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Investigating Federal Civil False Claims Act issues in connection with SBA Loan Default

You should not have to struggle to settle SBA debt on your own. Instead, turn to one of our attorneys who specializes in SBA OIC claims. We are dedicated to helping you settle SBA loan default by reviewing your case under Federal False Claims Act guidelines and key points.

I. THE FEDERAL FALSE CLAIMS ACT AND ITS RELATIONSHIP WITH AN SBA LOAN DEFAULT?

The False Claims Act (FCA), 31 U.S.C. Sections 3729-3733 can be utilized to combat SBA loan fraud and/or any fraud in connection with other government-funded program. The qui tam or whistleblower provisions (Section 3730) have assumed significant importance, especially in the healthcare area. Enhanced powers vested in the Department of Justice through the provision for Civil Investigative Demands (CIDs) are frequently employed to secure documentation and testimony prior to any complaint being served. Moreover, given the increasing incidence of compliance plans, it is essential for any compliance officer to be conversant with the general provisions of the FCA.

II.  SECTION 3729: WHAT ARE “FALSE CLAIMS” UNDER THE FCA?

Section 3729 is the core provision of the FCA. It defines false claims liability, establishes the Act’s scienter requirement, defines “claims,” and contains a voluntary disclosure provision.

A. Liability

The Act provides: Liability: Any person who — a. “knowingly” presents, or causes to be presented to the United States a false or fraudulent claim for payment or approval (Section 3729(a)(1)) or b. “knowingly” makes, uses, or causes to be made or used a false record or statement to get a false or fraudulent claim paid or approved (Section 3729(a)(2)) or c. conspires to defraud the government by getting a false or fraudulent claim allowed or paid (Section 3729(a)(3)) or d. “knowingly” makes, uses or causes to be made or used a false record or statement to conceal, avoid or decrease an obligation to pay or transmit money or property to the United States (Section 3729(a)(7)) [the so-called “reverse false claim”] is liable for treble damages and penalties of $5,000-$10,000 for each false claim submitted, unless the person satisfies the “volunteer” provisions of the Act, in which case damages may be assessed at not less than double (Section 3729(a)(7)(A)-(C)).

There are four principal types of false claims that the FCA seeks to foreclose. First, one may submit a claim to the government which, on its face, contains false or fraudulent information–the “classic” false claim. This is addressed in Section 3729(a)(1).

An example would be either making false representations or a false document in order to get a false or fraudulent claim paid or approved. For example, if a Lender or CDC submits a written certification to the SBA in connection with the submitting a loan package for the SBA guaranty or, in the case of a SBA 504 loan, presentation of a debenture or bond for purchase, but in fact the representations or certifications were either false, withheld and/or fraudulent, and the certification is relied upon as part of the payment process (honoring the SBA guaranty or purchase of the SBA debenture), then a violation of Section 3729(a)(2) has occurred.

Frequently, counsel not familiar with the FCA will mix-up two important sections. The distinction between Sections 3729(a)(1) and (a)(2) of the FCA is well illustrated by Jana v. United States, 34 Fed. Cl. 447 (1995). There, the government’s counterclaim alleged that false progress payments had been submitted “substantiated by individual daily time cards” that were fraudulent. Id. at 448. The time cards were actionable under Section (a)(2). “The difference between Section 3729 (a)(1) and Section 3729(a)(2) is that the former imposes liability for presenting a false claim, while the latter imposes liability for using a false record or statement to get a false claim paid.” Id. at 449. Third, the FCA addresses conspiracies to engage in any of the acts forbidden by the Act in Section 3729(a)(3).

Section 3729(a)(7), contains the so-called “reverse false claim” provision. The basic purpose of this provision is to address situations where an individual or entity has already received funds or material from the government which ought to be returned. This is very similar to a “restitution” action or a “claw back” action in a bankruptcy proceeding.  In the SBA context, an example would be a situation where a Lender, through a series of false representations, withholding material information or making a fraudulent certification, obtains payment on the SBA guaranty and assigns the defective rights to collect against the defaulted SBA Borrower to the SBA.  If it is discovered that the procurement of payment on the SBA guaranty was based on false representations by the Lender at the time of presentation, this FCA provision, could be used to not only obtain payback of the paid SBA guaranty on the SBA loan default, but also, provide compensation to the victim (e.g. SBA Borrower or Personal Guarantor) and the Federal Government in the form of treble damages.  For example, see this FCA Complaint.

Penalty Provisions

As alluded to above, section 3729(a) contains the awesome penalty provisions of the FCA. As a starter, the government is entitled to three times the amount of its loss (also known as “single damages”). However, the more severe penalty provision is that which addresses penalties: between $5,000 and $10,000 for each false claim submitted and/or false document used to get a false claim approved for payment.

For example, for every 100 false claims a defendant entity submits, it can face liability of one million dollars or more in penalties alone.

Voluntary Disclosure Provision

It is frequently overlooked that the FCA contains its own voluntary disclosure provision at Section 3729(a)(7)(A)-(C). Please note that all three provisions therein specified must be satisfied — an extremely difficult undertaking when negotiating with the Department of Justice.

Compliance officers, in particular, should become conversant with this provision which can result in some substantial benefit if properly invoked. Most importantly, in recognition of cooperation with the government, a court may assess “not less than 2 times the amount of damages which the Government sustains because of the act of the person.” Notice that this language suggests that no penalties will be assessed. In actuality, this section is never applied by courts; its real significance is in negotiations with DOJ where it can afford an effective argument for reducing ambitious government damage demands.

Definition of “Knowing” (Section 3729(b))

In 1986, the False Claims Act was substantially amended to improve and enhance the government’s ability to recover federal funds lost through fraud. One important change was the clarified definition of “knowing” found at Section 3729(b). The amended Act now mandates that a person (including any healthcare provider or contractor) can be held liable if it submits or causes to be submitted3 a false or fraudulent claim or a false statement in support of a claim: a. with actual knowledge that it is false (Section 3729(b)(1)); b. in deliberate ignorance of the truth or falsity of the information (Section 3729(b)(2)); c. or in reckless disregard of the truth or falsity of the information (Section 3729(b)(3)).

Moreover, Congress clarified that no proof of specific intent to defraud is required. (Section 3729(b)(3)). One of the most grievous mistakes counsel unfamiliar with the FCA make is to equate the scienter requirement of the FCA with criminal fraud statutes. Not only does the statute state on its face “no specific intent” is necessary, it offers three varying definitions of “knowing” which do determine the scienter requirement.

The first definition, actual knowledge (Section 3729(b)(1)), is entirely straightforward. If a false claim is submitted, or a false or fraudulent document submitted, and the submission is from a person who knows the document or claim is false or fraudulent, then a knowing submission has occurred. The next two definitions are somewhat more illusive.   A good illustration of acting in deliberate ignorance of the truth or falsity of information (Section b(2)) is found where, for example, a Lender does not properly supervise or train its SBA guaranty procurement staff, so that an inappropriate loan package and request that the SBA honor its guaranty is submitted.

The Lender cannot avoid liability by asserting that it relied upon its employees or, worse, point the finger against the Borrower if it could have exercised proper review, audit and/or SBA SOP compliance actions.  This provision is sometimes said to deal with the “ostrich with its head in the sand” problem.

Put simply, you cannot look the other way and thereby avoid FCA liability. The third definition, acting in “reckless disregard” is very difficult to assess. Probably, this provision relates to negligence of a very high category.

The important point to bear in mind is that nobody quite knows what the second and third categories of “knowing” mean and how a court would interpret these provisions.

Therefore, compliance officers, in particular, should act upon the assumption that careless or mistaken claims can serve as the basis for an FCA prosecution.

What is a “Claim” under the FCA (Section 3729(c))?

It is important remember that the definition of “claim” is broadly specified in the act: any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United States Government provides any portion of the money or property which is required or demanded, or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded [emphasis added]. Therefore, false claims or fraudulent documents do not have to be submitted to the government directly; the provision covers virtually anything of value, and the Act follows the flow of government money or property. The safest rule of thumb is that if the money or property at issue originated with the government, the FCA will reach it.

III. THE QUI TAM OR WHISTLEBLOWER PROVISIONS OF THE FCA

In 1986 the qui tam, or private citizen suit provisions of the False Claims Act (found at 31 U.S.C. Section 3730), was substantially strengthened and liberalized to provide greater incentives for private individuals (designated as “relators”) to come forward and report fraud against the government. Any violation of the Act may be brought by a private person in the name of the United States–the cases are captioned U.S. ex rel. [relator] v. Defendant–on behalf of the government as a qui tam action. Particularly in the healthcare area, qui tam actions alleging fraud increasingly are becoming the predominant source of the government’s actions under the Act.

The key provisions of Section 3730 are:

Section 3730(b)–Filing the Complaint

Section 3730(b)(1) states the basic authority of a relator to act on behalf of the United States. Please note that the relator cannot dismiss an action on its own; the Attorney General must consent. Section 3730(b)(2) specifies the procedures that must be followed in terms of serving the government with the qui tam complaint. Briefly, the relator files a complaint under seal, serves the Attorney General and the appropriate U.S. Attorney, and, in addition, furnishes the government with a statement of material evidence in support of the complaint’s allegations of fraud. The government has an initial 60 days to investigate the allegations.

However, pursuant to Section 3730(b)(3), the Department of Justice may (and almost always does) request extensions of time. Eventually, the government must either “intervene” and litigate the case, or “decline” to do so and let the relator pursue it. Section 3730(b)(4). Once a complaint has been filed, “no person other than the government may intervene or bring a related action based on the facts underlying the pending action (the so-called “first to file” rule). Section 3730(b)(5); see U.S. ex rel. Erickson v. Am. Inst. of Biological Sciences, 716 F. Supp. 908 (E.D. Va. 1989).

Section 3730(c)–Rights of Relator and Government

This section states the respective rights of the relator and the government. The government may dismiss an action without the consent of the relator as long as the relator can contest the issue in a hearing. Section 3730(c)(2)(A). Similarly, the government may settle the action with the defendant(s) even if the relator opposes the resolution, as long as the district court affords the opportunity for a hearing on the merits of the proposed settlement. Section 3730(c)(2)(B). If the government declines participation, the relator may conduct the litigation on its own. Section 3730(b)(4)(B).

Section 3730(d)–Financial Consequences

The relator is entitled to between 15 and 30 percent of the recovery/ settlement/judgment, depending on whether the government intervenes and conducts the litigation and other factors (less than 15 percent under some circumstances). Section 3730(d)(1) & (2). However, there are some substantial statutory limitations on a relator’s potential recovery. If the relator participated in the underlying actions giving rise to the claim, the relator’s share may be reduced or eliminated in its entirety by the district court. Section 3730(d)(3). If the government declines participation, and the defendant is successful, it may be entitled to “reasonable attorneys’ fees and expenses” pursuant to Section 3730(d)(4). See article titled, Recovering Attorney’s Fees and Expenses from Unsuccessful Relators in Qui Tam Cases Pursuant to Section 3730(D)(4) of the False Claims Act.

A particularly critical section of Section 3730(d)(1) is that provision which specifies that the relator “shall also receive an amount for reasonable expenses which the court finds to have been necessarily incurred, plus reasonable attorneys’ fees and costs. All such expenses, fees, and costs shall be awarded against the defendant” [emphasis added]. Unlike the relator’s recovery, which is deducted from the government’s total recovery, the relator’s expenses and costs are separately assessed against the defendant. A common mistake of inexperienced counsel is to either (a) assume that any such award is also subtracted from the settlement or judgment paid the government, or (b) assume that the issue of attorney’s fees is governed by the prevailing “American rule” which usually forecloses such an award.

Consequently, no settlement agreement should be entered into with the government until the issue of how much the relator will be paid under this provision is determined. This is because awards under this provision can prove to be enormous; by contrast, defendants have maximum leverage when negotiating the underlying settlement and can utilize the government’s desire to settle to restrain overly ambitious relators seeking exorbitant compensation under this provision. Otherwise, a district judge will decide what are the relator’s “reasonable” expenses in a proceeding which itself can prove exceedingly expensive to defend.

Section 3730(e)–Jurisdictional Foreclosure; Public Disclosure Bar and Original Source

This section is of crucial importance to defendants in qui tam actions. This is because Section 3730(e) contains jurisdictional provisions that limit the ability of relators to institute actions. For example, Section 3730(e)(3) forecloses any action which “is based upon allegations or transactions which are the subject of a civil suit or an administrative civil monetary penalty proceeding in which the Government is already a party.”

This provision is rather straightforward; not so for other components of the section. The most important jurisdictional bar relied upon by defendants to terminate qui tam litigation is found in Section 3730(e)(4)–the so-called “public disclosure bar.” The reported cases construing this section run into the hundreds–stark tribute to its potent power to terminate qui tam suits in their tracks. This is because unless a relator can satisfy Section 3730(e)(4), its action is jurisdictionally barred.

An extensive analysis of this section is beyond the scope of this essay; however, every unfortunate recipient of a qui tam complaint should initially direct their counsel to this provision. The best starting point to understand this concept is the language of section (e)(4)(A) itself: No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional administrative, or Government Accounting Office report, hearing, audit or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information [emphasis added].

Simply put, if the allegations or transactions upon which the qui tam complaint is based have been publicly disclosed in judicial proceedings, in government reports or audits/investigations or in the media, a “public disclosure” has taken place. The intent of Congress here is explicit.

What is a Public Disclosure?

The qui tam provision of the FCA was enacted by Congress in an effort to financially reward individuals who come forward with information about fraud against the government. The legislative history of the FCA suggests the legislative purpose was to use the public disclosure jurisdictional bar to ensure that plaintiffs who have not significantly contributed to the exposure of the alleged fraud would not share in the bounty. United States ex rel. Devlin v. California, 84 F.3d 358, 362 (9th Cir.), cert. denied, 519 U.S. 949 (1996). The public disclosure bar and the original source exception, therefore, embody the legislative effort to strike a balance between encouraging whistleblowing and discouraging so-called parasitic suits.

In order to qualify, a plaintiff “must be a true whistleblower. [A relator] is unable to pursue the suit and collect a percentage of the recovery if the case is based upon information that has previously been public or if the claim has already been filed by another.” United States ex rel. McKenzie v. Bellsouth Telecommunications, 123 F.3d 935, 939 (6th Cir. 1997) (quoting United States ex rel. Taxpayers Against Fraud v. General Elec., 41 F.3d 1032, 1035 (6th Cir. 1994)), cert. denied, 522 U.S. 1077 (1998).

Put differently, whistleblowers sound an alarm while “second toots” merely mimic allegations already exposed. Wang ex rel. United States v. FMC Corp., 975 F.2d 1412, 1419 (9th Cir. 1992) (“Qui tam suits are meant to encourage insiders privy to a fraud on the government to blow the whistle on the crime. In such a scheme, there is little point in rewarding a second toot.”)

Relators must not be “opportunistic late-comers who add nothing to the exposure of the [alleged] fraud.” See United States ex rel. Rabushka v. Crane Co., 40 F.3d 1509, 1511 (8th Cir. 1994) (discussing the purpose of the FCA), cert. denied, 515 U.S. 1142 (1995). An allegation of fraud has been publicly disclosed when it is in the public domain. United States ex rel. Dick v. Long Island Lighting Co., 912 F.2d 13, 18 (2d Cir. 1990) (discussing the meaning of “public disclosure” in the context of the FCA). Stated differently, “potential accessibility [of the information] by those not party to the fraud [is] the touchstone of public disclosure.” United States ex rel. Doe v. John Doe Corp., 960 F.2d 318, 322 (2d Cir. 1992) (citing United States ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1161 (3d Cir. 1991).

Additionally, where the allegations are not just potentially accessible to the public but were actually divulged to “strangers to the fraud,” the requirements of a public disclosure have been met. United States ex rel. Doe v. John Doe Corp., 960 F.2d at 322. When a relator’s complaint “merely echoes publicly disclosed, allegedly fraudulent transactions that already enable the government to adequately investigate the case and to make a decision whether to prosecute, the public disclosure bar applies.” United States ex rel. Findley v. FPC-Boron Employees’ Club, 105 F.3d 675, 688 (D.C. Cir.), cert. denied, 118 S. Ct. 172 (1997).

In fact, the jurisdictional bar may apply even if the public disclosure and the qui tam complaint are not identical. Some courts have held that the public disclosure need only raise an inference of fraud. See United States ex rel. Springfield Terminal, 14 F.3d at 654. Other courts have required that the publicly disclosed allegations or transactions “encompass the essential element of the fraud alleged.” United States ex rel. Rabushka, 40 F.3d at 1514.

Clearly, though, where the qui tam plaintiff’s complaint mirrors or “substantially repeat[s] what the public already knows,” the jurisdictional bar is triggered. See United States ex rel. Findley, 105 F.3d at 687. A qui tam plaintiff’s complaint is “based upon” a public disclosure if it merely repeats what the public already knows via the public disclosure. See United States ex rel. Biddle v. Board of Trustees of the Leland Stanford, Jr. Univ., 161 F.3d 533, 537-40 (9th Cir. 1998), cert. denied, 119 S. Ct. 1457 (1999); see also United States ex rel. Findley, 105 F.3d at 683 (finding that the purpose and legislative history of the FCA support a construction of “based upon” as requiring only that the qui tam plaintiff’s allegation parrot information in the public domain.) A complaint is “based upon” a public disclosure even if the qui tam plaintiff did not derive his knowledge of the alleged fraud from the public disclosure. See United States ex rel. Precision Co. v. Koch Indus., Inc, 971 F.2d 548, 552 (10th Cir. 1992), cert. denied, 507 U.S. 951 (1993); United States ex rel. Doe v. John Doe Corp., 960 F.2d at 324; United States ex rel. Kreindler & Kreindler v. United Technologies Corp., 985 F.2d 1148, 1158 (2d Cir. 1993); But see United States ex rel. Siller v. Becton Dickinson & Co., 21 F.3d 1339, 1348 (4th Cir.), cert. denied, 513 U.S. 928 (1994). In fact, several courts have held that a qui tam plaintiff’s complaint can be “based upon” a public disclosure of which the plaintiff had no knowledge. See United States ex rel. Findley, 105 F.3d at 683.

Who is an Original Source?

Once the complaint is challenged as being based upon publicly disclosed information (such as in a motion to dismiss under FRCP 12(b)(1)), the relator’s only device to survive is to demonstrate that she qualifies as an “original source, as defined in Section (e)(4)(B): For purposes of this paragraph, “original source” means an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information [emphasis added]. The litigation interpreting the “original source” provision has, as can be surmised from the language of the pertinent section, involved several key concepts.

A vital threshold concept is what constitutes direct knowledge? For example, must the relator have actually been involved or had first-hand knowledge of the pertinent events, or even actually witnessed those events; or will indirect knowledge (such as hearsay) suffice? A related issue is whether the relator must have had direct knowledge of the information that was released into the public domain. See Findley, 105 F.3d at 690. A second hotly-debated issue is how one establishes “independent knowledge.”

Interpretative case authority suggests that this term means (a) knowledge gained independently of the public disclosure, or (b) knowledge obtained independently of the government. One interesting issue is whether if any of relator’s knowledge is derived from information available in the public domain, that triggers the entire issue of whether the relator is an original source. In all the fuss over the original source provision, an important procedural element is often lost in the shuffle.

Section (e)(4)(B) also mandates that a prospective relator must “voluntarily” disclose his information to the government before filing his complaint. In contrast to other elements of the original source provision, this requirement has undergone limited interpretation. Interesting issues nonetheless present themselves. What if the government contacts a potential relator before the relator has contacted the government? What is a public disclosure takes place prior to the relator contacting the government, which has by then derived some knowledge at least of the allegations from the public disclosure.

If the prospective relator is a government employee; can he ever “voluntarily” disclose information? Finally, one of the most intriguing issues is whether a relator’s status as an original source survives if despite meeting the direct and independent knowledge thresholds, he has no connection with the public disclosure that occurs. Put differently, must the relator be the “original source” of the information contained in the public disclosure. Some circuits have so held as indicated above. Once again, the best way to get a flavor of how courts have developed and dealt with this provision is to read a sampling of the pertinent cases. This is time well spent, since the two “hurdles” imposed by Section 3730(e)(4) can be the death knell of a qui tam action.

Consequently, district courts likely perform variants of the following analysis when Section (e)(4) is invoked: 1. Have relator’s allegations been publicly disclosed? a. What is a public disclosure [manner of disclosure]? b. Does the public disclosure sufficiently reveal a fraudulent transaction [substance of the disclosure]? 2. If so, is relator’s suit based on publicly disclosed information? a. Actually “derived from” standard–i.e., non-parasitic since assumes had knowledge of the prior public disclosure. b. Or if information contained in allegations is supported by the content of a prior public disclosure–even if no knowledge of the disclosure, and the disclosure is coincidental, nonetheless it is then barred. 3.

If so, is the relator an original source of that information? What is “direct and independent knowledge”? a. But for–if would have not had knowledge of fraud but for public disclosure, then not an original source. b. Some courts require first hand knowledge of the fraud. c. How extensive must knowledge be? In addition, some courts (e.g., Second and Ninth Circuits) also require that the relator must be a source to the entity making the public disclosure or he cannot qualify as an “original source.”

Given the imprecise parameters of Section (e)(4), and its devastating potential impact upon a qui tam complaint, it is no wonder that the cases interpreting this provision have multiplied at a geometrical rate. The best way to become conversant with the multitude of Section (e)(4) issues is to dip into the cases from the appropriate jurisdiction. It will soon become evident why so much scholarly attention in law reviews and books has been devoted to this topic.’

Section 3730(h)–Whistleblower Protection

In addition to the significant penalties and multiple damages that may result from the underlying allegations of fraud, it is important from the employment law perspective to recognize that the FCA seeks to protect whistleblowers from retaliation by their employers. Section 3730(h) reads in pertinent part: Any employee who is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment by his or her employer because of lawful acts done by the employee on behalf of the employee or others in furtherance of a [qui tam action], including investigation for, initiation of, testimony for, or assistance in a [qui tam] action filed or to be filed . . . , shall be entitled to all relief necessary to make the employee whole. Such relief shall include reinstatement … 2 times the amount of back pay, interest … compensation for any special damages … including litigation costs and reasonable attorneys’ fees … An employee may bring an action in the appropriate district court of the United States for the relief provided in this subsection [emphasis added].

Since this provision was inserted into the FCA in 19866, well over 100 reported actions have been litigated involving Section 3730(h). As a consequence, when faced with a suspected qui tam situation, counsel must give separate consideration to the client’s potential liability under Section 3730(h) as well as developing a defense to the parent FCA action. See article titled, Retaliatory Discrimination Actions Under the Whistleblower Protection Provision of the Federal False Claims Act, 31 U.S.C. Section 3730(H).

IV. PROCEDURAL ISSUES–SECTION 3731

Section 3731 is dedicated to some important, but often overlooked, procedural issues. Particularly important are the FCA’s provisions governing the statute of limitations and the preclusive effect of collateral estoppel. A. Subpoenas The important thing to note about Section 3731(a) is that it makes provision for nationwide service of subpoenas compelling the appearance of witnesses at trial or a hearing. As a result, the normal Rule 45 (b) limitations foreclosing a witness from being served more than 100 miles from the location of the trial are inoperative. While this provision assists the government, it is also available to defendants. It is unclear whether this provision applies to deposition notices.

Statute of Limitations

The FCA contains two provisions governing the statute of limitations–both are found in Section 3731(b). The first provision, Section 3731(b)(1) provides for a straightforward six year period which begins to run when the “violation of Section 3729 is committed.” That date could be the point in time when the false claim or false or fraudulent document is submitted to the government. But the government and relators frequently argue that the statute does not begin to run until payment on the claim is made. In the healthcare area, one could even argue that the statute does not begin to run for providers who submit cost reports until final settlement has occurred on the cost report.

Section 3731(b)(2) provides an alternative basis for the statute of limitations. It forecloses any FCA action being brought: more than 3 years after the date when facts material to the right of the action are known or reasonably should have been known by the official of the United States charged with responsibility to acting the circumstances, but in no event more than 10 years after the date on which the violation is committed . . . [emphasis added].

This provision raises several interesting issues. First, who is the “official of the United States” referenced in the paragraph? Most courts have construed that to be either someone in the Civil Fraud Section of the Civil Division of Main Justice, or an Assistant U.S. Attorney. Therefore, the case agent’s investigation does not cause the statute to begin to run. It is only when the investigative report is presented to the Department of Justice that the clock begins to tick.

The more interesting issue is whether relators can rely upon this alternative provision. Given the reference to “official of the United States,” it has been contended by some defendants that the provision applies only to the government, not relators. The legislative history appears to support this contention, and increasingly courts have construed the provision as being inapplicable to relators. See, e.g., United States ex rel. El Amin v. George Washington University, 26 F. Supp. 2d 162, 170-73 (D.D.C. 1998).

However, even if this alternative provision is applicable, it can only extend the statute period no more than ten years from the date of the violation.

Burden of Proof

The FCA is not a criminal statute; it is controlled by the customary civil standard of proof. The burden of proof as to the elements of the cause of action and damages is by a preponderance of the evidence. Section 3731(c).

Collateral Estoppel

It is important to recognize that the FCA contains a highly stringent provision regarding collateral estoppel. Section 3731(d) reads: Notwithstanding any other provision of law, the Federal Rules of Criminal Procedure, or the Federal Rules of Evidence, a final judgment rendered in favor of the United States in any criminal proceeding charging fraud or false statements, whether upon a verdict after trial or upon a plea of guilty or nolo contendere, shall estop the defendant from denying the essential elements of the offense in any action which involves the same transaction as in the criminal proceeding and which is brought under subsection (a) or (b) of Section 3730 [emphasis added]. Put succinctly, a negotiated plea, as well as a finding of guilt after trial, can foreclose the ability of an FCA defendant to defend the action if the prior criminal action involves “the same transaction.”

This provision is one of the main reasons why it is so important that defendants facing both criminal and civil charges of fraud coordinate their defenses so that nothing resulting in the criminal proceeding forecloses their rights in a later civil proceeding. Similar care, in the healthcare area, needs to be taken relative to administrative proceedings, which may be impacted irretrievably by criminal pleas and civil settlement agreements.

V. VENUE AND STATE LAW CLAIMS–SECTION 3732

Section 3732 is devoted to two topics. Subsection (a) is the basic venue provision. It establishes venue in the usual locations, with one important twist. Venue is appropriate where “in the case of multiple defendants, any one defendant can be found, resides [or] transacts business.” Therefore, in a case where more than one defendant is named, venue is appropriate in a district where at least one of the defendants had contacts.

This provision can impose a substantial burden upon a distant defendant who has no real contact with the pertinent judicial district in which an action is brought, since barring transfer under 28 U.S.C. Section 1404(a), that is where the matter must be tried. It is important to bear in mind that Section 3732(a) is not a jurisdictional provision. United States ex rel. Thistlethwaite v. Dowty Woodville Polymer, 110 F.3d 861, 863 (2d Cir.1997).

Frequently, relators will plead Section 3732 (a) as their jurisdictional prerequisite. This is incorrect and can serve as a basis for dismissal upon appropriate motion. Subjection (b) addresses a point frequently overlooked. Namely, a relator can assert parallel claims under a state false claims act, such as that found in California, Florida, and Massachusetts for example, in their qui tam complaint and the district court has jurisdiction to entertain them. The only requirement is that the allegations arise “from the same transaction or occurrence as an action brought under Section 3730.” Few cases have interpreted this section.

SECTION VI. CIVIL INVESTIGATIVE DEMANDS

The 1986 amendments to the FCA equipped the Civil Division with a powerful investigative device patterned upon the Civil Investigative Demand authority long available to the Antitrust Division. Several dimensions of this authority bear particular notice. First, Civil Investigative Demands (CIDs) under Section 3733 can consist of (a) a request for the production of documents; (b) a demand for oral or deposition testimony; (c) service of interrogatories requiring written response; and (d) any combination of these devices.

Consequently, the CID is a much more potent device than most administrative subpoenas, which usually are limited to requesting documents. Second, CIDs can be utilized until DOJ files a complaint or until it declines or enters a qui tam. Therefore, the government is in the enviable position of being able to conduct investigative discovery prior to any ability of the potential defendant to conduct its own discovery.

Finally, one important way in which CIDs differ from administrative subpoenas is that Section 3733 imposes substantial limitations upon DOJ’s ability to disclose any of the information it gathers through their use. One helpful feature of Section 3733 is that its procedures, limitations, and bases for judicial challenge are all spelled out in precise detail. Therefore, when a CID is received, the first step should be a thorough review of Section 3733 which will dispose of most questions that may arise. The existing case authority interpreting Section 3733, while evolving, is not yet extensive. Section (a) In general. This section serves as the basic introduction to CIDs.

It is important to note that only the Attorney General can authorize issuance of a CID [subsection (1)]; therefore the AG’s signature (and not that of anyone else) must appear on the CID. The section spells out pertinent timetables and what elements each type of CID must contain in order to comply with the statute [subsection 2]. Substantial deviation from these directions can serve as a basis for challenging a CID. CIDs can also be challenged upon the grounds available for contesting any administrative subpoena. A special provision [subsection (2)(E)] governs material that the recipient of the CID has secured through discovery.

Finally, generally an individual can only be deposed once via CID [subsection (2)(G)]. While not specified in the statute, taking a CID deposition of an individual or entity does not foreclose later taking further depositions during regular discovery. Section (b) Protected material or information. This section categorizes some of the principal bases for challenging a CID for failure to comply with the statute. It is important to bear in mind, however, that CIDs are not discovery devices but “investigative” tools.

Therefore, courts may cut DOJ broader discretion in their use than for comparable discovery devices under the Federal Rules of Civil Procedure. Confidentiality orders secured in regular litigation will not foreclose disclosure under a CID. Section (c) Service; jurisdiction. This is one of two subsections dealing with service. An important point is that CIDs can be served by, amongst others, “false claims law investigators” (see subsection(i) for the definition of this term). That simply means that the DOJ trial attorney or Assistant U.S. Attorney so designated by the CID can serve the CID themselves.

Section (d) Service upon legal entities and natural persons

This subsection is very detailed and explicit. Mail service is permissible. Section (f) Documentary material. The main important element of this subsection is that a certificate of compliance must be executed when documents are produced. The certificate in blank should be attached to the CID; it merely needs to be filled out and executed by the appropriate individual. Procedures governing the production of material are written into subsection (2). Section (g) Interrogatories. Procedures specified here governing interrogatories are comparable to those under the federal rules.

Section (h) Oral examinations. It is critical to appreciate the differences between CID “oral examinations” and depositions under the FRCP. These distinctions arise from the fact that Congress intended CIDs to be investigative devices, not discovery tools. Therefore, counsel can face substantial limitations in representing clients during oral examinations. This section should be reviewed carefully before participating in an oral examination; it is essential to have a copy for reference during the oral examination. For example, only certain designated individuals may attend. DOJ will object to company employees being accompanied by company counsel, either as the the counsel for the witness or acting as the witness’ “representative.”

Negotiation is the order of the day when faced with this situation. Similarly, while transcripts (by virtue of subsection (6)) are supposedly available to the deponent, the witness may be limited in access if the Attorney General, or the Deputy AG, or an Assistant AG determines ” good cause” exists. Then access may be limited to correcting the transcript in DOJ’s presence.

Once again, such problems can often be avoided by thoughtful negotiation before the event. Subsection (7) is extremely important. It lays out in exceptional detail the role of counsel during the oral examination. Once again, more substantial constraints are imposed than those encountered in the FRCP. Familiarity with these provisions is absolutely essential for effective representation of a client during a CID oral examination. Witness fees are authorized.

Section (i) Custodians of documents, answers, and transcripts. The primary importance of this section is that it spells out in great detail who has access to materials secured by a CID. Important limitations are specified relative to disclosure. These limitations must be strictly adhered to by DOJ. Some questions are left unanswered–e.g., can the Civil Division share CID materials with the Criminal Division. DOJ has indicated that regulations governing CIDs eventually will be promulgated to resolve these issues. Provision is made for the return of materials. The procedure for designating false claims act investigators and custodians is also found in this section.

Section (j) Judicial proceedings. Simply stated, here are spelled out the procedures for challenging a CID. Strict adherence to the specified procedures is essential to avoid summary denial of the challenge. There is also provision for an individual or entity who provided material in discovery to challenge the conduct of the custodian. The Federal Rules of Civil Procedure are applicable, but only to the extent “that such rules are not inconsistent with the provisions of this section.” Successful challenges to CIDs are exceptionally rare and should not be casually undertaken.

Section (k) Disclosure exemption. CID materials are not subject to the Freedom of Information Act. Section (l) Definitions. The definitional section is particularly integral to understanding the CID authority. Like the remainder of Section 3733, it is spelled out in excruciating detail. But familiarity with the definitions will pay substantial dividends along the way.

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