The Federal Government spends more than $3 trillion a year on everything from healthcare, defense, education, and housing, to technology, research and beyond. With that much money on the table, efforts to defraud the government are inevitable.

Identifying, stopping or deterring fraud, however, can be difficult, given the challenging nature of detecting fraud and allocating resources to confront it. The False Claims Act, 31 U.S.C. § 3729, et seq. has become a powerful tool in the fight against fraud. Through a unique set of incentives, protections, and procedures, the Act creates a partnership between the government and private citizens to recover funds wrongfully taken from the government, and in effect, the taxpaying public.

A Little History

The False Claims Act has its roots in the Civil War, when the federal budget swelled to meet the needs of the Union Army. Contractors took advantage of this environment, selling the government shoddy and nonfunctioning equipment and supplies.

To combat the problem, Congress enacted a law in 1863 to provide incentives to private individuals to bring suits on behalf of the government to redress fraud. The new law drew upon a concept called a “qui tam” action that was brought to the American colonies from England, where it had been used since the Middle Ages.

In a qui tam action, a private person stands in the shoes of the government to pursue the government’s claim, and in exchange, receives a percentage of the government’s recovery. Qui tam – which translates from the Latin “who as well” – essentially means that the private individual, or “relator,” sues for the government as well as for themselves.

The original False Claims Act required that a person who violated the law would have to pay the government twice the damage caused by their conduct, with an added penalty of $2,000 for each violation; the relator in the case would then receive 50 percent of any recovery. The government also could bring its own lawsuits under the Act, but it would not have a role in a case brought by a private individual.

World War II and Limits on Qui Tam Actions

Later during World War II, the Act was criticized because some individuals were copying information from public criminal indictments and then filing qui tam actions to collect a portion of the civil recovery without providing any new information to the government.

In 1943 the Supreme Court held in United States ex rel. Marcus v. Hess, 317 U.S. 537, that the Act permitted such actions, and if change was desired, Congress should be asked to amend the Act. Congress did so that same year and provided that no one could bring a qui tam action if the government already possessed the information upon which the action was based.

The 1943 amendments also reduced the recovery so that the reward could not exceed 10 percent if the government intervened, or 25 percent if the government did not join. The amendments also provided that the government could assume responsibility for a case initiated by a private person, and that if it did so, the individual would have no ongoing role in the lawsuit. In effect, these amendments put an end to qui tam lawsuits as the government almost always possessed some information about the fraud even if it was unaware that it was being defrauded.

The 1986 Amendments to the False Claims Act

With continued military build-up during the Cold War, and particularly during the Reagan years, the American public became increasingly concerned about fraud against the government.

In response, Congress revised the False Claims Act in 1986 to make it a more effective law enforcement tool. These new amendments made several key changes to the Act. First, they guaranteed a minimum relator recovery of 15 percent. Second, they provided a framework that ensured an ongoing role for the relator as a party to the case even if the government joined the case and permitted the relator to proceed with the case if the government declined to intervene.

The amendments also assured protection from retaliation for individuals pursuing or assisting with a qui tam action by adding a private right of action for individuals to recover damages for personal harm. They also provided for attorney fees for successful relators to encourage counsel to invest in such cases. The amendments also changed the bar against lawsuits based upon information the government possessed and instead included a more limited restriction on certain parasitic lawsuits. Finally, they also increased the remedy to three times the damage caused by the violation and the penalties to $5,000-$10,000 per violation, to be adjusted for inflation.

The False Claims Act Today

The public/private partnership reflected in the Act continues to be a critical tool in the government’s effort to combat fraud, resulting in recoveries of more than $31 billion since 2009, mostly from lawsuits initiated by private whistleblowers. These recoveries have been obtained from a range of areas, including health care, military supplies, and federal loan and grant programs.

The impact of the law on protecting the Treasury is far greater than the monetary recoveries reflect because of the Act’s value in deterring fraud in the first place. By obtaining recoveries for certain types of fraud and publicizing them, the government dissuades others from engaging in similar conduct.

This post is written by Claire M. Sylvia, the author of The False Claims Act: Fraud Against the Government (3d ed.) published by Thomson Reuters.  She is also a partner in Phillips & Cohen LLP, which represents whistleblowers.  Prior to joining Phillips & Cohen in 2006, she served as a Deputy City Attorney for the City of San Francisco and Assistant Senate Legal Counsel for the United States Senate.  

The views and opinions expressed in this post are those of its authors alone.