Supreme Court Rules on Two Important FCA Issues

Split Decision Clarifies Applicability Of The First-To-File Bar and Wartime Tolling of FCA Statute of Limitations

June 4, 2015 — On May 26, 2015, the United States Supreme Court issued a unanimous ruling in the matter of Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter. The opinion resolves two significant issues under the False Claims Act (FCA), which imposes liability on persons or entities who knowingly present false or fraudulent claims to the Government for payment or approval. The FCA, which covers many different types of fraud, may be enforced through litigation brought by the Government or through a civil qui tam action brought by private parties, known as relators, on the Government’s behalf. The FCA is commonly used by whistleblowers in actions against companies who have committed fraud against the United States.

The Carter Ruling

In Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, a relator filed a qui tam action against a defense contractor, Kellogg Brown & Root Services (“KBR”), alleging that KBR had fraudulently billed the government for services performed during the armed conflict in Iraq. After several dismissals, new case filings, and an appeal, the matter went before the Supreme Court wherein two important issues were examined. The first issue concerned whether the FCA’s “first-to-file” bar, which precludes a qui tam suit “based on facts underlying [a] pending action,” precludes new actions while related claims are still active, or whether it may bar new actions in perpetuity. The second issue concerned the FCA’s statute of limitations provisions, under which a qui tam action must be brought within six years of a violation or within three years of the date by which the United States should have known about the violation, but no more than ten years after the date of the violation. The Court examined whether the Wartime Suspension of Limitations Act (WSLA), which suspends the statute of limitations for offenses committed against the government during wartime, applies only to criminal cases or if it also applies to civil qui tam claims under the FCA.

The Supreme Court ruled that the FCA’s “first-to-file” bar only blocks litigation of new claims while related claims are still active. The bar does not obstruct qui tam suits filed after a previously filed action is no longer pending. The Court concluded that use of the word “pending” in the FCA “first-to-file” rule must be interpreted to comply with the common meanings of the word - “remaining undecided” or “awaiting decision.” The Court rejected KBR’s argument that the word “pending” in the “first-to-file” rule was “short-hand for the first filed action.” The Court reasoned that such an interpretation would preclude suits dismissed for reasons other than the merits of the case, preventing potentially successful suits that might result in a large recovery for the Government, a result that Congress likely did not intend.

As to the statute of limitations issue, the Court ruled that the FCA’s statute of limitations could not be extended in civil qui tam lawsuits by the WLSA. The Court reasoned that, historically, the text and structure of the WLSA show that it applies only to criminal offenses and that any ambiguity in its current language must be resolved in favor of a narrow definition that comports with such history. Accordingly, the WLSA may  not be applied to civil claims under the False Claims Act.

Carter’s Implications on Future False Claims Act Lawsuits

While the WLSA portion of the Court’s ruling limits the filing of qui tam actions in a number of cases, the decision concerning the “first-to-file” bar has more far-reaching implication. Prior to Carter, in many jurisdictions, defendants accused of fraud in FCA cases could avoid liability under the “first-to-file” bar by simply illustrating that a previous case, based on related facts, had previously been filed – even if the claims in the prior action had been dismissed without reaching a decision on the merits, crippling countless credible qui tam cases. Under the new rule announced in Carter, the Government and taxpayers no longer face this unfair barrier to justice.

While Waters & Kraus is not handling this particular False Claims Act case, we are representing whistleblowers in similar lawsuits. If you have comparable claims concerning defense and homeland security fraud, contact us or call our qui tam attorneys at 800.226.9880 to learn more about our practice and how we can work together to notify the government about fraud against it. Jonathan R. Davis and Louisa O. Kirakosian, qui tam lawyers in Waters & Kraus’ Los Angeles office, protect tipsters throughout the whistleblower lawsuit process.

Sorrell and the Supreme Court’s New Approach to Commercial Speech

Will All Pharmaceutical Regulation Now Be Subject to Heightened Scrutiny?

Early this summer, in Sorrell v. IMS Health, Inc., -- U.S. --, 131 S. Ct. 2653 (2011), the Supreme Court invalidated a Vermont law that prohibited pharmaceutical marketers from using prescriber-identified information, absent the prescriber’s consent, to market drugs to physicians. Because the law did not prohibit other groups—such as research facilities—from using the same information, the Court found that the law imposed both content-based and speaker-based burdens on protected expression. Most notably, the Court expanded the category of what kinds of speech count for the purposes of heightened scrutiny under the First Amendment to include marketing activities, or commercial speech. And, given the application of heightened scrutiny, the Court narrowed the kind of content-based restrictions that might be permissible to curtail commercial speech. The court noted, for example, that the government may have a legitimate interest in protecting consumers from “commercial harms.” Id. at 2672. Specifically, the Court acknowledged that government regulation of commercial speech would be legitimate where the regulations are meant to curtail fraud or the risk of fraud. Id.

As Justice Breyer pointed out in his dissent, this expansion of First Amendment protections to commercial speech (which prior to Sorrell was understood to only be deserving of at most intermediate scrutiny) may undermine many of the regulatory schemes that have been in place for years, including FDA regulation:

The ease with which one can point to actual or hypothetical examples with potentially adverse speech-related effects at least roughly comparable to those at issue here indicates the danger of applying a “heightened” or “intermediate” standard of First Amendment review where typical regulatory actions affect commercial speech.  . . . If the Court means to create constitutional barriers to regulatory rules that might affect the content of a commercial message, it has embarked upon an unprecedented task—a task that threatens significant judicial interference with widely accepted regulatory activity.

Id. at 2676-77, 2678.

Does Sorrell mean that the government cannot put restrictions on off-label marketing? Such restrictions are clearly content-based and speaker-based, since as Justice Breyer points out, the regulatory scheme seeks to regulate the sale of drugs, but not furniture. Id. at 2677. And what about the use of kickbacks? On the one hand, the payment of kickbacks cannot be said to be “speech” and the regulation of kickbacks surely falls within the legitimate interest identified by the Sorrell majority to curtail fraud or the risk of fraud. But one commentator has already suggested that Sorrell means that government cannot interfere with kickbacks that are paid to marketers, since this is content-based interference with speech. How far will the Sorrell case be taken, and how will it affect False Claims Act cases based on off-label and anti-kickback theories? That will remain to be seen. For now, those of us who litigate these cases can only take comfort in the fraud exception laid out by the Sorrell majority, and be willing and able to show that the regulations that underlie the off-label and kickback cases fall within this category of acceptable government regulation.

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Loren Jacobson is a partner at Waters & Kraus, LLP, in the firm’s Dallas office. Her practice focuses on qui tam (whistleblower) cases and appellate matters.

Retail Pharmacy Fraud

Pharmacies that fail to perform federally-mandated drug safety screening procedures or falsely certify compliance with federal and state professional standard requirements, may be liable for fraud under the False Claims Act. Pharmacists are not just robots paid to dispense drugs prescribed by doctors. As the only healthcare providers trained to understand the multitude of pharmaceuticals and their potential interactions, pharmacists are also paid to exercise their professional judgment and intervene to prevent potentially fatal drug interactions and allergic reactions by contacting prescribing physicians and/or counseling patients.

Federal and state healthcare programs pay pharmacies not just for a product--the prescription drug--but also for this service, known as drug utilization review or DUR. The pharmacy’s DUR responsibilities include screening of prescriptions for potential problems, maintaining records of patient medical histories and allergies, and offering to counsel patients about new prescriptions.

In billing government healthcare programs, pharmacies are often required to certify compliance with their DUR responsibilities and formulary restrictions on the dispensing of certain drugs. During the billing process, pharmacies also interact with point-of-sale or “POS” software systems developed by many government programs, including the Medicaid programs of most states. Using vast databases containing information about drugs, interactions, allergies and the medical/drug histories of program beneficiaries, these POS systems generate warnings or alerts for pharmacists about potential problems with the drugs that they are attempting to dispense and bill. The pharmacist is required to acknowledge each alert and indicate the action he/she has taken to resolve the problem, including contacting the prescribing physician, counseling the patient or otherwise exercising his/her professional judgment.

Pharmacies that knowingly override DUR alerts without performing the specified services, or falsely certify compliance with formulary restrictions, but nevertheless submit claims to government healthcare programs for payment, can be guilty of fraud or false claims actionable under the federal False Claims Act and its state-law counterparts.

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WM. Paul Lawrence, II serves as of counsel to Waters & Kraus, LLP. His practice focuses on appellate, class action, and qui tam (whistleblower) litigation under the False Claims Act.

Bad Medicine in the False Claims Context

Improper Financial Ties Between Hospitals and Their Referring Physicians

On Friday, September 9, 2011, the Department of Justice announced that the United States has partially intervened in a False Claims Act lawsuit against Halifax Hospital Medical Center located in Daytona Beach, Florida, and Halifax Staffing, Inc.[1]  The case was initially filed in July 2009 by the current Director of Physician Services for Halifax Staffing.  A Second Amended Complaint, filed in February 2011, alleged that Halifax “improperly admitted thousands of inpatients even though no medical necessity existed for the admissions and the Defendants have routinely paid excessive compensation, and provided illegal kickbacks, profit-sharing incentives, as well as compensation pooling, to physicians in violation of the Stark and Federal Anti-Kickback laws.”[2] 

The government has partially intervened with respect to allegations that Halifax violated the Stark law[3], which prohibits hospitals and other entities from submitting claims to Medicare for certain health care services referred by physicians with an improper financial relationship with the hospital or other entity.  Here, the U.S. alleges that “Halifax’s contracts with three neurosurgeons and six medical oncologists were improper, in part, because they either paid physicians more than fair market value, were not commercially reasonable or took into consideration the volume or value of the physicians’ referrals.”[4]

According to Tony West, Assistant Attorney General for the Civil Division of the Department of Justice, “Improper financial arrangements between hospitals and physicians threaten patient safety because personal financial considerations, instead of what's best for the patient, can influence the type of health care that is provided.” [5]

The government’s involvement in this case is part of the Health Care Fraud Prevention and Enforcement Action Team (HEAT), an initiative by the Justice Department and the Department of Health and Human Services to focus efforts on reducing and preventing Medicare and Medicaid financial fraud through enhanced cooperation. Robert E. O’Neill, U.S. Attorney for the Middle District of Florida, said that “[b]y bringing cases such as this one, we hope to ensure that precious health care resources are not being wasted as a result of questionable financial relationships between health care providers.”[6]

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[1] U.S. Department of Justice, Office of Public Affairs, “U.S. Joined False Claims Act Lawsuit Against Florida’s Halifax Hospital Medical Center and Halifax Staffing, Inc.,” (Sept. 9, 2011), available at: http://www.justice.gov/opa/pr/2011/September/11-civ-1162.html (hereafter “DOJ Announcement”).

[2] U.S. ex rel. Baklid-Kunz v. Halifax Hosp. Med. Ctr., et al., Case No. 6:09-cv-1002 (M.D. Fla.) (Doc. 29).

[3] 42 U.S.C. § 1395nn, et. seq.

[4] DOJ Announcement.

[5] Id.

[6] Id.

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Melanie Garner is an attorney at Waters & Kraus, LLP, in the firm's Baltimore office. She focuses her practice on toxic tort, product liability, and qui tam (whistleblower) cases.

What Distinguishes Medical Judgment from Fraud?

Many qui tam cases involve decisions by physicians—a decision to certify a patient as eligible for hospice, a decision to order services that are allegedly medically unnecessary, a decision to code a procedure a certain way. In all of these circumstances, defendants will argue that allegations that such conduct is fraudulent are not actionable because differences in scientific opinion, methodology, and judgments cannot support claims under the False Claims Act.

Recently, the U.S. Attorney’s office debunked such arguments in a Statement of Interest filed in U.S. ex rel. Wall v. Vista Hospice Care, Inc., Case No. 3-07-cv-0604 (N.D. Tex.). In the Statement of Interest, the Government argued that where a physician acts with deliberate indifference or reckless disregard of objective facts, a fraud claim can lie. Specifically, in the hospice context, if a physician certifies a patient for hospice care without sufficient information to make the certification or with deliberate indifference or reckless disregard for whether the patient actually meets the objective criteria for such certification, the certification and claims for payment of that patient’s hospice care are false. As the Government noted:

Hospice care provided to a patient who does not meet objective medical criteria for terminal illness can be false or fraudulent under the FCA. A defendant cannot defeat FCA allegations simply due to the existence of a physician certification of terminal illness when there is evidence that the provider knew or should have known such a patient was not terminally ill.

This reasoning has equal force in the other circumstances described above:  where there are allegations that a physician ordered unnecessary procedures or services, or deliberately upcoded procedures, so long as there is a good faith allegation that the physician knowingly acted in direct contradiction to objective facts, an FCA claim should lie. The key is to be able to show that the physician’s conduct is not being challenged as erroneous, but as fraudulent.

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Loren Jacobson is a partner at Waters & Kraus, LLP, in the firm’s Dallas office. Her practice focuses on qui tam (whistleblower) cases and appellate matters.

Government Contractors Who Fail to Pay Davis-Bacon Prevailing Wages are Liable Under the False Claims Act

The Davis-Bacon Act requires that companies with contracts with the federal government pay workers the prevailing wage of the area in which the work is performed. The Department of Labor is responsible for determining the prevailing wage. Federal regulations provide that contractors submit weekly payroll certifications, including certifications for all their subcontractors. Additionally, Davis-Bacon and federal regulations provide that government contractors are responsible for ensuring that subcontractors pay Davis-Bacon wages.  

Cases against contractors have been brought under the False Claims Act. United States ex rel. Wall v. Circle C., 700 F.Supp.2d 926 (M.D.Tenn. 2010) is an important case for both its holdings in regards to subcontractors and for its holding in regards to calculating damages. In this case the defendant, Circle C, was awarded a contract at Fort Campbell, an Army base in Kentucky. An employee who worked for a subcontractor of Circle C alleged that Circle C violated the False Claims Act by submitting false certifications to the government that it complied with Davis-Bacon when the subcontractor was not paying prevailing wages. The employee brought a whistleblower action on behalf of the United States in the Middle District of Tennessee. The United States brought a motion for summary judgment and Circle C moved to dismiss and for a judgment on the record.  

Ultimately, the court ruled in favor of the United States and awarded treble damages. According to the Court, Circle C did not take measures to ensure that its subcontractor, Phase Tech, was paying prevailing wages to its electricians. The Court found that Circle C submitted false payroll certifications by failing to list that Phase Tech had performed the vast majority of the electrical work on the contract. Additionally, Circle C’s certifications did not match Phase Tech records. At the time that Circle C submitted its certifications the prevailing wage for an electrical worker in Kentucky was $19.19 an hour with $3.94 in fringe benefits. Instead of this prevailing wage, Circle C’s subcontractor had paid some of its electrical workers $12-$16 an hour. The United States paid Circle C a total of $553,807.71 for the electrical work on the project that was performed by its subcontractor. Although Circle C argued that its damages should be the difference between the prevailing wage and the wages it subcontractors actually paid, the court refused to discount the damages in this way. The court entered a judgment of $1,661,423.13 against Circle C, which included treble damages but no statutory penalties.  

The decision against Circle C is important for several reasons. It affirms that contractors have a duty to ensure that subcontractors pay Davis-Bacon wages. In its decision the court noted that defendant did not have a contract with their subcontractor that provided that the subcontractor would comply with Davis-Bacon and did not attempt to inform the subcontractor of their duty to comply with Davis-Bacon. The court affirmed that defendants will not escape False Claims Act liability by willfully remaining ignorant of whether their subcontractors comply with Davis-Bacon. Most importantly, it provides that the measure of damages is not just the difference between wages actually paid and prevailing wage. Instead, damages are calculated by the total amount of prevailing wages that should have been paid. This is important because if defendants were not held accountable for the entire amount of their fraud, there would be a greater temptation to risk paying less than Davis-Bacon wages. Given that contractors may also be responsible for paying treble damages and other statutory penalties for their fraud, the False Claims Act is a powerful tool for ensuring that contractors pay Davis-Bacon wages on federal contracts.    

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Jennifer L. McIntosh is an attorney at Waters & Kraus, LLP, in the firm’s West Coast practice — Waters, Kraus & Paul. Her practice focuses on class action cases, qui tam (whistleblower), and commercial litigation.

DOJ Considers Joining Lawsuit Against Home Depot for Violating Buy American Act; Several Companies Settle Similar Allegations

Home Depot confirmed in June of 2011 that the Department of Justice (DOJ) is “taking a closer look” at allegations in a complaint filed in federal court that Home Depot violated the False Claims Act.[1]  The complaint alleges that Home Depot violated federal law by selling products manufactured in China and other countries to the federal government, in violation of the Buy American Act.  The Buy American Act requires that sellers to the federal government provide only products which were made in the United States, or one of the countries which the United States has a trade agreement with.  China does not have a trade agreement with the United States, and so products manufactured in China may not be sold to the United States government under federal law unless the products fall under a recognized exception to the Buy American Act.   Although news that the DOJ may intervene in the suit against Home Depot came recently, the DOJ has been investigating the case since the complaint was first filed in 2008.  Recently, the Judge in this case denied Home Depot’s Motion to Dismiss—a positive sign for the plaintiffs. 

Although the lawsuit against Home Depot has not yet been resolved, Staples, Office Depot, and Office Max have settled similar allegations.  In 2005 Staples entered into a $7.4 million settlement with the Department of Justice regarding its alleged violations of the Buy American Act.[2]  The DOJ also entered into a $9.8 million settlement with Office Max and a $4.75 million settlement with Office Depot regarding their alleged violations which arose under the same complaint.   

Home Depot, Staples, Office Max, and Office Depot are not the only companies that have faced allegations that they violated the Buy American Act.  In January of 2011 the DOJ announced that Fastenal, a Minnesota-based chain of hardware stores, reached a $6.25 million settlement with the DOJ over allegations that it violated the Buy American Act.[3]  Whatever the outcome may be in the pending lawsuit against Home Depot, it is clear that the DOJ is taking a serious stand against companies which falsely certify that products sold to the government were made in the United States. 

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[1]Maxwell Murphy, Justice Dept Considers Joining Home Depot Whistle-Blower Suit, Wall Street Journal, June 27, 2011, http://online.wsj.com/article/BT-CO-20110627-711891.html.

[2] Minnesota-based National Hardware Store Distributor Fastenal to Pay U.S. $6.25 Million to Resolve False Claims Act Allegations, Department of Justice Press Release, January 13, 2011, http://www.justice.gov/opa/pr/2005/October/05_civ_549.html. 

[3] Staples Pays United States $7.4 Million to Resolve False Claims Act Allegations, Department of Justice Press Release, October 18, 2005, http://www.justice.gov/opa/pr/2011/January/11-civ-042.html.

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Jennifer L. McIntosh is an attorney at Waters & Kraus, LLP, in the firm’s West Coast practice — Waters, Kraus & Paul. Her practice focuses on class action cases, qui tam (whistleblower), and commercial litigation.

California DOJ Announces Two Multimillion Dollar False Claims Act Settlements

Quest Diagnostics Settles for $241 Million; CVS Pharmacy Settles for $1.76 Million

DOJ Affirms its Commitment to Prosecuting Medi-Cal Fraud  

California Attorney General Kamala D. Harris announced a $241 million settlement with Quest Diagnostics on May 19, 2011. Quest is the largest commercial laboratory in California, according to allegations in the complaint. The Attorney General’s Office stated that this settlement is the biggest recovery in the history of California’s False Claims Act. The Quest settlement involved allegations that Quest charged Medi-Cal[1] up to six times more for laboratory services than it charged private companies. By law, Quest was required to charge Medi-Cal no more than it charged any other purchaser of comparable services in comparable circumstances. The complaint also included allegations of an illegal kickback scheme.

                                        

Although the settlement involved just Quest, other laboratory companies, including LabCorp, are also named in the same complaint. The Attorney General’s Office stated that trial involving the LabCorp allegations is scheduled for early next year. LabCorp is the second largest provider of laboratory services in the state, according to the complaint. A total of eight laboratory companies, including Quest and LabCorp were named in the complaint. In the press release announcing the Quest settlement, Attorney General Harris stated: "In a time of shrinking budgets, this historic settlement affirms that Medi-Cal exists to help the state's neediest families rather than to illicitly line private pockets." Attorney General Harris also had a strong warning for companies and individuals who would try to defraud Medi-Cal. She stated, “Medi-Cal providers and others who try to cheat the state through false claims and illegal kickbacks should know that my office is watching and will prosecute." 

In addition to the Quest settlement, the California Department of Justice (DOJ) announced on April 22, 2011 that it reached a settlement with CVS Pharmacy, in conjunction with the U.S. Department of Justice and nine other states. California will receive $1.76 million of the total $17.5 million settlement with CVS. The allegations in this complaint were that CVS submitted claims for prescriptions drugs to Medi-Cal for individuals who had health insurance coverage under both Medi-Cal and private insurance. Under law, Medi-Cal is the secondary payer in claims where individuals are covered by both Medi-Cal and private insurance. In other words, if an individual is covered by both Medi-Cal and private insurance, Medi-Cal is only responsible for the co-payment, while the insurance company is responsible for the remainder of the claim. The California DOJ’s announcement in recent months of settlements with Quest and CVS demonstrates its commitment to pursuing legal action against those who make false claims to Medi-Cal.

Press Releases for the Settlements with Quest and with CVS can be found at:

  http://oag.ca.gov/news/press_release?id=2518&

  http://oag.ca.gov/news/press_release?id=2074&

[1] Medi-Cal is the name for California’s Medicaid program, which is jointly funded by California and the federal government.

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Jennifer L. McIntosh is an attorney at Waters & Kraus, LLP, in the firm’s West Coast practice — Waters, Kraus & Paul. Her practice focuses on class action cases, qui tam (whistleblower), and commercial litigation.

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Is Off-Label Marketing Here to Stay?

Since 2004, there have been dozens of settlements in qui tam cases alleging off-label marketing by pharmaceutical and medical device manufacturers. These include some of the largest qui tam settlements in history, including $1.4 billion paid by Eli Lilly in January 2009 and $2.3 billion paid by Pfizer in September 2009. One might reasonably ask whether the drug and device industries have learned their lesson from these cases and will be deterred from future off-label marketing. The writer thinks not, simply because off-label sales are an important part of the business model for drug and devices companies.

To understand this point, one must understand two simple facts about these industries: 

1. getting FDA approval for a new “indication” for a drug or device is very expensive; and
2. once a drug or device has been approved for a single use, no matter how narrow or specific, doctors are free to prescribe it for any other use they see fit.

If you are in charge of rolling out a new drug or device for a manufacturer, your job is to maximize sales of that drug or device and your compensation is likely tied to your success in doing so. Therefore, you don’t have to be a marketing genius to figure out that the market for your product can be increased greatly, and the company’s sales of the new drug or device will soar, if only doctors will make up their minds to use it for an off-label condition that affects large numbers of people.

Yet you are not supposed to actively “promote” a use of a drug or device that is not described in its FDA-approved labeling. If you do so, you may be guilty of misbranding, 21 U.S. C. §352, for which there are criminal penalties including imprisonment for not more than one year and fines of up to twice the gross gain realized by your company. 21 U.S. C. §§331 & 333. Moreover, the False Claims Act may subject you to treble damages and civil penalties on sales to government healthcare programs. 32 U.S.C. §3729. This creates a real conundrum for the drug or device marketer, one in which he weighs the benefits of violating the law (potentially billions of dollars in annual sales for a blockbuster drug) against the likelihood and consequences of getting caught (not too great and not to bad).

As a practical matter, even when drug and device companies are caught, no one goes to jail and the fines imposed are significantly less than the profits realized, especially profits pocketed by executives and sales personnel who have moved on and left others to clean up the mess. It often takes four to five years for the government to act upon a qui tam complaint and the complaint itself may not be filed until several years after the illegal activity occurs. Several of the off-label cases settled within the last year involved conduct occurring between 1998-2000, for a starting point, and 2004-2006, for an end point. The company and many in its sales force often realize years of profit before they are asked to pay anything back. So, doing a simple cost/benefit analysis, many people in the industry decide to break the law. It’s as simple as that.

Once the decision is made to break the law by engaging in off-label promotion of drugs or devices, it takes only a small additional failure of conscience to use money to influence medical education, to distort medical research and to influence the prescribing behavior of physicians, especially if you are losing market share to cut-throat competitors who are already doing so. Depending upon the circumstances, these acts may constitute violations of the Anti-Kickback Statute, 42 U.S.C. §1320a-7b(b)(2) and the False Claims Act, 31 U.S. C. §3729 et seq.

I'm convinced that people in the drug and device industries are no worse morally than people in any other. But these are tough, competitive industries where people are expected to produce outsized profits on their compainies' best products to make up for all the drugs and devices that never pay for their costs of development. The pressure to produce and compete can be overwhelming. many executives and sales representatives eventually reach a day when they can no longer look themselves in the mirror. If you have reached that point, the lawyers at Waters & Kraus are here to help you do the right thing without sacrificing the financial well-being of your family. The government provides you a significant bounty of 10% to 30% of its recovery in any qui tam case you file in order that you will not have to make the Hobson's choice of either breaking the law or having no livelihood.

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WM. Paul Lawrence, II serves as of counsel to Waters & Kraus, LLP. His practice focuses on appellate, class action, and qui tam (whistleblower) litigation under the False Claims Act.

Proposed Changes Threaten Integrity of Dodd-Frank Act

In 2010, the U.S. Government passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) in response to the economic meltdown caused by the financial sector. The industry, namely big banks and corporate giants, literally needed an "overhaul." The Dodd-Frank Act's Section 922(a) amended the Securities Exchange Act of 1934 by adding a new section 21F entitled "Securities Whistleblower Incentives and Protection." The Dodd-Frank Act was passed to protect, encourage, and incentivize whistleblowers to come forward, a tactic that may have spared the economy's failure had it been in place prior to 2010.

Similar to the outlines of the False Claims Act, whistleblowers under the Dodd-Frank Act who voluntarily provide original information about potential securities law violations that lead to sanctions of $1 million or more could be eligible for awards of 10 to 30 percent. The new Section 21F also prohibits employers from discharging, demoting, suspending, threatening, harassing (directly or indirectly), or otherwise discriminating against an employee who attempts to report the fraud.

Key Factor in Passing Dodd-Frank

Perhaps the key factor in the passage of the Dodd-Frank Act was whistleblower Harry Markopolos, who uncovered Bernie Madoff's Ponzi scheme some 10 years before the rest of the world learned of the biggest financial crime in history. Mr. Madoff was a prominent Wall Street figure and the former chairman of NASDAQ who was cheating thousands of individuals out of their savings and investments. During the course of many years, Mr. Markopolos worked tirelessly to get the Securities and Exchange Commission (SEC) to do something about Mr. Madoff by providing them, not only with information, but with countless supporting documents. Unfortunately, by the time the SEC decided to act, millions of dollars were already long gone.

Even though the Dodd-Frank Act has been passed, procedural rules have not been finalized and powerhouse financial organizations have been lobbying to delay finalization of the law and to hollow out key provisions. Big banks and companies claim that the Dodd-Frank Act will significantly heighten the risks that employers already face and complicate internal procedures. Politicians aligned with big business aim to chip away at the Dodd-Frank Act by proposed regulatory subversion.

Proposed Changes

One of the proposed changes would require individuals alleging corporate wrongdoing to first inform their employers, by following internal compliance programs, before reporting information to the SEC. Another proposed change would give the SEC greater leeway to deny rewards to people who otherwise meet the program's requirements. For example, awards would be banned for people who participated in wrongdoing even if they were not convicted of a crime. In another effort to discourage whistleblowers from coming forward, the big business lobby wants to ban attorneys representing whistleblowers from working on a contingency-fee basis.

The Risks

The current proposals defer too much to big business and violate the intent of the Dodd-Frank Act that established serious consequences for Wall Street and corporate misbehavior. The SEC's job is to protect investors and individuals, not corporations, from potential harm caused by fraud and abuse of the financial system. The SEC came under fire for failing to catch Bernard Madoff's massive Ponzi scheme and dismissing whistleblowers complaints about him. By entertaining limitations to the Dodd-Frank Act proposed by those who stand to benefit from their passage, the SEC is again placing the economy at risk.


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Joanna A. Hojdus is an attorney in Dallas, Texas. Joanna focuses her practice on qui tam (whistleblower) cases and is licensed to practice law in Florida and Texas.

Whistleblowers Helping the IRS Fight Fraud May be Subjected to Unannounced Inspections

Tight security issues surround tax return information. And rightfully so; a tax return contains some of the most private information disclosed to the government by individuals and businesses each year. But the IRS needs help in uncovering tax fraud, especially in these economic times, and whistleblowers are often the best tool in the detection, uncovering, and reporting of tax cheats. The question is, how hard should it be for whistleblowers and their attorneys to help the IRS?


In analyzing and investigating information provided by a whistleblower, the IRS may determine that it requires the assistance of the whistleblower and his/her attorney. As the law stands, if the IRS wants help, it must enter into a written contract with the whistleblower and his/her attorney for services relating to the detection of violations of the internal revenue laws or related statutes. (26 U.S.C. §§ 7623 et seq.; See also The Tax Relief and Health Care Act of 2006, Section 406, Public Law 109-432 (120 Stat. 2958)). Only in connection with the written contract for help in uncovering tax fraud may the IRS disclose the suspect individual or entity's tax return information to the whistleblower and his/her lawyer. The IRS has the discretion to determine whether to enter into a written contract with the whistleblower for fraud-detecting services, and can also limit the amount of information provided in the disclosure. The whistleblower and his/her attorney must additionally agree to protect the confidentiality of the return information and prevent any disclosure or inspection of the return information in a manner not authorized. A breach of the contract could mean serious consequences, including denial of any reward to the whistleblower for his/her efforts.

The federal False Claims Act, dubbed "Lincoln's Law," after the celebrated former president, is often seen as the cornerstone of whistleblower laws. 31 U.S.C. §§ 3729 et seq. The federal False Claims Act has never required formal contracts to be entered into by whistleblowers in order to aid in fraud prosecution.

Nonetheless, in 2008, additional regulations under section 301.6103(n) of the Tax Code were published in Federal Register (73 FR 15668) describing the circumstances under which the IRS may disclose return information to whistleblowers and their counsel in connection with written contracts for services relating to the detection of violations of the internal revenue laws or related statues.

Pursuant to any written contract the IRS may enter into with a whistleblower, the newly enacted sections require the IRS to conduct an inspection of the whistleblower and his/her counsel's premises to make sure the area is secure for the receipt and containment of disclosed return information. This may require the whistleblower to purchase a safe in order to secure disclosed return information pursuant to the contract to help unravel a tax fraud scheme. Unannounced inspections of the premises by IRS agents could always be a possibility. The IRS could also request the whistleblower and his/her attorney to maintain a very specific log detailing the dates and times tax return materials were moved to and from the secure location. Once the documents are no longer needed, they may need to be returned or destroyed, with the destruction process detailed and note on the log. This requirement makes tax return information akin to "top secret" documents.

Earnest whistleblowers are hard to come by. And once the decision to come forward is made, these individuals work tirelessly and make sacrifices in order to help the government uncover fraud. They often offer on-going expertise and technical assistance to governmental agencies for years, and even at the outset of a case, whistleblowers' counsel do their best to break down fraudulent schemes in initial disclosures so that the government can have a clear roadmap of approach. The proverbial forest may just be lost for the trees with burdensome requirements being imposed on those individuals wanting and willing to help the IRS fight fraud.

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Joanna A. Hojdus is an attorney in Dallas, Texas. Joanna focuses her practice on qui tam (whistleblower) cases and is licensed to practice law in Florida and Texas.