State false-claims acts merit increased caution

Government contractors arefamiliar with the federal False ClaimsAct, or at least with its existence andthe penalties for submitting fraudulentclaims for payment or retaining paymentsto which they were not entitled.Many contractors are probablyunaware, however, that some statesalso have their own false-claims acts,and their number is rapidly growing.State false-claims laws expose contractorsto liability for claims maderegarding contracts from state andlocal government agencies,including universities, transportationauthorities andschool systems. Many statefalse-claims laws also containqui tam provisions, whichallow private citizens, knownas "relators" (often disgruntled formeremployees), to bring claims againstcontractors in the name of the state orlocal government.Relators have substantial incentivesto bring such cases under both federaland state laws. If a judgment is awardedagainst the defendant, they can wina substantial share of the recovery andthe ability to deduct all the attorneyfees and court costs incurred in prosecutingthe action from their personalincome tax. In addition, another billbefore Congress would revise the federaltax code to exclude from theirgross income all amounts relatorsreceive as a result of a False ClaimsAct judgment.Until recently, only about a dozenstates had their own versions of a generalfalse-claims act. Several othershad statutes limited to health carefraud. Starting Jan. 1, however, a provisionof the Deficit Reduction Act of2005 gave states a financial incentiveto enact their own false-claims acts,including qui tam provisions.When a state has its own false-claimsact, the federal government willaward to it a bonus share of any recoverythat the federal governmentreceives as a result of a Medicare fraudprosecution in that state. These bonuspayments can be substantial. As aresult, about 20 additional states haveintroduced legislation to create a stateFalse Claims Act modeled on the federalFalse Claims Act, and more mayfollow.Some states limit their false-claimslegislation to Medicare fraud cases, butthe vast majority have used the federalincentive to introduce broad falseclaimsacts, with qui tam provisions,civil penalties comparable to the federalFalse Claims Act, and liability basedon a comprehensive wrongful-conductlist, including presenting a false claim,being paid on a false claim and engagingin a conspiracy to make a falseclaim for any product or service.Depending on the extent that a stateor local expenditure is supported byfederal funds, a contractor could beliable under both federal and statefalse-claims acts for the same misconduct.This provides an opportunity fora qui tam relator to engage in forumshopping, seeking the court that ismost likely to provide a friendly reception.While some states that have had afalse-claims act for some time havedeveloped their own judicial interpretationsof their respective statutes,most do not have experience withfalse-claims cases. Because the stateacts are modeled on the federalstatute, companies should expect thatstate courts will look to federal decisionsas cases under the state statutesarise. Federal jurisprudence treats theFalse Claims Act as remedial andbroadly interprets its provisions toeffect its remedial purposes.Contractors who have developedcomprehensive compliance policiesdesigned to avoid federal False ClaimsAct problems will find that this preparationserves them well as more statesadopt false-claims statutes. Companiesthat have neglected this precautionnow have an additional reason to takethe necessary steps to reduce theirFalse Claims Act liability and have aplan in place to guide their actions ifthey uncover problems.