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)
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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
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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
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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).)
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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
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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
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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
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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
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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"
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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
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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,
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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.
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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.
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Prior Vote :
Assembly Judiciary Committee (Ayes 8, Noes 0)
Assembly Appropriations Committee (Ayes 12, Noes 4)
Assembly Floor (Ayes 53, Noes 23)
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