The False Claims Act (FCA): Defending Against Qui Tam Litigation and Federal Fraud Investigations

A relator is typically a current or former employee, a competitor or a business partner who believes they have identified a fraudulent scheme against the government. Once a relator files a qui tam lawsuit, the government has the primary responsibility for investigating the claims while the case remains under a court-ordered seal. If the litigation results in a recovery, the relator can receive between 15 percent and 30 percent of the total proceeds. This creates a powerful incentive for individuals to characterize routine administrative errors or contractual disputes as "knowing" fraud to maximize their potential payout.

To prevail under the False Claims Act, the government or the relator must prove that the defendant acted "knowingly." In this legal context, "knowing" is defined broadly to include actual knowledge, deliberate ignorance of the truth or reckless disregard for the truth. The government does not need to prove a specific intent to defraud, which makes the FCA a much easier tool for prosecutors than traditional criminal fraud statutes. We focus on dismantling this standard by demonstrating that the challenged conduct resulted from a reasonable interpretation of ambiguous regulations or a legitimate clerical error rather than a conscious effort to deceive the treasury.

The arrival of a CID is the definitive sign that the government has found the relator’s claims credible enough to warrant a full-scale audit. We manage the CID response process by negotiating with the DOJ to narrow the scope of the request and identifying privileged communications that must be protected from disclosure. A failure to provide a strategic and organized response can lead the government to assume the worst about the company’s internal culture, potentially leading to an early decision to intervene in the case.

It is common for an FCA investigation to proceed alongside a criminal inquiry by the FBI or the Office of Inspector General (OIG). This creates a "parallel proceedings" environment where statements made in the civil context can be used to build a criminal case against executives. Our defense strategy involves a unified approach that manages both tracks simultaneously, ensuring that the civil defense does not inadvertently create criminal exposure for the board of directors or the C-suite.

In the healthcare industry, FCA claims are frequently tied to violations of the Anti-Kickback Statute (AKS) or the Stark Law. The government argues that any claim for payment submitted to Medicare that resulted from an illegal kickback or a prohibited self-referral is a "false" claim as a matter of law. This creates a "bootstrapping" effect where a technical regulatory violation is transformed into a multi-million dollar fraud case. We utilize healthcare compliance experts to prove that the underlying transactions were commercially reasonable and did not influence medical decision making.

For defense contractors, FCA litigation often centers on "product substitution" or "cost mischarging." The government may allege that a contractor utilized substandard materials that did not meet military specifications or that the company inflated its labor costs to maximize profits on a "cost-plus" contract. These cases require a deep understanding of the Federal Acquisition Regulation (FAR) and the ability to demonstrate that any deviations from the contract were either approved by the government or were not "material" to the final delivery of the product.

Treble damages are designed to be both compensatory and punitive. They ensure that the government is made whole for the fraud while sending a deterrent message to the entire industry. However, the calculation of the "actual loss" is a frequent point of litigation. We utilize forensic economists to argue for a narrower definition of damages, focusing on the actual harm to the government rather than the total amount of the contract.

In addition to treble damages, the court must impose a penalty for every single false claim submitted. These penalties are adjusted for inflation and can range from approximately 13,000 dollars to over 27,000 dollars per claim. For a pharmacy or a hospital that submits thousands of claims daily, the math of the FCA can be devastating. We aggressively challenge the application of these penalties as a violation of the "Excessive Fines Clause" of the Eighth Amendment when they are clearly disproportionate to the actual harm.

When the DOJ intervenes in a qui tam case, it takes over the litigation and puts the full resources of the federal government behind the relator’s claims. Statistically, over 90 percent of cases in which the government intervenes result in a settlement or a judgment for the plaintiff. Conversely, if the government declines to intervene, the relator must pursue the case alone, which is a much higher burden. Our primary goal during the seal period is to present a "white paper" or a "statement of interest" to the DOJ that highlights the factual flaws in the relator's theory, persuading the prosecutors that the case is not worth their time.

Violating the court’s seal is a serious offense that can lead to sanctions. However, the defendant must still conduct their own internal investigation to prepare for the eventual unsealing of the case. We guide our clients through a privileged internal audit that identifies the relevant witnesses and data sets without alerting the public or the markets to the existence of the qui tam litigation. This preparation ensures that the moment the case is unsealed, the defense is ready with a motion to dismiss.

One of the most effective ways to kill a qui tam case is the "public disclosure bar." If the allegations in the lawsuit were already publicly known through news media, government reports or prior litigation, the relator cannot sue unless they are the "original source" of the information. We perform exhaustive research to identify prior public disclosures that can be used to move for a dismissal of the relator’s complaint for lack of jurisdiction.

The Escobar standard has revolutionized FCA defense by focusing on the "materiality" of the alleged regulatory violation. We look for evidence that the government agencies involved did not consider the technical violation to be important enough to withhold payment. By subpoenaing the government’s own records and deponing agency officials, we can often prove that the "fraud" was actually a known and accepted industry practice that the government chose to ignore for years.