State false-claims acts merit increased caution

Infotech and the Law | Legal insights for today's market

"Until recently, only about a dozen states had their own versions of a general false-claims act." Jonathan Cain

Government contractors are
familiar with the federal False Claims
Act, or at least with its existence and
the penalties for submitting fraudulent
claims for payment or retaining payments
to which they were not entitled.
Many contractors are probably
unaware, however, that some states
also have their own false-claims acts,
and their number is rapidly growing.

State false-claims laws expose contractors
to liability for claims made
regarding contracts from state and
local government agencies,
including universities, transportation
authorities and
school systems. Many state
false-claims laws also contain
qui tam provisions, which
allow private citizens, known
as "relators" (often disgruntled former
employees), to bring claims against
contractors in the name of the state or
local government.

Relators have substantial incentives
to bring such cases under both federal
and state laws. If a judgment is awarded
against the defendant, they can win
a substantial share of the recovery and
the ability to deduct all the attorney
fees and court costs incurred in prosecuting
the action from their personal
income tax. In addition, another bill
before Congress would revise the federal
tax code to exclude from their
gross income all amounts relators
receive as a result of a False Claims
Act judgment.

Until recently, only about a dozen
states had their own versions of a general
false-claims act. Several others
had statutes limited to health care
fraud. Starting Jan. 1, however, a provision
of the Deficit Reduction Act of
2005 gave states a financial incentive
to enact their own false-claims acts,
including qui tam provisions.

When a state has its own false-claims
act, the federal government will
award to it a bonus share of any recovery
that the federal government
receives as a result of a Medicare fraud
prosecution in that state. These bonus
payments can be substantial. As a
result, about 20 additional states have
introduced legislation to create a state
False Claims Act modeled on the federal
False Claims Act, and more may
follow.

Some states limit their false-claims
legislation to Medicare fraud cases, but
the vast majority have used the federal
incentive to introduce broad falseclaims
acts, with qui tam provisions,
civil penalties comparable to the federal
False Claims Act, and liability based
on a comprehensive wrongful-conduct
list, including presenting a false claim,
being paid on a false claim and engaging
in a conspiracy to make a false
claim for any product or service.

Depending on the extent that a state
or local expenditure is supported by
federal funds, a contractor could be
liable under both federal and state
false-claims acts for the same misconduct.
This provides an opportunity for
a qui tam relator to engage in forum
shopping, seeking the court that is
most likely to provide a friendly reception.

While some states that have had a
false-claims act for some time have
developed their own judicial interpretations
of their respective statutes,
most do not have experience with
false-claims cases. Because the state
acts are modeled on the federal
statute, companies should expect that
state courts will look to federal decisions
as cases under the state statutes
arise. Federal jurisprudence treats the
False Claims Act as remedial and
broadly interprets its provisions to
effect its remedial purposes.

Contractors who have developed
comprehensive compliance policies
designed to avoid federal False Claims
Act problems will find that this preparation
serves them well as more states
adopt false-claims statutes. Companies
that have neglected this precaution
now have an additional reason to take
the necessary steps to reduce their
False Claims Act liability and have a
plan in place to guide their actions if
they uncover problems.

Jonathan Cain is a member of the law firm
Mintz Levin in Washington, D.C. The opinions
expressed in this article are his. He can be
reached by e-mail at jtcain@mintz.com.

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