BILL ANALYSIS
AB 1196
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Date of Hearing: April 21, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1196 (Blumenfield) - As Amended: April 15, 2009
SUBJECT : THE FALSE CLAIMS ACT
KEY ISSUE : TO COMBAT FRAUD AND ENSURE THAT STATE TREASURY ASSETS
ARE NOT LOST TO FALSE CLAIMS, SHOULD SPECIFIED CHANGES BE MADE
TO THE CALIFORNIA FALSE CLAIMS ACT TO INCREASE CIVIL LIABILITY
FOR FALSE CLAIMS AND TO IMPROVE THE STATE'S ABILITY TO RECOVER
GOVERNMENT FUNDS THAT ARE THE SUBJECT OF A FALSE CLAIM?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
The California False Claim Act (CFCA), like its federal
counterpart the False Claims Act (FCA), was created to address
the problem of companies or contractors who defraud state and
local governments of public funds by making false claims for
payment or reimbursement for their services. The CFCA imposes
strict civil penalties and liability for damages on persons who
commit any one of certain enumerated acts relating to the
submission to the government of a false claim for money,
property, or services in violation of the act. The CFCA also
allows an individual called the qui tam plaintiff to bring a
civil action for himself and for the government. The qui tam
plaintiff is generally a whistle blower who exposes the fraud
upon the government, and the CFCA encourages whistle blowers to
come forward by allowing a qui tam plaintiff who prevails in a
successful qui tam civil action to keep a certain portion of any
damages collected from the defendant, with most of the remainder
of the money to be restored to the public treasury. Thus, to
the extent that the public fiscal interest is at stake in the
qui tam plaintiff's action, the government has an important
interest in retaining some degree of control over the qui tam
action. This interest is reflected in the special rules of
civil procedure that apply to qui tam lawsuits under the CFCA,
which allow the Attorney General or local prosecuting authority
the first option to proceed with the case as well as the ability
to later dismiss, settle, or intervene.
This bill is supported by both the Attorney General and a public
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interest organization affiliated with whistleblowers and qui tam
plaintiffs. It seeks to amend the California False Claim Act to
redefine key definitions, increase civil liability, strengthen
government control over a qui tam plaintiff's lawsuit, and
clarify application of the statute of limitations, all in an
effort to improve the ability of state and local authorities to
recover government funds that are the subject of a false claim.
The bill is opposed by associations of businesses, hospitals,
and contractors, who contend that liability for false claims
under the CFCA is sufficiently broad and should not be further
expanded to favor qui tam plaintiffs and the government in these
kinds of actions.
SUMMARY : Seeks to amend the California False Claim Act (CFCA)
to redefine key definitions, increase civil liability for making
false claims, strengthen government control over a qui tam
plaintiff's lawsuit, and clarify application of the statute of
limitations, all in an effort to improve the ability of state
and local authorities to recover government funds that are the
subject of a false claim. Specifically, this bill among other
things:
1)Expands the definitions of "state funds" and "political
subdivision funds" to include any money, property, or services
that were appropriated, administered, expended, or that will
be reimbursed directly or indirectly by the state or political
subdivision, respectively.
2)Expands the definition of "claim" to include any record or
statement used to conceal, avoid, or decrease an obligation to
pay or transmit money or property to the state or any
political subdivision.
3)Removes the instruction that a person's liability to the state
or political subdivision for specified false claim violations
is calculated from the amount of damages sustained by the
state or political subdivision, and instead provides that the
person is liable for "three times the amount of damages
because of the act of that person."
4)Makes the current penalty provision mandatory rather than
discretionary, and imposes the penalty for each specified
violation of the CFCA on a "per violation" basis rather than a
"per claim" basis.
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5)Expands the scope of conspiracy liability under the CFCA to
include conspiracy to commit any one of several enumerated
violations relating to the submission of a false claim,
including so-called "reverse false claims".
6)Clarifies that the Act's penalty and liability provisions do
not apply to false claims submitted to the Commissioner of
Insurance acting as Conservator for an insolvent insurer,
pursuant to Insurance Code Section 1011.
7)Requires written consent from the Attorney General or
prosecuting authority of a political subdivision for the court
to grant dismissal of a false claim civil action brought by an
individual ("the qui tam plaintiff").
8)Prohibits a private person from waiving or releasing a claim
for any of several enumerated violations of the Act, except if
the action is part of a court approved settlement of a false
claim civil action.
9)Permits the state or political subdivision, upon
court-approved intervention in a qui tam plaintiff's action,
to file its own complaint in intervention or amend the
complaint of the qui tam plaintiff to clarify or add detail to
the claim in which the state or political subdivision is
intervening, and to add any additional claim with respect to
which the state or political subdivision contends it is
entitled to relief.
10)Provides that for statute of limitation purposes, any state
or political subdivision pleading shall relate back to the
filing date of the complaint of the qui tam plaintiff who
originally brought the action, to the extent that the claim of
the state or political subdivision arises out of the conduct,
transaction, or occurrence set forth in the complaint of that
person.
11)Clarifies the statute of limitations to prohibit the filing
of a false claim civil action more than three years after the
date of discovery by the Attorney General or prosecuting
authority with jurisdiction to act, or, in any event, not more
than ten years after the date on which the violation of the
Act was committed.
EXISTING LAW , The False Claims Act, among other things,
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1)Provides that a person who commits any one of several
enumerated acts relating to the submission of a false claim to
the state or a political subdivision for money, property, or
services shall be liable to the state or political subdivision
for three times the amount of damages which the state or
political subdivision sustains because of the act of that
person plus the costs of a civil action to recover those
damages. Two of the enumerated acts are:
a) Conspiring to defraud the state or any political
subdivision by getting a false claim allowed or paid by the
state or by any political subdivision.
b) Knowingly making, using, or causing 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
state or any political subdivision (hereafter, a "reverse
false claim".)
(Gov. Code Section 12651(a).)
2)Provides that a person who commits any one of several
enumerated acts relating to the submission of a false claim
may be liable to the state or political subdivision for a
civil penalty between $5,000 and $10,000 for each false claim .
(Gov. Code Section 12651(a).)
3)Authorizes a person ("the qui tam plaintiff") to bring a civil
action for a violation of the False Claims Act for the person
and either for the State of California in the name of the
state, if any state funds are involved, or for a political
subdivision in the name of the political subdivision, if
political subdivision funds are exclusively involved.
Provides that the action, once filed, may be dismissed only
with the written consent of the court, taking into account the
best interests of the parties involved and the public purposes
behind this act. (Gov. Code Section 12652(c)(1).)
4)Requires the Attorney General, within 60 days after receiving
a qui tam plaintiff's complaint alleging false claim
violations that involve any state funds , to decide whether to
intervene and proceed with the action, unless the Attorney
General, showing good cause, makes a motion for extension of
time that is granted by the court. (Gov. Code Section
12652(c), subparagraphs (4) & (8).)
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5)Requires the Attorney General, before the expiration of the
60-day period or any extensions obtained, to notify the court
that it either:
a) intends to proceed with the action, in which case
the action shall be conducted by the Attorney General but
the qui tam plaintiff shall have the right to continue as
a full party to the action; or
b) declines to proceed with the action, in which case
the qui tam plaintiff shall have the right to conduct the
action.
6)Authorizes the state or political subdivision, in cases where
it has elected to proceed with the action, to:
a) dismiss the action for good cause notwithstanding the
objections of the qui tam plaintiff, if the qui tam
plaintiff has been notified by the state or political
subdivision of the filing of the motion and the court has
provided the qui tam plaintiff with an opportunity to
oppose the motion and present evidence at a hearing;
b) settle the action with the defendant notwithstanding the
objections of the qui tam plaintiff, if the court
determines, after a hearing providing the qui tam plaintiff
an opportunity to present evidence, that the proposed
settlement is fair, adequate, and reasonable under all of
the circumstances.
(Gov. Code Section 12652(e)(2).)
7)Provides that, in cases where the state or political
subdivision has elected not to proceed with the action, the
qui tam plaintiff shall have the same right to conduct the
action as the Attorney General or prosecuting authority would
have had if it had chosen to proceed. (Gov. Code Section
12652(f).)
8)Imposes a statute of limitations that prohibits the filing of
a civil action for violation of the False Claims Act more than
three years after the date of discovery by the official of the
state or political subdivision charged with responsibility to
act in the circumstances or, in any event, no more than 10
years after the date on which the violation was committed.
(Gov. Code Section 12654(a).)
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COMMENTS : This bill would amend the California False Claim Act
(CFCA) to redefine key definitions, increase civil liability for
making false claims, strengthen government control over a qui
tam plaintiff's lawsuit, and clarify application of the statute
of limitations, all in an effort to improve the ability of state
and local authorities to recover government funds that are the
subject of a false claim.
According to the author, "The recently enacted federal stimulus
package will mean billions of dollars in new government
contracts and increased potential for fraudulent claims by
government contractors. AB 1196 seeks to strengthen the ability
of state and local governments to protect treasury assets and
fight fraud through improvements in the California False Claims
Act."
For similarly articulated reasons, the bill is supported by the
California Attorney General and Taxpayers Against Fraud (TAF), a
national nonprofit organization that promotes use of the qui tam
provisions of false claims acts and whose members include many
whistleblowers and qui tam plaintiffs.
The CFCA closely mirrors many provisions of the federal False
Claims Act (FCA), 31 USC 3729, and thus federal judicial
authority is persuasive in interpreting parallel provisions of
the CFCA. Recent opinions by federal and state courts have
resulted in outcomes that the author believes do not or will not
give full effect to the Legislature's intent to protect state
treasury funds from false claims when it enacted the CFCA. As a
result, this bill represents an effort to legislatively address
certain concerns about the CFCA in a manner that reflects recent
jurisprudence and promotes consistency between the CFCA and the
federal FCA wherever possible.
The Bill Expands the Definitions of "State Funds" and "Claim" in
Light of Recent Court Decisions That Limit Applicability of the
CFCA : Three recent court decisions have created some
uncertainty as to application of the CFCA to certain "state
funds" obtained by false "claim", as both terms are currently
defined. The bill's expansion of the definition of "state
funds" addresses issues raised in Allison Engine and Altus
Finances (described below), while the change to the definition
of "claim" directly addresses the holding of Fassberg
Construction.
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Allison Engine v. U.S. ex rel Sanders (2008) : In June 2008, the
U.S. Supreme Court in Allison Engine v. U.S. ex rel Sanders, 553
U.S. __(2008), considered provisions of the federal False Claims
Act that impose civil liability on a person who knowingly uses a
"false record or statement to get a false or fraudulent claim
paid or approved by the Government " (emphasis added), 31 U.S.C.
3729(a)(2). The Court held that a plaintiff asserting a claim
under 3729(a)(2) must prove that the defendant intended that
the false record or statement be material to the Government's
decision to pay or approve the false claim. In other words, it
was not sufficient to show that government funds were the source
of the funds used to pay the false claim, but that the defendant
intended, with his false record or statement, to materially
influence the Government's decision to pay or approve the false
claim.
Thus, Allison Engine may preclude prosecutions under the CFCA in
cases where state funds are disbursed to fund a construction
project, and the contractor then pays a false claim with
"government funds" received from the government. This unwanted
result may occur because the false claim was not technically
"paid or approved by the Government." In these situations,
however, it is still taxpayer dollars that may be lost to the
false claim, and thus the public that suffers harm if the
construction project is not built to specification or ends up
costing significantly more to complete because of the false
claim.
State of California v. Altus Finances, S.A. (2005) : In 2005,
the California Supreme Court held that the "state funds" subject
to protection under the CFCA "only includes funds that are in
some sense part of the public treasury, the diminution of which
harms or would harm taxpayers." (State of California v. Altus
Finances, S.A. (2005) 36 Cal.4th 1284, 1302.) Unfortunately,
this standard articulated by the Court leave many questions open
as to what extent the CFCA protects billions of dollars of state
administered funds which are part of the state budget but may
not be considered "part of the public treasury." For example,
public employee healthcare funds, which are administered by the
state but include significant contributions from state
employees, may be unprotected by the CFCA under the Court's
holding in Altus Finances.
To address the concerns raised by these two court decisions, the
author of this bill seeks to amend the existing definitions of
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"state funds" and "political subdivision funds" to include
money, property, or services that were appropriated,
administered, expended, or that will be reimbursed directly or
indirectly by the state or political subdivision, respectively.
The expanded language is aimed at ensuring CFCA protections
apply to billions of dollars of government funds disbursed to
contractors and other organizations that administer state or
local programs.
Fassberg Construction Co. v. Housing Authority of City of Los
Angeles (2007): In 2007, the Court of Appeal in Fassberg, 152
Cal.App.4th 720, 736-37, held that certain violations of the
CFCA are not "false claims" subject to penalty under the CFCA
because they are defined differently than a "claim" in Section
12650(b)(1). For example, Section 12651(a)(7) describes what is
commonly referred to as a "reverse false claim", using language
that slightly differs from the definition of claim under Section
12650(b)(1). Thus, under Fassberg, a person who uses a reverse
false claim to defraud the government would not be subject to
the penalties provided by the CFCA.
To eliminate this discrepancy, the author seeks to expand the
definition of "claim" to include the definition of reverse false
claim from Section 12651(a)(7) ("any record or statement used to
conceal, avoid, or decrease an obligation to pay or transmit
money or property to the state or any political subdivision") so
that reverse false claims are treated as "false claims" for all
purposes under the statute.
The Bill Seeks To Assist the Government By Authorizing
Additional Causes of Action to a Qui Tam Complaint That Will Not
Be Barred by the Statute of Limitations : In cases where the
state or political subdivision intervenes in a qui tam civil
action, this bill authorizes the prosecuting authority to file
its own complaint in intervention or amend the qui tam complaint
to clarify or add detail to the claim in which the state or
political subdivision is intervening. The bill also authorizes
the prosecuting authority to add any additional claim with
respect to which the state or political subdivision contends it
is entitled to relief.
The bill also adds the following amendment regarding the concept
of "relation back" (hereafter, the "relation-back amendment"),
whose practical effect is the subject of debate between
supporters and opponents of the bill:
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For statute of limitation purposes, any state or
political subdivision pleading shall relate back to
the filing date of the complaint of the person who
originally brought the action, to the extent that the
claim of the state or political subdivision arises
out of the conduct, transaction, or occurrence set
forth in the complaint of that person.
Opponents of the bill, including the Civil Justice Association
of California (CJAC) and the California Hospital Assocation
(CHA) contend that this amendment:
. . . allows any claim the government might wish to
bring to relate back to the filing date of the qui
tam plaintiff's claim-a provision that effectively
means there is no statute of limitations for
government prosecutions of the False Claims Act.
This result would be bad public policy. . . Statutes
of limitations encourage the diligent and prompt
presentation of claims . . . and provide certainty
and predictability to potential defendants after a
set period of time.
Supporters believe that the relation-back amendment does not
nullify the statute of limitations in these situations, but
merely rearticulates the principle in light of the special
relationship between the qui tam plaintiff and the state or
political subdivision in this kind of action. Taxpayers Against
Fraud writes:
California law has traditionally relied upon the
"relation back" principle for calculating the
statute of limitations. The proposed amendment
would simply give the State of California the right
to expect that its claims will "relate back" to the
whistle blower's claims. It does not expand the
State's time to bring new claims based on new or
different facts. The only suit a whistle blower can
bring to fight fraud is under the False Claims Act.
The State, however, could have different theories,
based on the same set of facts.
This amendment would only affect the ancillary State
claims that are based on the same set of facts and
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the same evidence that is relevant to the FCA case.
Since the state's other claims could only be brought
if they are based on the same facts and the same
transactions, the same evidence and witnesses
relevant to the FCA case will be relevant to the new
legal theories.
Both sides concede that unless the statute of limitations for
any additional causes of action relates back to the date of the
filing of the qui tam complaint, the prosecuting authority may
be precluded from bringing those additional causes of action.
Although it is a fair criticism that the government was already
allowed at least 60 days to investigate the alleged fraud at the
center of the lawsuit, it is possible that diligent
investigation of the matter may not reveal, until later,
sufficient evidence of an important claim that arose out of the
original transaction or occurrence. In those situations, it is
reasonable to not automatically bar the addition of such claims
to the existing lawsuit if they truly relate back to the qui tam
plaintiff's claims.
The Bill Clarifies When the Statute of Limitations Begins to Run
Against the Government : The bill also amends Section 12654(a)
to clarify specifically which government official's knowledge
triggers the statute of limitations to begin running against the
government. Section 12654(a) currently provides that a false
claims civil action "may not be filed more than three years
after the date of discovery by the official of the state or
political subdivision charged with responsibility to act in the
circumstances. . . " There is some ambiguity about who is the
official "charged with responsibility to act" under the CFCA.
This bill resolves this question in favor of the Attorney
General, based on the theory that only the Attorney General has
the authority to investigate and prosecute false claims
violations involving state funds. There is no other official
who, even having early knowledge of the wrongdoing, is "charged
with responsibility to act" under the CFCA. Thus it makes
logical sense that the statute of limitations begins to run
three years after the date of discovery by the Attorney General.
To Fully Protect the Public's Interest in False Claim Cases, the
Bill Restricts the Qui Tam Plaintiff's Ability to Waive a Claim
or Dismiss the Action : The author's most recent amendment goes
to the qui tam plaintiff's rights to dismiss the action and
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waive or release a claim for any violation of the CFCA. First,
the qui tam civil action may be dismissed only with the written
consent of both the court and the Attorney General or
prosecuting authority. Second, no legal claim for any false
claim violation may be waived or released by any private person,
unless as specified.
Although this amendment appears to further restrict the already
limited rights of the qui tam plaintiff at the expense of the
state or political subdivision, at least one group closely
affiliated with qui tam plaintiffs supports this proposal.
Taxpayers Against Fraud writes that this bill "would prevent
companies from bullying their employees or former employees into
dismissing suits which have been brought in the public interest,
to recover public money." The bill prioritizes the public
interest in protecting public funds over the qui tam plaintiff's
personal interest in obtaining a favorable settlement or, as is
often the case, a severance agreement from a former employer.
The requirement of written consent from the Attorney General to
dismiss the action would conform California law with the federal
FCA, while the limitation on waiver or release of any claim
corresponds to recent Congressional legislation to amend the
federal FCA. (S. 2041 (110th) "False Claims Act Correction Act
of 2008")
The Bill Codifies the Holding in Altus Finance, S.A. by
Exempting Certain Claims Made to the Commissioner of Insurance
For Assets of an Insolvent Insurer : In State of California v.
Altus Finance, S.A., one of the precise issues in the case was
whether assets to which the Commissioner of Insurance acquires
title constitute "state funds" within the meaning of the CFCA.
The California Supreme Court rejected the Attorney General's
argument, on behalf of plaintiff State of California, that these
assets in fact constitute "state funds" under the CFCA. The
Court held:
In sum, we conclude that the "state funds" necessary
to state a claim under the CFCA only include funds
that are in some sense part of the public treasury,
the diminution of which harms or would harm taxpayers
When the Commissioner takes title to the assets of an
insolvent insurer pursuant to Insurance Code section
1011, he holds them as a trustee for the benefit of
private parties, and they never become part of the
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public treasury.
Thus it appears appropriate that this bill codify the Court's
decision in Altus Finance, S.A. to exclude assets of an
insolvent insurer pursuant to Insurance Code section 1011 from
the CFCA.
REGISTERED SUPPORT / OPPOSITION :
Support
Office of the Attorney General
American Federation of State, County, and Municipal Employees
(AFSCME)
Consumer Attorneys of California
Taxpayers Against Fraud
Opposition
Civil Justice Association of California (CJAC)
California Hospital Association ( Oppose Unless Amended )
Engineering Contractors Association
California Fence Contractors Association
Marin Builders Association
Flasher/Barricade Association
California Chapter of the American Fence Contractors'
Association
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334