By

David Rody

12 November 2013

New York Proposes Law to Improve Incentives for Financial Industry Whistleblowers

Posted by David Rody and Lauren Treadaway

New York lawmakers have sought to fill a perceived gap in the New York State False Claims Act by providing a bounty and legal protections to whistleblowers who provide information for successful claims involving financial wrongs prohibited by state law. NYS Bill No. 4362, which is modeled in part on the New York State False Claims Act, provides new incentives to employees of financial services providers who report employer violations of New York State’s banking, insurance, and financial services laws. Currently, the New York Financial Services Law does not address monetary rewards or legal protection from employer retaliation for whistleblowers who report employer misconduct. Sponsored by New York State Senators James Seward and Joseph Griffo, S4362 would strengthen the current Financial Services Law in two significant ways: (1) by providing financial rewards for employees who disclose employer violations of New York State’s banking, insurance, and financial services laws to the Department of Financial Services (“DFS”); and (2) by including a provision for legal protection against employer retaliation for employees who report such misconduct.

If enacted, S4362 would allow a whistleblower who reports original information to receive between 10 and 30 percent of the total monetary sanctions received by DFS in a successful action against defendant based on the whistleblower’s information. The bill also creates legal protections for whistleblower employees against employer retaliation that mirror the remedies provided by the New York False Claims Act. According to the bill, a whistleblower employee may seek an injunction, reinstatement, backpay, and/or special damages where an employer retaliates against the employer by demoting, suspending, terminating, or harassing the employee. The full text of S4362 can be found here.

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04 November 2013

U.S. Chamber of Commerce Recommends False Claims Act Reforms

Posted by David Rody and Lauren Treadaway

On October 23, 2013, the U.S. Chamber of Commerce’s Institute for Legal Reform (ILR) issued a white paper entitled “Fixing the False Claims Act: The Case for Compliance-Focused Reform.” The paper proposes three areas of Congressional reforms to the FCA that would better prevent the loss of government funds through earlier detection and prevention of fraud, while reducing the cost of FCA lawsuits and investigations on companies accused of wrongdoing by narrowing the scope of successful claims as well as the amount of damages and penalties.

The first area of the paper’s FCA reform proposal deals with a shift from the government’s use of ex-post litigation to recover for fraudulently obtained government funds to ex-ante compliance programs that encourage businesses contracting with the government or participating in government programs to preclude, discover, and report fraudulent activity. Such compliance programs would not only reduce the estimated $60 billion lost by the U.S. Treasury to fraud each year but would also decrease the burden of FCA enforcement on taxpayers by relying on less expensive government investigation techniques and reducing the resort to costly litigation techniques.

The proposed voluntary compliance programs would encompass two requirements outlined by the paper: (1) independently developed” best practice” standards that measure compliance both across industries and within specific industry sectors; and (2) company retention of an independent auditing body to periodically review and certify the company’s compliance with those standards. To incentivize voluntary adoption of the certified compliance programs, the paper proposes reforms to the FCA for companies with such programs, including elimination of the blanket mandate for treble damages in favor of a variable factor based on the defendant’s culpability; a prohibition of subsequent qui tam actions based on fraudulent activity already reported by the company to a government investigatory agency; a mechanism by which companies can dismiss a qui tam suit filed by a relator-employee who failed to internally inform the company of the alleged wrongdoing at least 180 days prior to filing suit; and an elimination of mandatory or permissive exclusion or debarment.

The second area of the paper’s FCA reform proposal targets eight isolated provisions of the FCA, recommending amendments in order to effectuate the just and efficient use of the FCA against all companies and individuals regardless of their adoption of the proposed certified compliance programs. A majority of the eight proposed reforms focus on narrowing the scope of the FCA in various ways, thus preventing duplicative or frivolous claims as well as excessive damage pay-outs by defendants. The amendments would include, among other things, a calibrated structure for determining relator award percentages to reduce high recovery amounts paid to relators and their counsel; a prohibition against the filing of qui tam suits by government employees based on information obtained during their government service; a restriction of FCA liability to “instances of genuine, material falsehood or fraud” as opposed to the historical “implied false certification” cause of action; a change in the standard of proof for all elements under the FCA from a preponderance of the evidence to clear and convincing evidence; and a limitation of the government’s recovery to “net actual damages” to prevent windfall recoveries by the government.

Finally, the FCA reform proposal also urges the Department of Justice to improve its policy guidelines governing the use of Civil Investigative Demands (CIDs) in order to reduce the number of CIDs and the cost that companies incur when responding to these administrative subpoenas. The proposals include limiting the employees authorized to issue CIDs, establishing a narrow scope for CIDs, and limiting the DOJ’s ability to share CID-obtained information with relators and third parties. The report is available here.

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10 July 2013

District Court Finds Mere Failure to Comply with All Contractual Conditions for Services Does Not Necessarily Result In a False Claim

Posted by David Rody and Michael Mann

On June 19, 2013, a district court sitting in the Eastern District of Virginia held in United States ex rel. Badr v. Triple Canopy, Inc., No. 1:11-cv-288, Dkt. #55 (GBL), that “[m]ere failure to comply with all contractual conditions does not necessarily render the billing for those services so deficient or inadequate that the invoice constitutes a false claim under the FCA. Nor does it constitute an incorrect description of services provided to constitute a false statement sufficient to impose FCA liability.” Id. at 1-2. In granting the motion to dismiss of defendant Triple Canopy, Inc. (“TCI”), the court also held that a Relator cannot use allegations of a fraudulent scheme at one location to infer a false claim at another.

TCI was awarded government contracts to provide security services to various military installations overseas, including military bases located in Iraq. Given the nature of the assignment, TCI was required to ensure compliance with U.S. Army standard weapons qualification requirements. The government, as Intervenor, alleged that 332 Ugandan TCI guards arrived for duty, and failed to complete basic skills required before even attempting to qualify on a qualification course. Further, TCI allegedly began to falsify scorecards that were placed in the personnel files of the guards in the event of an inspection. The Relator, a former TCI employee, reported the allegedly fraudulent conduct to TCI’s human resources director, vice president, and general counsel. Later, Relator was allegedly instructed to alter TCI’s scorecards to reflect passing scores for all the guards. Although TCI was not awarded a contract renewal, the government alleged TCI continued to perform other government contracts in Iraq, and the Ugandan unqualified guards were allegedly transferred to other installations in Iraq to perform similar services.

In dismissing the claim, U.S. District Judge Gerald Bruce Lee concluded that because the invoices simply identified the quantity of guards, the price for each, the period of service, and the amount for the services, the invoices, without more, “[did] not contain objectively false statements sufficient to render them false claims for purposes of FCA liability.” Id. at 12. The government sought to analogize under-qualified guards to defective products, but the court dispelled the analogy, noting that “defective goods . . . are materially different from a claim for defective services.” Id. at 15 (emphasis in original). There is still some “inherent value retained in a service that is provided by an unqualified employee compared to a complete inability to use a product that is rendered defective.” Id. (citing U.S. ex rel. Sanchez-Smith v. AHS Tulsa Reg. Med. Ctr., LLC, 754 F. Supp. 2d 1270, 1287 (N.D. Okla. 2010) (rejecting a worthless services theory based upon substandard medical care because some care was provided, even if ultimately below expectations).

The “worthless services” theory did not work here because the government failed to allege “that the TCI guards were entirely deficient so as to render their services worthless.” Id. The Ugandan guards provided a service, although perhaps not fully compliant. The court held that the services must be “entirely devoid of value, or the noncompliance must have caused an injury to the Government such that the guards effectively provided no service at all.” Id. (citing In re Genesis Health Care Ventures, Inc., 112 F. App’x 140, 143 (3d Cir. 2001) (“Case law in the area of ‘worthless services’ under the FCA addresses instances in which either services are literally not provided or the service is so substandard as to be tantamount to no service at all.”). While the failure to receive proper qualification may be a breach of contract action, the government never alleged that TCI presented the qualifications in support of a demand for payment.

Judge Lee also held that a Relator cannot use allegations of a fraudulent scheme at one location involving one contract to create an inference of a false claim at other locations, without personal knowledge, as it would fail Fed. R. Civ. P. 9(b)’s requirement of specificity. The court dismissed all the FCA counts, but granted the government leave to re-plead claims of “breach of contract” and “payment by mistake.”

On July 3, 2013, TCI moved to dismiss the remaining contractual claims pursuant to Fed. R. Civ. P. 12(b)(1), contending that the court lacked subject matter jurisdiction over such disputes pursuant to the Contract Disputes Act, 41 U.S.C. §§ 7101 et seq. See Triple Canopy, Inc., No. 1:11-cv-288 (GBL), Dkt. #57 (E.D. Va. July 3, 2013). A hearing on the motion to dismiss is scheduled for July 26.

— Andrew Soler, a summer associate, provided assistance in the preparation of this post.

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