Whistleblower Laws, Lucrative for Some States, Stall in Others

November 28, 2011

For many states, a law intended to root out corruption also has been good for the bottom line.

Over the last decade, more than 20 states have passed a version of the federal anti-corruption law known as the False Claims Act (FCA). The local laws, like the federal one, allow governments to join lawsuits filed by whistleblowers who spot fraud involving taxpayers dollars.

They have been a lucrative proposition, helping states collect millions of dollars in fines. In May, California announced a $241 million settlement of an FCA lawsuit against Quest Diagnostics Inc. that alleged overcharges to the state’s medical program for the poor. California’s share of the settlement, $171 million, flowed to the state’s general fund.

Yet at least nine states have tried and failed to pass local versions of the False Claims Act. In Ohio, there have been attempts to pass a bill since at least 2007. Republican state Attorney General Mike DeWine threw his support behind a bill in April, but so far nothing has come of it. Kentucky and Pennsylvania have also been unable to beat back opponents.

Some of the most vocal criticism of the False Claims Act has come from the pharmaceutical and medical industries, which claim that the law encourages meritless lawsuits and creates a hostile business environment.

They also question the cost-effectiveness of such statutes, which require significant government resources to investigate the claims and oblige the government to share recoveries with whistleblowers.

Samuel Denisco of the Pennsylvania Chamber of Business and Industry, said that a state False Claims Act would be duplicative of the federal law, adding that policy makers have a responsibility to avoid “protractive litigation that is not beneficial to the state.”

States that have been unable to counter those objections are starting to pay the price, according to proponents of the law.

In August, for example, Kentucky sought to join a sweeping lawsuit accusing Education Management Corp., a for-profit educational company, of fraud. The state said that EMC made false statements to the Kentucky Higher Education Assistance Authority and the U.S. Department of Education.

California, Florida and Illinois — all of which have False Claims statutes — had already joined the case, first filed by a whistleblower in 2007 alleging that EDMC wrongfully received more than $11 billion in federal and state funds.

But on Oct. 24, Federal District Judge Terrence McVerry in Pittsburgh ruled that Kentucky could not intervene, citing its lack of a False Claims Act. A spokeswoman for the Kentucky attorney general’s office said it “respectfully disagrees” with the judge’s decision and is considering an appeal.

“It’s a shame that Kentucky didn’t have all the tools that other states have to go after fraud against taxpayers,” said Harry Litman, an attorney for the whistleblowers in the case.

False Claims legislation has run into similar obstacles in Pennsylvania. A coalition of Pennsylvania business groups, mainly in the medical professions, urged the legislature to oppose a version of a False Claims Act bill that was introduced last year. It argued that the bill would duplicate the federal statute and would hurt the state’s efforts to recruit and retain physicians.

Opposition to the False Claims Act hardly is hardly ever about politics or ideology, said Patrick Burns of Taxpayers Against Fraud, who notes that states with the law are both blue and red.

“It’s really about how state legislators will sell themselves out for a few thousand dollars apiece,” said Burns. “Even in a state like Ohio or Pennsylvania where the economy is in shatters and unemployment is through the roof, a few thousand dollars will prevent the state legislature from passing a bill that will stop the hemorrhaging of fraud and recover hundreds of millions of dollars.”

DATING TO LINCOLN’S ERA

The federal False Claims Act has a long history. It was first passed in 1863 in an effort championed by President Abraham Lincoln to combat unscrupulous defense contractors defrauding the Union Army.

But the act really got its teeth in 1987 when it was amended to allow whistleblowers who discover fraud against the government to bring a lawsuit and to receive 15 percent to 30 percent of any recovery. The changes also increased potential recoveries available to plaintiffs to three times the amount of actual damages.

As states began passing their own version of the False Claims Act, they tended to use the statutes to target healthcare fraud. Recoveries were initially relatively modest, according to findings published in a 2005 Tulane Law Review article. In Hawaii, for example, recoveries obtained between 2000 and the fall of 2004 were $4 million.

But more recently, some states have reached eight and nine-figure settlements in whistleblower cases and begun to amend their False Claims Act laws to tackle other types of corruption.

New York, with one of the most powerful state FCAs in the country, put the statute to novel use in October when Attorney General Eric Schneiderman intervened in a whistleblower case brought against Bank of New York Mellon for bilking investors in foreign exchange transactions. He is seeking nearly $2 billion on behalf of public pension funds and other investors.

And False Claims Act boosters whose efforts have been unsuccessful are going back to the drawing board. Kentucky’s House speaker, Greg Stumbo, has been trying to push a False Claims Act since he was attorney general of the state from 2003 to 2007. Though an effort to pass a version of the law failed earlier this year, Stumbo says he plans to reintroduce the legislation in January. “There’s no reason for states not to have it,” he said.

(Reporting by Andrew Longstreth; Editing by Eileen Daspin and Steve Orlofsky)

 

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