BILL ANALYSIS SENATE JUDICIARY COMMITTEE Senator Ellen M. Corbett, Chair 2009-2010 Regular Session AB 1196 Assemblymember Blumenfield As Amended June 26, 2009 Hearing Date: July 14, 2009 Government Code NRB:jd SUBJECT The False Claims Act DESCRIPTION This bill would revise and clarify significant aspects of the California False Claims Act (CFCA). Among other provisions, this bill would ensure that those who knowingly defraud the government are held liable regardless of whether the fraud was conducted through an intermediary. This bill also would reorganize existing state law provisions to conform to the structure of federal law. Further, the measure ensures that false claim lawsuits are not dismissed without the written consent of the government. Finally, this bill would require that civil penalties be imposed for each violation of the CFCA, in order to deter and punish those inclined to defraud the government. BACKGROUND The CFCA, enacted more than 20 years ago, is widely regarded as the most effective tool available to detect, deter, and punish those who defraud the government of public money. In addition to making it unlawful to intentionally commit specified acts - or false claims - against the government, the CFCA is best known for two key components: (1) it encourages private citizens to report fraud by providing a right to share in any recovery; and (2) it imposes treble damages on violators. California's law is modeled after its federal counterpart, the federal False Claims Act (FFCA), which was first enacted during (more) AB 1196 (Blumenfield) Page 2 of ? the Civil War, reportedly for the purpose of combating fraud against the federal government by suppliers to the Union Army. Over the years, both Acts have been instrumental in recovering billions of dollars in fraudulently obtained public money. Similarly, both Acts have occasionally been amended and improved upon to keep pace with the times, the sophistication of those intent upon committing fraud, and applicable case law. Most recently, in May of 2009, President Barack Obama signed the Fraud Enforcement and Recovery Act (FERA). Among the provisions contained in this bipartisan measure, were amendments designed to strengthen the FFCA. As stated in the U.S. Senate Judiciary Committee's official report on the measure: FERA improves one of the most potent civil tools for rooting out waste and fraud in Government - the False Claims Act [citation omitted]. The effectiveness of the False Claims Act has recently been undermined by court decisions which limit the scope of the law and, in some cases, allow subcontractors paid with Government money to escape responsibility for proven frauds. The False Claims Act must be corrected and clarified in order to protect from fraud the Federal assistance and relief funds expended in response to our current crisis. This bill seeks to make similar improvements to state law. Specifically, this bill would amend the CFCA to conform its structure to federal law, recast existing definitions to conform with federal law and recent state case law, eliminate a potential loophole that would permit subcontractors to defraud the government through an intermediary, increase civil liability for violations, and strengthen the government's ability to prevent improper dismissal of false claims lawsuits. CHANGES TO EXISTING LAW 1. Existing law establishes the CFCA, which provides that a person who commits any one of several specified acts relating to the submission of a false claim to the state or a political subdivision shall be liable to the state or political subdivision for triple the amount of damages sustained by the government as well as the costs of the civil action to recover the damages. (Gov. Code Sec. 12651(a).) Existing law defines a claim as "any request or demand for money, property, or services made to any employee, officer, or agent of the state or of any political subdivision, or to any contractor grantee, or other recipient, whether under contract AB 1196 (Blumenfield) Page 3 of ? or not, if any portion of the money, property, or services requested or demanded issued from, or was provided by the state . . . or by any political subdivision thereof[.]" (Gov. Code Sec. 12650(b)(1).) This bill would amend the structure of the existing state law definition of claim to more closely parallel that which is provided in the FFCA. (See Comments 2 and 3.) 2. Existing law provides, in addition to treble damages, that a person who commits specified violations of the CFCA may be liable for a civil penalty, ranging from $5,000 to $10,000, for each false claim. (Gov. Code Sec. 12651(a).) This bill would specify that each of the specified acts in violation of the CFCA is a separate violation for purposes of the existing civil penalty and that violators shall be liable for a civil penalty for each violation. 3. Existing law provides that it is a violation of the CFCA to knowingly present or cause to be presented to an officer or employee of the government, a false claim for payment or approval. (Gov. Code Sec. 12651(a)(1).) This bill would delete the requirement that the false claim be presented to an officer or employee of the government, thus ensuring that those who knowingly submit false claims through an intermediary can be held liable under the CFCA. 4. Existing law provides that it is a violation of the CFCA to knowingly make, use, or cause to be made or used a false record or statement to get a false claim paid or approved by the government. (Gov. Code Sec. 12651(a)(2).) This bill would amend this provision to clarify that it is a violation to knowingly use a false record or statement that is material to the decision to pay a false or fraudulent claim with government money, regardless of whether the government paid the claim through an intermediary. 5. Existing law provides that it is a violation of the CFCA to conspire to defraud the government by getting a false claim allowed or paid by the government. (Gov. Code Sec. 12651(a)(3).) This bill would specify that conspiracy to commit a fraud on the government through any one of the specified violations of AB 1196 (Blumenfield) Page 4 of ? the CFCA is itself a violation. 6. Existing law provides that it is a violation of the CFCA to knowingly deliver or cause to be delivered less property or money to the government than the amount for which the person receives a certificate or receipt. (Gov. Code Sec. 12651(a)(4).) This bill would delete the requirement that the person receive a certificate or receipt. 7. Existing law provides that it is a violation of the CFCA to knowingly make, use, or cause 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 government. (Gov. Code Sec. 12651(a)(7).) In colloquial terms, this is known as a "reverse false claim." This bill would make technical changes to the definition of a reverse false claim to mirror the structure of its counterpart in the FFCA. This bill also would make it a violation of the CFCA to knowingly conceal or knowingly and improperly avoid, or decrease an obligation to transmit money or property to the government, regardless of whether a false record or statement was used. 8. Existing law specifically excludes application of the CFCA to claims statements relating to workers' compensation and tax law. (Gov. Code Sec. 12651(e)-(f).) This bill would add an exception to the CFCA for specified claims relating to the assets of an insurance company held in trust by the Insurance Commissioner, which codifies the holding in State of Cal. v. Altus Finance et al. (2005) 36 Cal.4th 1284. This bill also would exclude compensation for government employment and income subsidies from the definition of "claim." 9. Existing law requires the Attorney General and local prosecuting authorities to diligently investigate CFCA violations. (Gov. Code Sec. 12652(a), (b).) If it is determined that a person has violated the CFCA, the Attorney General and/or the local prosecutor may file suit against the person. (Id.) As a general matter, if the alleged violations involve any state funds, the Attorney General is entitled to control the action in its entirety. (Id. at (a)(2), (b)(3).) AB 1196 (Blumenfield) Page 5 of ? Existing law provides that a person, referred to as a "qui tam plaintiff," may file a false claims action for the person and either in the name of the State, if any state funds are involved, or in the name of a political subdivision, if political subdivision funds are exclusively involved. (Gov. Code Sec. 12652 (c)(1).) Existing law requires that a qui tam plaintiff's lawsuit be filed under seal with the court and served on the Attorney General. (Gov. Code Sec. 12652(c)(2)-(3).) If the complaint involves any state funds, the Attorney General has the right to intervene and lead the prosecution of the action. (Id. at (c)(6)(A), (c)(8)(D)(i).) If the complaint involves a mixture of state and local funds, the local prosecuting authority has the right to intervene and lead the prosecution of the action, unless the Attorney General elects to intervene. (Id. at (c)(8)(D)(i)-(ii).) If the complaint exclusively involves local funds, the local prosecuting authority has the right to intervene and lead the prosecution of the action. (Id. at (c)(7)(D)(i).) If neither the Attorney General nor the local prosecutor exercise their right to intervene, the qui tam plaintiff is entitled to lead the prosecution of the action. (Id. at (c)(6)(B), (c)(7)(D)(ii), (c)(8)(D)(iii).) Existing law provides that once an action is filed, it may only be dismissed with the written consent of the court taking into account the best interests of the parties involved and the public purposes behind the CFCA. (Gov. Code Sec. 12652(c)(1).) This bill would require that written permission also be obtained from the Attorney General or local prosecutor, or both as the case may be, before an action can be dismissed. This bill also would provide that no claim for any violation of the CFCA may be waived or released by a qui tam plaintiff except pursuant to a court approved settlement of the false claims action. 10. Existing law provides that a false claims action may not be filed more than three years after discovery by the government official "with responsibility to act in the circumstances[.]" (Gov. Code Sec. 12654(a).) This bill would clarify that the three year statute of AB 1196 (Blumenfield) Page 6 of ? limitations runs from the date of discovery by the Attorney General or local prosecuting authority with jurisdiction to act under the CFCA. COMMENT 1. Stated need for the bill The author writes: California is among more than 20 states that have enacted a false claims act modeled after federal statute providing one of the biggest weapons in combating fraud against taxpayers perpetrated by government contractors, vendors and others who contract with the government. The law provides civil penalties and treble damages for defrauding the government. It encourages private persons to come forward and aid the government in pursuing waste and fraud by providing a reward of between 15 to 50 percent of the total funds received. The CFCA has proven effective in the fight against fraud in California. Indeed, the state Attorney General's Office reports that since 1999 more than $1 billion has been recovered by the state as a result of false claims actions. The recently enacted federal economic 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. 2.Clarifying liability for those who submit false claims through an intermediary AB 1196 makes a series of amendments to existing law designed to ensure that those who knowingly defraud the government are held liable regardless of whether they present a false claim directly to the government or not. (See proposed Gov. Code Secs. 12650(b)(1); 12651(a)(1)-(3), (8).) The purpose of these amendments is to ensure that those who present false claims do not escape liability when the government pays for property or services through an intermediary, such as a contractor or grantee. According to the author, these amendments fulfill the AB 1196 (Blumenfield) Page 7 of ? clear intent of existing law, which has only recently been called into question. In a June 2008 decision, the United States Supreme Court interpreted two former provisions of the FFCA that were essentially identical to their existing state law counterparts. (Allison Engine Co. v. U.S. (2008) 553 U.S. 128 S. Ct. 2123.) The first provision imposed liability on those who knowingly use a false record or statement to get a false or fraudulent claim paid or approved by the government. (Former 31 U.S.C. Sec. 3729(a)(2); Gov. Code Sec. 12651(a)(2).) The second provision imposed liability on those who conspire to defraud the government by getting a false claim paid by the government. (Former 31 U.S.C. Sec. 3729(a)(3); Gov. Code Sec. 12651(a)(2).) In Allison, the Court concluded that neither of these former federal law provisions required that a person physically present a false claim to the government. However, the Court did hold that liability may be imposed only if it is proven that the person intended for a false record or statement to have a "material effect" on the government's decision to pay the false or fraudulent claim. The author contends that the Allison holding led to an unjust result, and has the potential to undermine the effectiveness of the CFCA. The underlying facts in Allison involved a false claims action against three subcontractors who were paid more than $350 million by the U.S. Navy, via the prime contractor, to build generators for Navy guided missile destroyers. In its contract with the prime contractor, the Navy expressly required that the ships be built to specified standards. In turn, the prime contractor's contract with the subcontractors required that they meet these standards and provide a certificate of conformance (COC) attesting to the fact they had complied. Qui tam plaintiffs later filed suit alleging that the subcontractors knew that their generators were defective and nonconforming, and that by submitting COCs they knowingly submitted false statements to, and conspired to defraud, the government. The Court held that because the subcontractors submitted their false claims to the prime contractor, and not the government, and because the government did not produce evidence that it relied on the COCs prior to paying for the subcontractors' work, the subcontractors could not be held liable for their conduct. In order to close the loophole created by the Allison decision, Congress passed, and the President signed, legislation that amends federal law to close this loophole. (The Fraud AB 1196 (Blumenfield) Page 8 of ? Enforcement and Recovery Act, Pub.L. No. 111-21 (May 20, 2009) 123 Stat. 1621.) AB 1196 seeks to do the same for state law. Specifically, AB 1196 ensures that those who knowingly use, or conspire to use, a false claim to wrongfully obtain taxpayer money from the government are held accountable for their conduct even when the claim is submitted through an intermediary. (See proposed Gov. Code Secs. 12650(b)(1); 12651(a)(1)-(3), (8).) 3. Recasting existing definition of "claim" Existing law defines a claim as follows: "Claim" includes any request or demand for money, property, or services made to any employee, officer, or agent of the state or of any political subdivision, or to any contractor, grantee, or other recipient, whether under contract or not, if any portion of the money, property, or services requested or demanded issued from, or was provided by, the state (hereinafter "state funds") or by any political subdivision thereof (hereinafter "political subdivision funds"). (Gov. Code Sec. 12650(b)(1) [emphasis added].) As amended on June 26, 2009, this bill recasts the existing definition of a "claim" for purposes of the CFCA. Despite its appearance, however, the proposed definition is basically a reorganization of existing state law designed to more closely resemble the structure under federal law. Indeed, the key amendments recently made to the federal law definition of claim are really efforts to conform with existing state law, which already includes false claims made to contractors, grantees, or other recipients when any portion of the money or property came from the government. According to the author, this restructuring will reduce the potential for confusion over substantively identical provisions of existing state and federal law. 4. Author's Amendments The June 26, 2009 amendments to AB 1196 resulted in the addition of some new terms, and deletion of some current terms, from existing law. The author has offered the following clarifying amendments. Defining state and political subdivision funds Under existing law, the jurisdiction of the Attorney General and local authorities when prosecuting false claims actions is AB 1196 (Blumenfield) Page 9 of ? determined by the source of the defrauded government funds. Generally, the Attorney General is responsible for pursuing claims involving any "state funds," and local authorities pursue claims exclusively involving "political subdivision funds." In its recasting of the existing definition of "claim," AB 1196 deletes the definitions provided for these terms. In order to avoid any potential for confusion, the author has offered the following amendment: On page 3, line 23, after "(4)" insert "(5) 'Political subdivision funds' means funds that are the subject of a claim presented to an officer, employee, or agent of a political subdivision or where the political subdivision provides, has provided, or will reimburse any portion of the money, property, or service requested or demanded." On page 3, line 24, replace "(5)" with "(6)" On page 3, line 29, replace "(6)" with "(7)" On page 3, line 31, after the period, insert "(8) 'State funds' means funds that are the subject of a claim presented to an officer, employee, or agent of the state or where the state provides, has provided, or will reimburse any portion of the money, property, or service requested or demanded." Defining "material" This bill provides that it is a violation of the CFCA to knowingly use a false record or statement material to a false or fraudulent claim for government money, property, or services. (See p. 3, lines 9 to 12.) The use of the term "material" is consistent with federal law, and ensures that only those false statements designed to influence payment of a false claim are subject to the CFCA. Because the bill does not separately define the term material, the author has offered to incorporate the definition provided by federal law through the following amendment: On page 3, line 31, after the "." insert " (7) "Material" means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money, property or services." Technical amendment In order to correct a technical drafting error, the author also has offered the following amendment: On page 2, line 23, delete "the" and insert "a" AB 1196 (Blumenfield) Page 10 of ? 5. Mandatory civil penalties for each "violation" of the CFCA The CFCA imposes liability on violators two ways: (1) triple the amount of damages sustained by the government as a result of the commission of specified acts in violation of the CFCA; and (2) a civil penalty of between $5,000 to $10,000 "for each false claim." The use of the term "false claim," rather than "violation," in the civil penalty provision has long been regarded as a distinction without a difference. This application of the law appears consistent with the admonition that the CFCA be liberally construed and applied to promote the public interest. (Gov. Code Sec. 12655(c).) In 2007, however, the 2nd District Court of Appeal held that the distinction did make a difference. (Fassberg Construction Co. v. Housing Auth. of the City of L.A. (2007) 152 Cal.App.4th 720.) In Fassberg, the court ruled that a "false claim" which does not constitute a request or demand for money was not a claim punishable by a civil fine. (Id. at pp. 735-736.) According to the sponsor, this interpretation could lead to unjust results: For example, if a Medi-Cal provider submitted one "claim" which contained 40, 100, or 1000 line entries, one can make an argument that under the Fassberg case and under several other FFCA cases, only one penalty can be imposed since only one "claim" was submitted. AB 1196 would address that situation by imposing a penalty for each violation of the act, e.g., each improper line item, which really represents a request for money from the government. There really is no reason why a vendor or contractor should be able to circumvent the penalty provision so easily just by "bundling" their claims into one super, consolidated claim. In addition, even in instances where only one false claim was submitted, the vendor or contractor may have generated seven or eight improper records to support the one claim. Under current law, if only one false claim was submitted although 10 separate acts of wrongdoing were committed to get that one claim paid, only one penalty can be imposed regardless of how many times the egregious conduct/false records or statements occurred in the process of getting that "one claim" paid. The author contends that by providing that a civil penalty applies to each violation of the CFCA, AB 1196 seeks to ensure AB 1196 (Blumenfield) Page 11 of ? that those who submit multiple false claims to the government do not escape full liability for their conduct. This bill also requires, rather than permits, imposition of a civil penalty for each violation. The author contends that because the purpose of the CFCA is to both deter and punish those who knowingly defraud the government, it is appropriate to impose a mandatory civil penalty for each violation of the CFCA on offenders. 6. Required government consent for dismissal of qui tam action Pursuant to existing state law, the Attorney General or local prosecutor has the option to intervene and lead the prosecution of a false claims action filed by a qui tam plaintiff. Depending upon the complexity of a case, it can take government officials quite some time to evaluate whether it should intervene. Existing law, however, permits a qui tam plaintiff to dismiss a false claims action during this evaluation period, with the written consent of the court. Because the government, acting through the Attorney General and/or a local prosecutor, is the real party in interest in all false claims actions, the author contends that the government should be given an opportunity to protect its interest before a qui tam action can be dismissed. This bill would specify that a qui tam plaintiff may only dismiss a filed action with the written consent of the Attorney General and/or the local prosecutor, in addition to the court. This change also would conform the CFCA to its federal counterpart. (See 31 U.S.C. Sec. 3730(b)(1).) In addition, and based on the same rationale, the bill would provide that qui tam plaintiff could not release a person from false claims liability in a separate action from that brought under the CFCA. 7. Controversial language related to statute of limitations deleted Prior versions of this bill contained a provision that would permit government authorities, upon intervention, to file their own complaint in intervention or amend the complaint of a qui tam plaintiff to clarify or add detail to the claim. The bill also would have permitted government authorities to add any additional claim with respect to which the government contends it is entitled to relief. More controversially, the measure would have specified that, for statute of limitations purposes, AB 1196 (Blumenfield) Page 12 of ? the claims within the government's pleading would "relate back" to the filing date of the qui tam's complaint so long as the claims arose out of the conduct, transaction, or occurrence set forth in the qui tam complaint. The Civil Justice Association of California (CJAC) and California Hospital Association expressed concern that the "relate back" component would effectively eliminate the statute of limitations for government enforcement of the CFCA. Supporters of the bill disagreed, asserting that the language merely permitted the government to allege new theories of recovery on the existing facts in the qui tam's complaint. Although the author later amended the bill to address the opponents' concerns, the author deleted this provision in its entirety in the June 26, 2009 version of the measure. CJAC and the California Hospital Association have not taken a position on the most recent version of AB 1196. 8. Opposition arguments A variety of contractors have taken an oppose unless amended position on AB 1196. According to the opponents, the CFCA "is already too broad and overused." They contend that public agencies use the existing CFCA to "bully" contractors into dropping perfectly legal claims. The opponents suggest that these alleged tactics have had the unintended consequence of driving up bids on public contracts. The contractors state, however, that they would be willing to remove their opposition if two amendments were taken pertaining to the payment of attorney's fees and costs to prevailing defendants. Existing law permits, but does not require, the court to award attorney's fees and expenses to a prevailing defendant if the court finds that the claim was "clearly frivolous, clearly vexatious, or brought solely for the purposes of harassment." (Gov. Code Sec. 12652(g)(9).) The opponents' requested amendments would make such fee awards mandatory, and also delete the requirement that the claim be found "clearly" frivolous or vexatious. The author objects to the proposed amendments, contending that existing law captures the right balance. The author states that by making it easier for defendants to recover their expenses, the proposed amendments would undermine key purposes of the CFCA by discouraging whistleblowers from reporting fraud, and discouraging qui tam plaintiffs and the government from pursuing allegations of fraud against the government. AB 1196 (Blumenfield) Page 13 of ? Generally, in the United States, the "American rule" is that parties must bear their own costs of civil litigation. The Legislature has crafted exceptions to this rule permitting plaintiffs to recover their costs when it has recognized that privately initiated lawsuits are often essential to the effectuation of the fundamental public policies embodied in statutory provisions. Similarly, exceptions have been crafted for prevailing defendants when the motivation for the underlying lawsuit is unrelated to an actual legal dispute. The CFCA has adopted both exceptions to the "American rule," permitting plaintiffs and defendants to recover their expenses if they prevail. The rationale for permitting qui tam plaintiffs and the government to recover expenses seems self-evident - the CFCA seeks to encourage whistle-blowers to report fraud and for qui tam plaintiffs and the government to aggressively pursue legitimate claims. By permitting prevailing defendants to recover, the statute protects defendants from clear abuses of the CFCA. Given that the CFCA has been used successfully to recover more than $1 billion by the state over the last decade, the committee may conclude that existing law protects the interests of all parties appropriately. Support : Attorney General's Office; Consumer Attorneys of California; California Inspector General Opposition :Engineering Contractors' Association; California Fence Contractors' Association; Marin Builders' Association; Flasher/Barricade Association; California Chapter of the American Fence Contractors' Association; Southern California Contractors Association HISTORY Source : Author Related Pending Legislation : None Known Prior Legislation : AB 940 (Keeley, 2002), would have eliminated the minimum civil fine for false claims and provided that a person would be liable for a civil penalty for twice the amount falsely claimed when that claim had not been paid. The bill was not amended in time for committee consideration. AB 1196 (Blumenfield) Page 14 of ? Prior Vote : Assembly Judiciary Committee (Ayes 8, Noes 0) Assembly Appropriations Committee (Ayes 12, Noes 4) Assembly Floor (Ayes 53, Noes 23) **************