Testimony of John R. Phillips on H.R. 4563, False Claims Act technical amendments of 1992, before the House Judiciary Subcommittee on Administrative Law and Governmental Relations
April 1, 1992

I appreciate the invitation to appear before your committee today, Mr. Chairman, to discuss generally the implementation of the qui tam provisions of the False Claims Act, and to specifically address the issues raised by Congressman Berman's proposed legislation.

I first testified before this committee in 1986 when Congress was considering amendments to update and modernize the century-old False Claims Act to make it a more effective weapon for fighting the chronic problem of fraud against the government. Two years ago, I returned to provide you with a "progress report," from the plaintiff's perspective, on the implementation of those 1986 amendments.

Today, the act remains a very effective tool for bringing forward instances of fraud. Moreover, we are finally reaching the point in the litigation pipeline where very substantial recoveries will become common. These recoveries will encourage new qui tam plaintiffs to come forward and, more importantly, should deter government contractors and others from wrongdoing.

Clearly, the most controversial aspect of the act today is the question of whether the qui tam provisions should be available to a government employee. The legislative history of the 1986 amendments is absolutely silent on the question, and although I worked closely with members of Congress in both the House and Senate, providing some technical background and assistance as the 1986 amendments were being drafted, I have no recollection of the government employee issue being raised by anyone.

In retrospect, it is not surprising that the government employee issue was not identified in 1986. Because the pre-1986 law barred any qui tam case based on information already in the government's possession, by definition, government employees could not file qui tam cases. A key purpose of the 1986 amendments was the removal of this jurisdictional bar, which had the unnoticed side effect of removing the prohibition on suits by government employees.

Recently, several government employees have filed cases under the False Claims Act, and the courts, after searching the legislative record and the language of the statute, have concluded that there is no express prohibition against suits by government employees. This has raised the question of how to resolve the False Claims Act's purpose of encouraging those with knowledge of fraud to come forward with broader concerns about the role and obligations of government employees.

The vast majority of government employees are men and women of integrity who are motivated by their feelings of public spirit to take jobs that often involve considerable financial sacrifice. The Department of Justice, however, is concerned that there are some government employees who, rather than reporting fraud they uncover, would instead convert that information into lawsuits where they could achieve great personal gain. While we have seen no evidence that any significant problem now exists, we must acknowledge its theoretical possibility. And if such practices were to occur, the image and integrity of the False Claims Act would suffer.

In more than five years, we have screened hundreds of cases and have filed fewer than two dozen. From that process, we have yet to represent a government employee. This is true, in part, because we are troubled by the public policy considerations, but also, in part, because we have not yet been presented with a government employee case that meets our stringent criteria. The fact remains, however, that there may well be instances where government employees are unable to get their superiors to act upon clear evidence of fraud. In those instances, we believe strongly that the False Claims Act should actively encourage the employee to come forward and should provide a mechanism for action.

We are aware of two separate approaches to deal with this issue. One alternative is to create an incentive for government employees, who have reported evidence of false claims to their superiors and who have been unsuccessful in spurring their superior to act, to bring that information to the attention of the appropriate inspector general or the Department of Justice. If the Justice Department initiates a false claims action and obtains a recovery, and if the employee's actions are above and beyond the ordinary scope of the employee's official duties, the Attorney General could then be granted the discretion to provide a reward to the individual. To be effective, such a reward system needs to include (1) a commitment by the Department of Justice to investigate false claims allegations made by government employees, and (2) a commitment that when the information does lead to a recovery, the Attorney General will generously reward those employees who provided the information. Being a whistleblower -- whether in the private sector or as a government employee -- carries a tremendous cost, and people need all the encouragement they can get to take such a risk.

The second alternative represented by Congressman Berman's bill would utilize the existing qui tam mechanism, with two key modifications. First, a qui tam government employee would not be guaranteed the minimum recovery of 15 percent. Instead, in each case, the court would have the discretion to provide for an award to the plaintiff of up to 10 percent of the government's recovery, based on the extent to which the court concludes that the government employee reasonably and in good faith attempted to bring the violation to the attention of the government authority and that the authority had failed to diligently investigate and pursue the action.

We believe this amendment offers a balanced approach to the competing concerns of uncovering fraud without undercutting employee loyalty. (We, however, would recommend that the percentage recovery available to the government employee be raised to the 15 percent minimum recovery guaranteed to most other qui tam plaintiffs.) It will insure that those employees who ultimately recover are only those who have acted consistently with their employment obligations. At the same time, Congressman Berman's proposed amendment leaves the door open for well-motivated government employees who have done everything within their power to bring fraud to the attention of their superiors. And it will insure that the courts are not deluged with government employee suits. Based on our own personal experience, we are confident that few lawyers would be willing to spend the time and resources necessary to pursue a false claims case if they did not believe that their client, the government employee, would be able to meet the standard established by this amendment. Finally, it is important to remember that under the proposed legislation, if a government employee recovers, it means that a judge will have determined that the Treasury actually recovered funds because of the acts taken by that government employee. Thus, the government wins, the taxpayer wins -- only the defendant loses.

Congressman Berman's legislation before this committee also clarifies the act's bar against parasitic lawsuits, and we fully support these clarifications. While the intent of the 1986 amendments was to prohibit qui tam cases in which the qui tam plaintiff brought no new information forward, the current public disclosure provision has been misconstrued by some courts to bar legitimate, non-parasitic claims and claimants. For example, in U.S. ex rel. Stinson v. Prudential Ins., 944 F. 2d 1149 (3rd Cir. 1991), the Third Circuit barred an action based on information obtained during civil discovery in litigation between private parties. The court took great pains to sort through whether discovery was encompassed in a "hearing" and whether it was "publicly disclosed." In addition, the court rejected an argument that the language was meant to bar suits based on allegations from litigation in which the government is a party. The court in Stinson thus entirely missed the point of the 1986 prohibition -- to bar only completely parasitic suits where the party has made no contribution to the government's effort to prosecute fraud. The language in Congressman Berman's bill recognizes that if a person discovers the basis for a false claims action in private litigation where the government is not a party, that person is contributing by developing that information into a false claims action and bringing the information to the attention of the government.

In addition to correcting the Stinson decision, the proposed language makes it clear that private efforts to discover and develop false claims actions -- even from a variety of public sources -- are encouraged. For example, we have been working with one nonprofit group and a number of medical experts to develop methods of identifying areas of Medicare abuse. This could involve reviewing and analyzing publicly available data. The language proposed by Congressman Berman makes it clear that such efforts could not be barred by some court that gives an expansive reading to the Stinson decision.

Finally, the proposed language is intended to correct judicial misinterpretations of the "original source" component of the "public disclosure" bar. The intent of the original source provision was to provide a safeguard for those individuals who had independent knowledge of allegations that were publicly disclosed, and therefore would not be merely "parasitic" qui tam relators if they brought an action based on such allegations. However, some courts have incorrectly ruled that all relators must meet the original source test. U.S. v. Rockwell Intern. Corp., 730 F.Supp. 1031 (D.Colo. 1990); U.S. ex rel. LeBlanc v. Raytheon Co., 913 F.2d 17 (1st Cir. 1990). The original source test is clearly to be invoked only after the case is found to be based upon a section 3730(e)(4)(A) public disclosure.

In addition, some courts are requiring that "original sources" show they were the source to the entity that publicly disclosed the allegations. U.S. ex rel. Dick v. Long Island Lighting Co., 912 F.2d 13 (2nd Cir. 1990). other courts are interpreting "direct and independent knowledge" as two separate tests to be met. U.S. v. Rockwell Intern. Corr., 730 F.Supp. 1031 (D.Colo.1990) ; U.S. ex rel. Stinson, et al. v. Prudential Ins., 736 F.Supp. 614 (D.N.J.1990).

The proposed language makes clear that to be an original source, a party must be able to demonstrate that he or she did not learn of the allegations from the public disclosure. So, for example, in a case where an individual provides information to a congressional committee which is later revealed in a press report that individual is an original source even though not the direct source of the allegations printed in the press report. In addition, where a public interest group or law firm learns of the information on which the allegations are based from their original source client, they qualify as original sources since their knowledge is not derived merely from the public disclosure. See U.S. v. Rockwell Intern. Corp., 730 F.Supp. 1031 (D.Colo.1990).

Now that we have more than five years' experience with the amended act, the question that I am most often asked is whether these amendments are actually working. The simple answer is yes. Fraud that would otherwise have gone undetected has now been exposed and substantial additional recoveries are beginning to flow into the U.S. Treasury as a result of the amendments. Information made available by the Department of Justice shows that recovery from qui tam lawsuits has increased 300 percent in the last year alone. We expect that trend to continue. For example, settlement negotiations are currently ongoing in two large cases where we represent qui tam plaintiffs. The settlement offers (which the government has rejected as being inadequate) in these two cases alone total nearly $100,000,000. We are currently litigating four other large cases, each with a potential recovery in excess of $100,000,000. (One of these cases is conservatively valued at $300,000,000.) In 1985, the year before the 1986 amendments were enacted, the government recovered $27,000,000 from all false claims cases. When you compare that total to the likely recoveries from just our handful of qui tam cases, the effectiveness of the act's qui tam provisions is readily apparent.

While such anticipated rewards to the qui tam plaintiffs and their attorneys may appear substantial, these rewards do not come without great risk and sacrifice. One of the main congressional objectives as expressed in the legislative history of the 1986 amendments was to encourage private lawyers to contribute legal resources in a joint effort with government lawyers. Congress envisioned a partnership effort with the Department of Justice playing the role of senior partner. We have worked both with attorneys in the Department's Civil Fraud Unit in Washington and with various U.S. Attorney's offices, and have been impressed by the high level of skill, dedication and public spirit displayed by each of these government attorneys. However, it is simply a fact of life that government resources are limited. The defendants spare no resources in fighting these cases, and all too frequently the budgets allocated for experts, depositions and litigation expense are inadequate for the government to fight the defendants on an even battlefield. This makes the contributions of private attorneys all the more necessary.

So, to fulfill our part of the "partnership," we must commit years of attorney time and resources to hard-fought and expensive litigation. False claims defendants routinely field a phalanx of attorneys to represent them thoroughly and aggressively. For example, we represent a qui tam plaintiff in a case the government has joined against Litton Systems Inc. This case is now in its fifth year, and Litton is represented by three large corporate law firms. In this case alone, we have had to commit approximately 15,000 hours of time and have expended substantial amounts of money for experts' fees, depositions and transcript costs and the like. With the trial date still seven months away, the total investment in time and expenses for our firm is already about $3,000,000, all of which is at risk unless and until the case is successfully concluded.

But, as great as the financial risk is for lawyers, it does not compare to the personal and professional risks taken by the whistleblowers. Those employees who challenge the conduct of their current or former employers frequently undergo a life-changing experience: they are frequently threatened and harassed; they are often ostracized within their own company and blackballed from employment throughout the industry; many risk financial ruin because they become unemployable; friendships may be destroyed and all too often even their family relationships are severely jeopardized.

Even though the 1986 amendments contained a very strong anti-retaliation provision to protect employees who utilize the provisions of the act, there seems to be an ever-increasing number of ways in which companies attempt to retaliate. I would like to bring to your attention some of the recent retaliation experienced by just three of our clients:

In November, 1990, Chester Walsh filed a false claims case against General Electric, alleging that GE had diverted millions of dollars in foreign military aid that Congress had intended for the government of Israel. The Department of Justice joined the case, re-affirming Mr. Walsh's allegations, and is seeking a treble damage recovery of $120,000,00 to the Treasury. GE has responded by threatening to terminate Mr. Walsh's employment and has told us that it may file a suit against Mr. Walsh to recover back any amount he may be awarded under the False Claims Act for his efforts in this case. They base their claim on the allegation that Mr. Walsh did not come to GE sooner to report the fraud that he witnessed. GE makes this claim despite the facts that:

In our view, GE's threats are a meritless and blatant attempt to undermine the False Claims Act by attempting to take away the incentives Congress provided. Three recent court decisions have concluded that the False Claims Act bars third party claims or counterclaims against qui tam plaintiffs. See Mortgages Inc. v. U.S. District Court for the District of Nevada, 934 F.2d 209 (9th Cir. 1991) ; United States ex rel. Newsham v. Lockheed, 92 Daily Journal D.A.R. 172 (N.D. Cal. 1991); and United States ex rel. Madden v. General Dynamics Corporation, CV 88-5253 (C.D. Cal. 1992).

If GE does pursue Mr. Walsh, the message GE will send to other would-be whistleblowers is clear: If you dare to file a qu tam case against GE, you will be exposed to lengthy, expensive and harassing litigation.

In a case filed against Teledyne Inc., the defendant has sought to intimidate the whistleblower, Klaus Kirchhoff, by filing a counterclaim alleging that Mr. Kirchhoff violated its Fourth Amendment rights when he provided government prosecutors with his own file copies of documents evidencing wrongdoing by Teledyne. Teledyne's novel and preposterous position is that our client is liable for the entire cost of defending the company against the government investigation. The implication of this position is overwhelming. If Teledyne were to succeed, it would mean that any person who turns over documents to the government evidencing wrongdoing by his employer would be subjecting himself to financial ruin. Even though we believe Teledyne's claim is totally meritless, you can imagine the impact upon an individual who is told that he may be held personally accountable for tens of millions of dollars because he reported a crime to the government.

Retaliation has taken a different form in a case filed against Northrop. Our client, Glenn Rohrer, filed a false claims case against Northrop, alleging improprieties in the construction of the B-2 facilities. The case was unsealed in the summer of 1991, and in the fall, Mr. Rohrer testified under subpoena to a congressional committee about the allegations of his qui tam case and about other improprieties he had witnessed at Northrop. Since then, Mr. Rohrer has been increasingly isolated at work and has received virtually no work assignments. Instead, his previously assigned tasks have been delegated to others, and he is shut out of meetings and interaction with other employees. The psychological toll this has taken is significant and the message it sends to other Northrop employees is clear.

Unfortunately, the current employee protection provisions of the act provide no ready remedy for Mr. Rohrer's situation. The act instead provides for only double back pay damages and reinstatement. In light of Northrop's conduct and that of other defendants, Congress may wish to add additional protections for whistleblowers by providing for both injunctive relief and punitive damages. If companies believe that actions such as those taken against Mr. Rohrer will deter others from filing false claims cases, they may be willing to pay the monetary penalties of double back pay damages. If, however, their conduct demonstrates bad faith and a clear intent to intimidate other employees, that would make them liable to punitive damage and these companies may re-assess whether they would engage in such retaliatory conduct.

Given all the risks associated with pursuing a False Claims Act case, it is important that the level of compensation at the end of the case be commensurate with those risks. We hope that members of Congress will remember this when they are approached by those in the defense industry who suggest that recoveries under this act are too generous and that these recoveries should be capped in some way. If a plaintiff gets 15 percent to 25 percent of a recovery, this means the U.S. government gets 75 percent to 85 percent of the money, money that would not have been returned to the U.S. Treasury absent the action taken by that courageous individual. Moreover, when qui tam plaintiffs do ultimately receive millions of dollars in hard fought cases, it will encourage others who know of fraud against the government to take similar risks and file their own false claims cases, again providing substantial benefits to the American taxpayers.

Thank you.