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What is the False Claims Act?

Congress first enacted the federal false claims act in 1863 during "The War between the States," sometimes known as "The Civil War," in response to outrage over extensive fraud against the government by Union army contractors.

A congressional committee formed to investigate "the gross waste and squandering of the public funds" found "an astounding amount of illegal and fraudulent activities ... Through haste, carelessness, or criminal collusion, the state and federal officers accepted almost every offer and paid almost any price for commodities, regardless of character, quality, or quantity ... For sugar it [the government] got sand; for coffee, rye; for leather, something no better than brown paper; for sound horses and mules, spavined beasts and dying donkeys; and for serviceable muskets and pistols, the experimental failures of sanguine inventors, or the refuse of shops and foreign armories."

In order to prevent recurring and chronic public fraud, the federal false claims act allows an individual whistle blower to bring a civil action in the name of the United States of America as a private attorney general and share in the recovery as a de-facto bounty hunter. The plaintiff whistle-blower is known as a "Relator" and, if successful, he or she is entitled to a statutory share of any settlement or recovery. The statute may apply even if the Relator engaged in wrongful activity. The theory of the statute is that "it takes a rogue to catch a rogue."

Now the bounty hunter law has arrived in North Carolina. The N.C. False Claims Act was enacted in response to the Deficit Reduction Act of 2005, which Congress passed in February 2006. The Deficit Reduction Act provides incentives to states to adopt their own false claims statutes. So as our legislature struggled to close the $4.5 billion budget gap over the summer of 2009, one of 300 changes looked at was enacting a N.C. False Claims Act to gain access to the federal incentives.

Under the law just about any written document, if submitted to the government in connection with a commercial transaction, may be considered a "claim." A claim may be "false" if an individual:

1. Had actual knowledge of the correct information and failed to disclose it.

2. Acted in deliberate ignorance of the truth or falsity of the information submitted to the government.

3. Acted in reckless disregard of the truth or falsity of the information submitted to the government.

The statute establishes a simple preponderance of the evidence standard, civil penalties (punitive damages) of $5,500 to $11,000 per violation, civil damages of three times the amount of payments made in reliance upon the "false claim," and give the Relator's share legally protected status -- (15 to 25 percent if the N.C. Attorney General gets involved, and 25 to 30 percent without AG's involvement) and attorney's fees.

Who the Law Applies To

In general, the False Claims Act covers fraud involving any federally or state funded contract or program, with the exception of tax fraud.

While many qui tam actions in the late 1980s and early 1990s involved Department of Defense contracts, in recent years most qui tam actions have been used to fight Medicare fraud and fraud against other federally funded health care programs. A broad array of scenarios can constitute FCA violations. Some examples include the following:

A contractor falsifies test results or other information regarding the quality or cost of products it sells to the Government;
A health care provider bills Medicare for services that were not performed or were unnecessary, or;
A grant recipient charges the Government for costs not related to the grant.

Types of Fraud Prosecuted Under the FCA

It is impossible to list all of the frauds that have been prosecuted under the False Claims Act, but the following list gives some idea of the scope of the false claims on the Government that have been uncovered to date:

Billing for goods and services that were never delivered or rendered.
Billing for marketing, lobbying or other non-contract related corporate activities.
Submitting false service records or samples in order to show better-than-actual performance.
Presenting broken or untested equipment as operational and tested.
Performing inappropriate or unnecessary medical procedures in order to increase Medicare reimbursement.
Billing for work or tests not performed.
Billing for premium equipment but actually providing inferior equipment.
Automatically running a lab test whenever the results of some other test fall within a certain range, even though the second test was not specifically requested.
Defective testing - Certifying that something has passed a test, when in fact it has not.
"Lick and stick" prescription rebate fraud and "marketing the spread" prescription fraud, both of which involve lying to the government about the true wholesale price of prescription drugs.
Unbundling - Using multiple billing codes instead of one billing code for a drug panel test in order to increase remuneration.
Bundling -- Billing more for a panel of tests when a single test was asked for.
Double billing - Charging more than once for the same goods or service.
Upcoding - Inflating bills by using diagnosis billing codes that suggest a more expensive illness or treatment.
Billing for brand -- Billing for brand-named drugs when generic drugs are actually provided.
Phantom employees and doctored time slips: Charging for employees that were not actually on the job, or billing for made-up hours in order to maximize reimbursements.
Upcoding employee work: Billing at doctor rates for work that was actually conducted by a nurse or resident intern.
Yield burning -- skimming off the profits from the sale of municipal bonds.
Falsifying natural resource production records -- Pumping, mining or harvesting more natural resources from public lands that is actually reported to the government.
Being over-paid by the government for sale of a good or service, and then not reporting that overpayment.
Misrepresenting the value of imported goods or their country of origin for tariff purposes.
False certification that a contract falls within certain guidelines (i.e. the contractor is a minority or veteran).
Billing in order to increase revenue instead of billing to reflect actual work performed.
Failing to report known product defects in order to be able to continue to sell or bill the government for the product.
Billing for research that was never conducted; falsifying research data that was paid for by the U.S. government.
Winning a contract through kickbacks or bribes.
Prescribing a medicine or recommending a type of treatment or diagnosis regimen in order to win kickbacks from hospitals, labs or pharmaceutical companies.
Billing for unlicensed or unapproved drugs.
Forging physician signatures when such signatures are required for reimbursement from Medicare or Medicaid.

Whistle Blower Protections

In addition, the N.C. False Claims Act provides protection to the Relators who are discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of their employment as a result of their furtherance of an action under the N.C. False Claims Act. Remedies include reinstatement with comparable seniority as the Relator would have had but for the discrimination, two times the amount of any back pay, interest on any back pay, and compensation for any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys' fees.