Shortly after his inauguration as New York state’s top law enforcement official, Attorney General Eric Schneiderman issued a press release addressing the commitment of his office to fight fraud, waste and abuse in the state. “Restoring New Yorkers’ faith in their government and cracking down on those who try to defraud the taxpayers will be two of our top priorities in this office … we will leave no stone unturned in the fight against Medicaid fraud, waste and abuse in New York state.”
One of the attorney general’s tools for delving into fraud is the N.Y. False Claims Act (FCA). Modeled after the federal law, it is designed to bring volunteers forward by offering rewards to “whistleblowers” (relators) bringing actions in state courts. But this is only part of the package: the FCA provides strong remedies for local governments when contractors and others file false claims.
What previously might have been a municipality’s simple cause of action for breach of contract can be transformed under the FCA into a powerful case allowing for treble damages and attorneys fees — the highest civil penalties of any New York statute.
We wrote about the potential under the FCA in a column one year ago (The Daily Record, March 8, 2011). Since then, there have been three reported cases under the FCA on the whistleblower front that made it to the appellate courts, all with negative results, and none prosecuted by local governments. Five years after passage of the FCA, and a couple of years since its enhancement into a statutory remedy “on steroids,” there is no reported decision in state case law discussing a local government’s prosecution of a case under the FCA.
State and local government prosecutions
A person held liable under the FCA may face a civil penalty of between $6,000 and $12,000 per violation, plus “three times the amount of all damages” sustained by the government, plus additional costs and attorneys’ fees, See N.Y. State Finance Law § 189(1)(g), (3). Amendments to the FCA in 2010 sharpened the already powerful “teeth” of the FCA and now provide, for example, a significant inducement for local governments to use the FCA to try to recover costs of repair or replacement arising from a contractor’s false or fraudulent claims.
The AG formed the Taxpayer Protection Bureau (TPB) to crack down on targets, including firms that rip-off government pension funds, contractors that over-bill taxpayers, and large-scale tax cheats. The TPB has hosted CLE-certified seminars to promote “Blowing the Whistle on Fraud Against the Government,” as it did a few months back in Buffalo. But still there is no report of any local government prosecuting a case to decision.
The TPB, for its own part, has successfully investigated and recouped illegal charges from vendors who received discounts/rebates from subcontractors and failed to disclose or pass on the savings to governmental units. In a settlement of such a lawsuit involving a food vendor (Whitsons Culinary Group) and downstate school districts, the TPB recovered a $1.6 million payment for such a scheme.
It is not only the state that can bring such lawsuits, however, as the FCA gives standing to school districts themselves, as well as other local governmental units (e.g. cities, villages, water and lighting districts), to pursue claims. The governor has weighed in on the need for local governments to pursue actions for fraud and abuse: “I was the attorney general for four years. I investigated school districts. I investigated double-dipping. I investigated pensions. I investigated procurement contracts. I know there’s fraud and abuse in school districts.” We discussed the state’s interest in FCA actions by local governments in our Sept. 13, 2011, column.
Yet, there has been no reported decision on local government use of the FCA since.
Recently, the TPB intervened in a whistleblower suit against Sprint Nextel and others (Sup. Ct. N.Y. County, Index No. 103917-11) seeking three times $100 million in damages for an alleged refusal to pay sales tax on calling plans. The complaint is online at www.ag.ny.gov. New York’s FCA, unlike other state statutes, provides for actions against those taxpayers who do not pay up (when their liability reaches the legal threshold), and this action will bear watching.
Private whistleblowers have not been so successful. In State v. Unitedhealth Grp., 84 A.D.3d 442 (1st Dep’t 2011), the Appellate Division dismissed a relator’s action based on health insurer underpayments because the allegations were “derived from and substantially similar to allegations publicly disclosed in numerous lawsuits.” State Finance Law § 190.9, like its federal counterpart on which it is modeled, provides for dismissal when the allegations are already in the public domain. The statute provides, however, for such an action to continue if the state or a local government oppose dismissal. None opposed in this case (indeed, the AG declined to intervene) and the action was dismissed.
In another case, the Appellate Division considered and dismissed a case alleging a “reverse claim” under the FCA. In State v. Utica First Ins. Co., 943 N.Y.S.2d 36 (1st Dep’t 2012), the court dismissed allegations that contractors avoided paying a governmental fee by making a false filing. While the court held that it did not doubt that reverse claims are viable under the FCA, the facts in this case did not support the claim. As in Unitedhealth, the AG had declined to intervene in this case.
In another futile case where the AG declined to intervene, State v. DHL Express (USA), Inc., 2012 WL 1429252 (Apr. 26), the Court of Appeals upheld the dismissal of a case alleging false charges for fuel by a contractor that billed the state for transportation services. The court held the claims to be preempted by federal law.
Over a dissent by Judge Pigott, the court followed the logic of the Appellate Division (83 A.D.3d 1450), which had previously dismissed the claim, and held there was no exception applicable to the preemption. (Note: the relator brought a separate action in the State of Florida under that state’s FCA against the same defendants, but the case was dismissed there on the same grounds, see DHL Express (USA), Inc. v. State, 60 So. 3d 426 (Fla. App. 1st Dist. 2011)).
Where Now, FCA?
One commentator determined, based on a review of Department Of Justice and United States Department of Health and Human Services releases, that the total share of relator awards in federal whistleblower cases since 1987 amounted to $2,877,694,871, and that 96 percent of these awards were in cases where the U.S. intervened.
The recent experiences in Grupp and others suggests that relators and their counsel should think twice about proceeding when the AG declines to intervene, notwithstanding that his award is enhanced by the AG’s absence.
With respect to local governments, the bar waits to see how they will fare in court when breach of contract or similar claims are pressed based on allegations of false submissions appearing on the record.
Alan J. Bozer is a partner with Phillips Lytle LLP and is co-chair of the Firm’s White Collar Criminal Defense and Government Investigations Practice Team. He is active in trying criminal and civil cases, and handles appellate and arbitration work as well. He can be reached at email@example.com or (716) 504-5700.