Testimony of John R. Phillips on the implementation of
the False Claims Act before the House Judiciary Subcommittee of Administrative Law and Government Relations
April 4, 1990

Four years ago, I appeared before this subcommittee to testify on behalf of legislation to modernize and strengthen the qui tam provisions of the False Claims Act. Then, what I had to offer was my best estimate -- based on many calls and inquiries I had received from whistleblowers during my 17 years of practice as a public interest lawyer -- of how the qui tam provisions could be restructured to become an effective weapon in fighting and deterring government fraud.

Today, while I'm still appearing as a public interest lawyer, my comments are based on three and a half years of extensive and varied experience working with the act. My firm, Hall & Phillips, serves as counsel for qui tam plaintiffs in 15 cases. Settlement documents are being finalized in one case, five more are in active litigation and the remainder are still under investigation by the Department of Justice. In addition to these matters, Hall & Phillips has filed amicus briefs on behalf of Taxpayers Against Fraud and the Center for Law in the Public Interest on several false claims issues, we have coordinated the effort to oppose constitutional challenges to the Act, we serve as an informal clearinghouse for false claims information and regularly provide advice to attorneys around the country on false claims issues. In addition, in 1988 when we recognized that, as drafted, the act could permit a false claims recovery an to individual who was the mastermind behind a fraud, we brought this to the attention of Congress and assisted in drafting a corrective amendment.

The question of how well the qui tam provisions of the False Claims Act are working cannot yet be answered by a simple dollars and cents calculation. Because false claims cases involve complex factual situations, they inherently take a long time to develop and litigate. We usually spend two to six months preparing a case for filing. Once filed, the government investigation may take as long as a year. After the case is unsealed and served, the defense (which is always well funded and staffed to the hilt) typically wages a war of attrition. As a result, while the three and a half years since the 1986 amendments took effect has seen more than 200 new cases filed, to date there have not yet been substantial recoveries.

We do know, however, that there are many cases in active litigation that the government has joined where the potential recoveries run into the hundreds of millions of dollars. For example, in the Central District of California alone, the government has joined four pending qui tam cases where the damages in each case is conservatively estimated at $100 million. Of the 15 matters we are handling, damages in at least three, when trebled, will be in the $100 to $300 million range.

We also know that the mechanism Congress created in 1986 to permit the government to focus on the best cases is working well. Congress wanted to develop a mechanism to encourage false claims information to be forwarded to federal authorities for expeditious and efficient review. The 1986 Amendments did this by providing that qui tam complaints be filed under seal for 60 days to permit the government to investigate secretly the false claims allegations. At the end of this 60 day period (and any extensions granted by the court), the government is to make a decision whether to commit additional resources to the case and join the litigation, whether to seek to dismiss the action, or whether to sit back and monitor the case. By providing this trio of options, Congress provided the Justice Department with the maximum flexibility to expend its resources on the most meritorious claims.

According to observations made by various government investigators and U.S. attorneys, the 1986 qui tam plaintiffs have presented the government with the best false claims cases in the Act's 127 year history. The reason for this, of course, is that the 1986 amendments provide incentives and protection that encourage "insiders" with information to come forward and take on the risks associated with being a "whistleblower."

In large part the motivation for these new qui tam plaintiffs is financial. The monetary rewards offered by the act can be quite substantial. But in our experience, money is not the sole or even primary motivation for most of our clients.

While a client like Dr. Michelson, who acts out of a sense of civic and professional responsibility, and who donates his entire recovery to charity, is the exception, I do not believe that any of our clients have approached the False Claims process solely as a money making venture.

For example, we represent one individual, I'll call Mr. A, since he is a qui tam plaintiff in a case still under seal, who was employed by a relatively small company that provides hardware to the military. Mr. A learned that his employer was routinely installing defective and substandard parts in the goods it sold the government. Mr. A knew this was illegal, and he knew that uncorrected it could cause death and injuries to servicemen, so he reported his employer to federal criminal authorities. The employer was subsequently convicted and sent to prison.

Mr. A then went to work for another company only to learn that his new employer was doing the same thing. About that time, Mr. A learned of the False Claims Act, and at the time he reported his second employer to the criminal authorities, he filed false claims cases against both employers.

Another of our clients is Chris Urda. While Mr. Urda was employed by the Link Flight Simulator Division of the Singer Company as a Bid Supervisor, he learned that the division routinely falsified the cost data it submitted to the government contracting authorities. Mr. Urda left Singer to become a price analyst with the Defense Logistics Agency. In this new capacity, he realized how harmful and how wrongful Singer's actions were. When he heard about the False Claims Act, he recognized that it offered him an opportunity to bring his information forward.

We have other clients who are looking to the False Claims Act as a way to atone for years they have spent forced into a conspiracy of silence while those they worked with defrauded the government. In this sense, the act's qui tam provisions really do empower "the little guy" to take corporate management head on and to salvage their self-respect.

We have a client, for example, who is about to file a case challenging the foreign military sales program of a major national corporation. The career and social risks to him in doing so will be substantial since he is well respected and well placed in the corporation. At the same time, his share of the qui tam recovery will not make him a rich man. When I asked him why he was willing to take on this burden, he told me that having been a silent participant in the wrong doing, in order to now "look his children in their eyes," he had to try to make things right.

A common and less noble motivation for qui tam plaintiffs is revenge. We frequently receive calls from individuals who are terminated by their employer when they complain about irregular billing or costing practices. There is an obvious potential for abuse here, and in this situation we are particularly careful to make certain that we can independently verify the false claims violation.

We have also talked with individuals who are interested in bringing False Claims actions against their competitors. For example, one area we have examined is health care equipment supply. There competition is intense and many small businesses are involved, and a supplier who fraudulently obtains Medicare reimbursements gains a substantial competitive advantage over his more honest competition. Again, such cases should be carefully screened and investigated to avoid abuse.

One clear by-product of 1986 Amendments is that the act is beginning to attract management personnel and other upper level businessmen and women who are likely to know about more sophisticated, and therefore better disguised, fraud. These individuals, however, have the most to lose by an unsuccessful suit. As Jim Carton and others like him, in their cases, I believe that they will increasingly come forward, and bring with them substantial recoveries to the Treasury.

Regardless of their motivation, all of our qui tam clients share one quality: their willingness to make a long-term commitment of time and effort to the litigation. Before we file a case we may spend as long as eight months meeting repeatedly with our clients to go over every detail and fill in any gaps in our knowledge to make sure that we have a full picture of the industry, its common practices, and the way contracting laws and regulations apply. We also frequently use outside experts to help us evaluate our cases. Defense procurement regulations are complex and in many areas, a standard industry practice has developed. When we consider a case we need to know not just whether the conduct in question technically violates the law, but to what extent it goes beyond the bounds of acceptable behavior.

We then work with our client to prepare a disclosure statement to provide the government with the material information and relevant doC:uments we possess. The last step we take is to prepare the complaint. Once the complaint is filed, we make our client available to the appropriate authorities to assist in their investigation.

In the last two and a half years, we have received between 500-600 inquiries from people who thought they might have a false claims case. While many of these cases probably did involve at least technical false claims violations, we have chosen to limit our practice to instances where the facts and circumstances of the violation indicate that litigation would serve a clear public interest.

In some cases, for example, the defendant's resources (and therefore the potential return to the Treasury) were insufficient to justify the costs of litigation. Where that has occurred, we have encouraged our client to provide the information to the relevant Inspector General and to urge that they take corrective action. For example, we recently spent several months and dozens of hours working up a medicare case that involved fraudulent claims for reimbursement of medical equipment expenses. Ultimately we decided not to take the case because, despite the defendants egregious conduct, the litigation costs would dwarf any potential recovery from the small business defendant. Our client's main concern is stopping additional abuses from occurring, and he has authorized us to hand the file over today to the Inspector General.

One area where a "public interest" test is now relevant is the question of whether a government employee should be permitted to bring a qui tam action covering activities he learned of in the course of his employment. As a policy matter, we have not pursued any of these cases. However, with the increasing public focus on the issue, we have reviewed the question from the perspective of whether and how the act could be amended to deal with this hard question. We believe that the appropriate way to deal with this issue is to permit a financial recovery to a government employee who learns of a False Claims violation in the course of his employment only when the court determines that the employee reasonably and in good faith attempted to bring the violations to the attention of the appropriate government employees. Further, we recommend that when the court does make such a finding, it retain sole discretion to determine the size of the award up to a maximum of 25 percent of the proceeds.

This approach would provide a mechanism of last resort to government employees who have tried and failed to obtain internal government action. At the same time, it will discourage government employees from seeking to enrich themselves at the taxpayers, expense.

Critics of the qui tam provisions argue that the act encourages lawyers to file frivolous cases, which wastes government resources. our experience in monitoring false claims activity around the country suggests that this is not the case.

In the first place, the act does not compel the government to investigate a meritless case. To the contrary, the law gives the government the best of both worlds by permitting it to join any case it wants to at the outset, while reserving the option of moving to intervene later.

Moreover, the False Claims Act contains provisions expressly providing that the plaintiff may be charged with paying the defendant's attorneys fees and expenses if the court finds that the claim was "clearly frivolous, clearly vexatious, or brought primarily for the purpose of harassment." Since these cases are so expensive to litigate, few attorneys or qui tam plaintiffs are going to be willing to fund meritless cases on the chance that they can con a well-funded defendant into settling. Instead, what we are seeing is that qui tam cases are being hard fought on both sides throughout the nation.

The 1986 amendments added a number of new features to the act that we believe have worked quite well in actual practice. One of the more unique features of the act is its provision for filing under seal. In order to accommodate the Justice Department's desire that its ability to investigate fraud not be compromised by disclosure to the defendant of the filing of a qui tam action, the 1986 amendments provided that crui tam complaints were to be filed under seal for at least 60 days. The act further provided that the seal period could be extended by the court. Once the government decided whether or not to join the case, the seal was to be lifted and the complaint served on the defendant.

In practice, we have found that while the 60-day period is almost always extended at the government's request, the existence of the statutory deadline does ensure that cases don't fall into limbo and also provides an opportunity for ongoing dialogue with government attorneys and investigators.

Generally, the seal provisions keep most defendants unaware that an investigation is ongoing. However, in our case against Litton Systems, Inc., Litton discovered that a qui tam complaint had been filed. Litton's counsel asked the government for a copy of the complaint so that Litton could make a presentation to the government before the Justice Department made a decision about whether to intervene. Ironically, in that case, once the Department of Justice decided to intervene and asked that the seal be lifted, Litton objected to unsealing the case and contended that the seal provision was included in the law for the defendant's benefit. While Litton was unsuccessful, we expect that other defendants who become aware of qui tam cases filed against them will also seek to misconstrue the congressional intent and ask courts to extend the seal provisions to prevent public knowledge of the lawsuit.

Another innovation added by the 1986 amendments is the public/private litigation partnership which occurs when the Department of Justice enters a qui tam case. In our experience, this congressional attempt to encourage the use of private sector resources to supplement government services has been extremely successful.

We are now litigating six cases where we are working closely with government attorneys. (The government has joined five of these cases and is actively participating as an amicus in the sixth.) In two of these cases, we are working exclusively with counsel from the Civil Division of the Department of Justice here in Washington and in the others we are working both with local assistant U.S. attorneys and with Civil Division attorneys. In all cases, we have a close and cooperative working arrangement with the government counsel.

The act clearly provides that where the government proceeds with the action "it shall have the primary responsibility for prosecuting the action." In light of this statutory directive, we work closely with the government to develop and implement a uniform and consistent case strategy. In some cases the government attorneys have determined that the best use of government resources is to have us carry the primary burden of developing the facts and carry the majority of the day-to-day litigation work while the government maintains overall and ultimate control of the case. A good example of this is Dr. Michelson's litigation.

When the claim is large and the litigation especially hard fought, such as in the Litton litigation, we are working day in and day out with the government attorneys to maximize the available resources for prosecuting the case. We have increased our legal staff to make certain that the case is fully staffed, we have divided up the more mundane discovery chores, we work together developing and researching the legal issues, and we are sharing the expense of hiring experts.

While the concept of deferring to other counsel is not something that is natural to litigators, in this context it has not been difficult to play the supporting rather than the leading role, because we are working with capable and dedicated government counsel. I have the greatest respect for the government attorneys we have worked with, and know that they share the same goal we do - - ferreting out fraud against the government and people of this country and discouraging ill-gotten gains from wrongdoers to discourage future fraud, encourage reports of wrongdoing and reimburse the Treasury.

It may seem ironic, but as a private public interest attorney representing individual qui tam plaintiffs, my principal concern is whether sufficient resources are being made available to permit the Justice Department to aggressively pursue these major procurement fraud cases. While, in our opinion, major policy decisions affecting the enforcement and interpretation of the False Claims Act should be made in Washington by the Department of Justice, it is crucial that local U.S. attorneys offices be allocated the necessary resources to staff these important matters. This is especially true in Los Angeles. Not only does the threehour time difference distance and burden of travel make it impractical to litigate complex Los Angeles cases from the East Coast, but Los Angeles is an extremely active area for these types of cases. This can be attributed to the extensive defense contractor community in and around Los Angeles and to the experience of the bar with these matters.

The local U.S. attorneys offices need more resources. For every example I can give you of active government participation in a case, there is a case that is languishing because there is no staff available to run with the case.

It is just common sense that you cannot achieve the greatest possible recoveries without vigorously pursuing these cases. By litigating hard at the ground level, the investment in attorney time can be returned to the Treasury more than 1,000 times over. There is nothing like a success story to inspire other qui tam plaintiffs to come forward. On the other hand, failure to pursue strongly the good cases already on file, will only show the defense contractors that by hiring large numbers of attorneys, they can protect hundreds of millions of dollars of fraudulently obtained profits.

So far, the False Claims defense bar has shown creativity and tenacity in seeking to limit at every turn the applicability of the Act. While none of these initial efforts have hit "pay dirt" they do pose a series of expensive hurdles for qui tam plaintiffs.

For example, the first major generic challenge to the act is the defendants' claim that the 1986 amendments did not apply to pre-1986 conduct. Ten or so courts have rejected this claim, and have found that Congress clearly intended that the amendments apply to such conduct and that no "manifest injustice" was created by such application.

With the retroactivity challenges failing, defendants next have contended that the qui tam provisions violate constitutionality mandated separation of powers principles because Congress empowered private qui tam plaintiffs to assume functions that are reserved exclusively for the executive. To date, this challenge has been conclusively rejected on eight separate occasions. Similar challenges are pending in at least two other cases.

The remarkable thing about this constitutional challenge is that defense attorneys have been able to convince their clients to sink thousands and thousands of dollars into raising such claims of unwarranted Executive intrusion. The 1986 amendments were supported by a Justice Department and signed by a president who are legendary for jealousy guarding executive prerogatives. At no point in the lengthy hearings on the amendments was any serious separation of powers concern raised. Nor at any point in these court challenges did the Justice Department ever support the defendants' position that the act interferes with its ability to enforce the law.

The legal counsel for both the House of Representatives and the Senate appeared in many of these challenges to defend the act. We followed these challenges closely, and from our first hand observation, the work done by your legal counsel's office and that of the Senate played an important role in preserving the statute. I hope that you will continue to encourage the House legal counsel to participate in the few remaining challenges so that this false challenge can be put to rest.

False Claims defendants have also tried to derail false claims prosecutions by asking the trial court, over the objection of the government, to stay false claims litigation pending the resolution of administrative contract dispute proceedings, a process that could take 5 years or more. Because contract dispute proceedings have no jurisdiction to resolve fraud claims, staying the court proceedings would serve no purpose other than to make it more difficult for the government and qui tam plaintiffs to prove their case as memories grew stale and witnesses became unavailable.

Although defendants have tried to persuade the courts that Congress intended that such stays be issued, to date they have failed. If courts were to begin to buy this bit of "revisionist history", false claims recoveries could be seriously jeopardized. It might then be necessary to amend the statute to provide expressly that false claims actions are not to be stayed pending Contract Disputes Act proceedings unless the government requests such a stay.

We have also identified a number of areas where, with the benefit of experience, we think the act could be further improved. Most of these changes are truly clarifying amendments needed to make sure that the act's actual application corresponds with the original congressional intent.

2) Calculation of recovery

When we take on a new qui tam client, one of the first things we consider is whether the matter is an appropriate one for criminal prosecution and if so whether there is an urgent need for the government to execute a search warrant to preserve evidence. When this is the case, we always take our client to meet with federal criminal authorities without waiting to finalize before the civil case.

In a case being litigated right now, the qui tam plaintiff first reported the fraudulent activities of the defendant company and its officers to government investigators in 1987. As a result of the information he provided, the government executed a search warrant on the facility, discovered extensive records documenting the fraud and obtained an indictment against the company and its officers for submitting false claims, making false statements and defrauding the government. The qui tam plaintiff worked closely with government investigators during the criminal investigation, assisting them in reviewing and interpreting voluminous company records. The company and its officers subsequently pled guilty to felony violations. Pursuant to a plea agreement, the company paid $1,000,000 in restitution arising from its submission of false claims. The individuals were sentenced to terms of imprisonment and fines.

After the conclusion of the criminal case in 1989, he filed a civil False Claims Act case which the government joined. Under the law, the government is required to give the defendants credit against any judgement or settlement obtained in the civil False Claims Act action for the $1,000,000 in restitution paid in the criminal case. This represents a significant portion of the recovery that the government is likely to obtain. Thus, unless the False Claims Act provides that a qui tam plaintiff is to share in recoveries obtained in criminal cases as a result of a qui tam plaintiff's information, qui tam plaintiffs like our client may receive reduced recoveries solely because the evidence of fraud that they disclosed was so strong that it resulted in a criminal conviction and payment of restitution.

Moreover, in this case, the Department of Justice has agreed to allow the Department of Defense to proceed to negotiate an administrative settlement with the defendants for damages resulting from the defendants' fraudulent activities. It is likely that the administrative settlement will be obtained before the civil false claims case is concluded. If this occurs, the government also will be required to give the defendants credit against any false claims judgment or settlement obtained for the monies paid out in the administrative settlement. Again, this may well result in an arbitrary and unfair diminution of the qui tam plaintiff's eventual recovery, unless the statute is amended to provide that the qui tam plaintiff shares in this administrative recovery.

This same problem is recurring in at least two other cases we are presently pursuing. In the first case, after meeting with our client, we immediately disclosed the information he provided to us to the criminal division of the U.S. Attorney's offices because there appeared to be a pressing need for the government to execute a search warrant before records were destroyed. A search warrant was in fact executed and valuable records were recovered. Although we filed.a qui tam action shortly thereafter, it is likely that the criminal case will be concluded before the civil action. If the government obtains restitution in the criminal case, as is likely, the amount of money obtained should be included in any recovery obtained by the qui tam plaintiff in the civil action.

In another case, we also expect that criminal and civil false claims actions will be proceeding simultaneously, with the criminal case likely to conclude first. In this case, although the conduct at issue is egregious, it may be difficult for the government to prove damages. Thus, the focus of both the civil and criminal cases will be on obtaining penalties, namely criminal fines and civil forfeitures. However, under the recent Supreme Court decision in U.S. v. Halper, 109 S.Ct. 1892 (1989), the government may not recover civil forfeitures which are penal rather than compensatory in nature, if fines or imprisonment have already been imposed for the same conduct in a criminal proceeding. Thus, in the case at hand, the qui tam plaintiff may not recover anything, despite the valuable information he provided to the government, if the criminal case is resolved first.

To prevent this unfair result we urge that the act be amended to clarify that the recovery to the qui tam plaintiff includes funds recovered in other proceedings that were "started" by the qui tam plaintiff and that were based on the same facts and allegations set out in the qui tam complaint.

Although this is an oversight hearing on the implementation of the qui tam provisions to date, I firmly believe that their potential has barely been tapped. And I would like to conclude my testimony by looking to the future.

While much of the testimony here today has been about defense procurement and medicare fraud, the act is not so limited in scope. Since the act can recover funds and deter fraud any place the government spends money, you only have to look at the federal budget to identify dozens of areas where qui tam actions would be appropriate. For example, we spend millions of dollars each year in housing and farm subsidies, on public works projects, on small business loans, and environmental clean up. Similarly, the False Claims Act applies almost anywhere the government collects funds. For example, we are about to file our first customs case, charging that a foreign corporation underpaid its import duties.

The only impediment to expanding the application of the act is a practical one. If individuals do not know about the act, they can not use it. While there are ongoing private efforts to publicize the act and educate the public, the government should also play a role in this process. Public awareness could be raised by something as simple as requiring those receiving federal funds to post a notice describing the qui tam provisions on the company bulletin board.

Widespread awareness of the act and its qui tam provisions is important not just for the recoveries they bring into the Treasury, but more importantly for the fraud they deter.

In Dr. Michelson's case, for example, the total recovery to the Treasury will approximate $600,000. The contribution his actions have made to the taxpayer, however, far exceed this sum. As you can imagine, this Medicare fraud case has been widely reported in professional journals and is well known within the select ophthalmological community. The message the case carries with it is clear. No one should falsify Medicare bills and plan to escape detection because the HHS Medicare auditors may be overworked.

This message is now being heard in the defense industry. Past practices of taking advantage of the government with little risks of detection are changing. This effort must continue. No recipient of government funds, no defense contractor, no importer ought to entertain the thought of fraudulently profiting at taxpayers' expense. The qui tam provisions of the False Claims Act provide a powerful, pervasive and effective mechanism to remove the temptation of dishonesty and help ensure that the government recovery of wrongfully obtained funds by fraud be recovered.

Thank you.