Environment is new target for old fraud law

By Lisa Foster and Eric Havian, Phillips & Cohen LLP
(Reprinted from BNA’s Toxics Law Reporter, Sept. 14, 2000)

A Civil War-era fraud law that has cost the defense and health care industries billions in liability is being applied with growing frequency in the environmental arena. The law, known as the False Claims Act, could result in government contractors paying millions for violations of environmental laws and regulations and could become the government’s and private citizens’ strongest tool for enforcing environmental compliance. It could also make some whistleblowers rich.

The False Claims Act allows whistleblowers to sue — on behalf of the federal government — companies and individuals that defraud the U.S. and to share in the government’s recovery. Over the past 13 years, companies and individuals have paid more than $3.5 billion to the federal government as a result of "qui tam" (whistleblower) cases brought under the civil statute, according to the Justice Department. And the whistleblowers have received over $550 million from the government as a reward for bringing the lawsuits.

Several prominent qui tam cases involving environment-related matters made headlines this past year:

• A former employee at the Hanford Nuclear Reservation slapped Westinghouse Hanford Co. and Fluor Daniel Hanford Inc. with a $ 240-million qui tam lawsuit alleging the contractors overcharged DOE for cleanup work at the site.
• A federal jury awarded treble damages totaling $4.2 million to the government in April in a qui tam case alleging that Rockwell International Corp. misrepresented to the Department of Energy its progress under its contract to clean up the Rocky Flat nuclear weapons plant. (U.S. ex rel. Stone v. Rockwell International Corp. (D Co No. 89-M-1154).
• DOE launched a massive investigation into the practices at a uranium enrichment plant in Paducah, Kentucky, as a result of a qui tam case filed by the Natural Resources Defense Council and three plant employees. The lawsuit alleges that Lockheed Martin Corp., Lockheed Martin Energy Systems Inc. and their predecessor corporations defrauded the federal government of hundreds of millions of dollars under contracts with DOE related to the control of radioactive materials and waste at the plant, employee exposure to radioactive materials, the recycling of contaminated metals and the improper dumping of radioactive wastes into landfills.

Qui tam lawsuits

The False Claims Act generally applies when a government contractor defrauds the government. Whistleblowers, who are known as relators, file lawsuits "under seal " — which means they are not available to the public nor even to the defendant — to give the government time to investigate and decide whether it wants to join the lawsuit. Generally the seals may be extended up to a year or more. Anyone with knowledge of the fraud may bring a lawsuit.

If they are found liable, defendants must pay three times the government’s losses plus $5,000 to $10,000 for each false claim. This could add up to millions of dollars in some cases. The relator is entitled to receive between 15 percent and 30 percent of whatever the government recovers as a result of the lawsuit.

Seven states — California, Florida, Nevada, Illinois, Tennessee, Louisiana and Texas — and the District of Columbia have enacted laws similar to the False Claims Act. Under their provisions, a whistleblower could bring a lawsuit on behalf of the state or a subdivision of the state, such as a city or county.

Qui tam v. citizen lawsuits

Members of the public may file citizens’ lawsuits under most federal environmental laws. But there are major differences between a citizen lawsuit and a qui tam case:

• In a citizen lawsuit, the private individual sues on behalf of the public, but does not represent the government, as in a qui tam lawsuit.
• Qui tam lawsuits don’t need to be prospective in nature as they do in citizen lawsuits.
• The statute of limitations is relatively long in qui tam cases (six to 10 years, depending on certain factors).
• The liable defendant faces stiff financial penalties and damages in qui tam cases, i.e., treble damages and $5,000 to $10,000 for each false claim.
• The government is required to investigate allegations in a qui tam lawsuit.
• The whistleblower’s allegations remain under seal until the federal government decides whether to join the case.
• The person who files a qui tam case is entitled to receive a share of the amount the government recovers as a result of the lawsuit.

Some environmentalists already see the False Claims Act as an effective way to pursue their goals. The Paducah case, which was filed by a national environmental group as well as three company employees, indicates that a qui tam lawsuit might become the preferred way to pursue companies that violate environmental laws — as long as financial damage to the government can be shown.

Actions that create liability under the False Claims Act

The False Claims Act specifies seven types of actions that create liability under the law. The ones most applicable in the environmental arena are:

1. Presentation of a false claim for payment. Overcharging for work done, such as a whistleblower alleged in the Hanford case, would fall into this category.
2. Use of a false statement to get a claim paid. Two waste disposal companies in Maryland paid $2 million in 1999 to resolve their False Claims Act liability for submitting falsified dump tickets to the Navy that purported to document they had used licensed solid waste transfer stations for disposal of the Navy’s waste when in fact they had not. (U.S. v. A.W. Stevens and Sons Waste Disposal Systems Inc. et al. (D. Md.)
3. Conspiracy to get a false claim paid. When two or more parties act together to defraud the government, all the parties are liable under the False Claims Act. This would occur, for example, when a subcontractor does not conform with specific environmental regulations as required in a contract to dispose of waste generated during the cleanup of a Superfund site. The general contractor knows that the sub is not disposing of the waste in compliance with the contract, but signs and submits a compliance certification with each invoice submitted to the government. Both the contractor and the subcontractor could be liable for conspiracy under the False Claims Act.
4. Reverse false claims, i.e., avoiding an obligation to pay the government. If a company is required, as a specific term of its contract with the government, to dispose of hazardous waste in compliance with specific regulations or else pay a fine or penalty, then it could be sued for false claims if it certifies to the government that it has disposed of the waste properly but has not done so.

The False Claims Act does not cover fraud in all cases. It does not cover:

• Income tax fraud.
• Cases where a current or former member of the armed forces charges that another member is committing fraud against the government.
• Fraud by a member of Congress or the judiciary or a senior executive branch official if the lawsuit is based on information already known to the government.
• Fraud that is already the basis of another False Claims Act lawsuit or of an administrative hearing that involves civil penalties if the government is already a party.
• In qui tam cases, fraud that already has been publicly disclosed. Various courts have issued conflicting opinions about the definition of "publicly disclosed." But if there has been substantial publicity in a newspaper or on television about the allegations of fraud, that certainly would be considered a public disclosure.

Liability for environmental violations

The False Claims Act has been applied in the environmental arena only sporadically and with varying results. But court decisions over the past few years make clear that the law can apply in certain kinds of environmental cases.

The clearest example of liability is billing the government for work that is not done. A company that fails to clean up a Superfund site or the site of a natural disaster as stipulated in its government contract might be liable.

If a company is illegally dumping hazardous waste, and it certifies as part of a government contract that it is complying with all environmental laws and regulations, then it also might be liable under the False Claims Act. An environmental testing firm that does not comply with EPA

or other agency standards could be sued under the statute.

To bring a lawsuit under the reverse false claims provision, a whistleblower must prove more than just the defendant failed to report a violation of an environmental statute. The defendant has to have created or submitted some type of false statement or record to the government to be liable.

In a qui tam case brought against a barge-towing company, a federal district court ruled that the company was liable for making reverse false claims by falsifying information on a vessel log. Because the government relies on such logs as part of its regulatory role, the court said, the vessel log could be considered a false claim that the company created to avoid an obligation to the government, i.e., paying a fine for illegal dumping. [Pickens v. Kanawha River Towing, 1996 WL 56092 (S.D. Ohio 1996)].

Inflated bid prices also have been grounds for False Claims Act case. Under certain types of government contracts, companies are required when negotiating the contract to submit pricing information that reflects its best estimates or actual costs. If a contractor submitted inflated prices to clean up hazardous waste at a Superfund site, for example, it would be liable under the False Claims Act. The government (or a whistleblower on the government’s behalf) could sue for up to three times the difference between the reasonable cost and the amount billed for the work and for $5,000 to $10,000 for each false claim.

One difficulty in certain types of environmental cases is quantifying damages as a result of environmental violations. The dollar loss to the government can be calculated in many instances, but in other cases, damages are hard to quantify. How do you measure the cost to the government of illegal dumping? What is the value of a partially remediated site?

Congress intended that the False Claims Act be applied broadly. But not all violations of environmental laws and regulations can be the basis of a qui tam case.

In general, for there to be liability under the False Claims Act, the contract must specifically require that a contractor comply with a particular environmental statute or regulation and the government must suffer financial damages as a result of the failure to do so. Congress and the Justice Department have embraced qui tam lawsuits as a way to fight Medicare and defense contractor fraud. It won’t be long before they grasp its effectiveness in dealing with environmental scofflaws as well.