DOJ) has released its False Claims Act statistics for fiscal year 2010. According to this press release, the DOJ recovered $3 billion this year in False Claims Act recoveries, 83 percent, or $2.5 billion, of which involved health care fraud. The Obama Administration has made no secret of its focus on health care fraud, and health care companies have been in the news recently for getting caught up in false claims liability.
While the government made out pretty well this year, whistleblowers didn’t do too badly either, recovering $385 million. And one relator in particular has been in the news for her whistleblowing against one of the largest drug manufacturing companies in the world, GlaxoSmithKline, for one of the scariest health care frauds ever perpetrated.
The recent regulatory reform package known as the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the Securities and Exchange Commission to pay bounties to whistleblowers whose information results in a monetary recovery. In cases involving valuable information concerning securities fraud, the whistleblower payment can be as high as 30 percent of the total recovery. There is good reason to believe that these bounty provisions will extend to cases involving violations of the Foreign Corrupt Practices Act of 1977 (FCPA), which broadly prohibits the payment of bribes to foreign officials for the purpose of obtaining government contracts; securities fraud occurs because the bribes are seldom, if ever, properly accounted for on a company’s books. Recent FCPA cases have resulted in recoveries in the tens of millions of dollars.
Two recent court decisions and a 2004 statute affirm that False Claims Act whistleblowers have to pay income taxes on their relator’s share of any recovery―at ordinary income rates. Because the taxation questions that arise from whistleblower’s rewards can be significant, as shown below, it remains wise for any successful relator to seek proper and current tax advice.
The False Claims Act amendments found in the Fraud Recovery Enforcement Act of 2009 appear to broaden the “original source” rules by eliminating the requirement that a person must have “direct” knowledge of information underlying False Claims Act allegations.
On August 13, 2010, New York State Governor Paterson signed into law Assembly Bill 11568, which includes major changes to New York’s False Claims Act, enacted in 2007. According to legislators, the bill was passed to address several issues that have arisen in the courts since its enactment. It is also designed to assure that the New York law continues to keep pace with federal law. One of the biggest changes, a divergence from the federal False Claims Act, is a provision that allows qui tam plaintiffs to bring actions for tax fraud, but only when the net income or sales of the defendant total $1 million or more and the damages pleaded in the action exceed $350,000. It also strengthens the protections for whistleblowers, both private individuals and government employees, who uncover information concerning the misuse of government funds. These amendments took effect immediately and apply to all false claims, records, and statements made or used prior to, on, or after the April 1, 2007, effective date of the New York False Claims Act.
False Claims Act settlements are increasing dramatically in the medical industry, and many of the growing number of settlements are being paid by an unlikely target: hospitals. Over the past few months, Brookhaven Memorial Hospital Medical Center, in Long Island; Mercy Hospital, in Springfield, Massachusetts; and Southern New Hampshire Medical Center, in Nashua, New Hampshire, all resolved False Claims Act cases with considerable settlements. Most of the whistleblower claims were based on allegations of improper charges to obtain Medicare and Medicaid reimbursement.
Commentators are talking about the somewhat under-the-radar whistleblower provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act, recently signed into law by President Obama. This massive law is a sweeping overhaul of the financial system, and it includes a number of provisions expanding opportunities and increasing protections for whistleblowers. The National Whistleblower Center has compiled the sections of the act pertaining to whistleblowers and has posted it here.
A common scenario: a whistleblower files a solid False Claims Act complaint with an ample disclosure. The government takes the disclosure and complaint, does some preliminary investigation, and opens a criminal file and grand jury investigation. The civil False Claims Act goes dormant and the Federal Rule of Criminal Procedure 6(e) prohibits the U.S. attorney from discussing any grand jury evidence with the whistleblower or whistleblower’s counsel. De facto, the government has taken over the case. That can only be good. Simply, if there is a criminal conviction by plea or after trial, and the factual basis for the conviction is the same as that alleged in the complaint, the case is a winner. And if there is a plea, global settlements are the rule rather than the exception. So the relator gets paid at the same time the criminal plea is entered.
A recent decision by State Supreme Court Justice John M. Curran allows a New York State False Claims Act lawsuit brought by Kevin Grupp and Robert Moll, the owners of MVP Delivery and Logistics, to proceed. MVP Delivery is an independent trucking company that was subcontracted by DHL. Grupp and Moll are represented by the whistleblower attorneys at Hodgson Russ.
The National Law Journal recently published an article about the increase in whistleblower lawsuits that are based on a “false marking” theory of liability in the wake of the recent appellate court decision in The Forest Group Inc. v. Bon Tool Co. The “false marking” theory of liability encompasses labeling products or packaging with an expired patent or one that doesn’t cover the product’s technology. This decision is bad news for companies with patents.