The California False Claims Act: Deficit Reduction Act Model?

Passage of section 6032 of the Deficit Reduction Act of 2005, which provides a 10% incentive in a state’s share of Medicaid false claim recoveries if it has an acceptable state false claims act provision on the books, has focused new attention on the importance of state False Claims Acts (“FCA’s”). Of the eighteen or so state FCA statutes currently in operation, that of California has attracted the most attention. And this is not simply because California was the first state to enact its own FCA. Rather, the CFCA provides valuable lessons for states contemplating enacting their own statutes. While it is patterned on the federal FCA, which is supposed to serve as the model under the DRA, it contains some unique provisions departing from the federal model. Moreover, the statute has been amended since its enactment in 1987 based upon California’s experience–experience which may prove valuable to states now designing their own FCA statutes. This article is not meant to be an exhaustive treatise on the CFCA but rather a brief consideration of these issues.

A. Unique Provisions of the CFCA

The CFCA is found at Cal. Gov’t Code §§ 12650-12656. Excellent commentaries on the legislative history of the CFCA are available. See, e.g., James W. Taylor & Brian Taugher, The California False Claims Act, 25 Pub. Cont. L.J. 315 (1996). Also quite helpful is A Section-by-Section Analysis of the California False Claims Act, prepared by the Center for Law in the Public Interest which took the lead in drafting the CFCA.1 It is well established under California law that the CFCA is not only modeled primarily upon the federal FCA, but that case authorities construing the federal act can be used to interpret the CFCA as well. United States ex rel. Stierli v. Shasta Services, Inc., 440 F. Supp.2d 1108, 1111 (E.D. Cal. 2006). However, it would be a mistake to simply assume that the two statutes are identical, because they do manifest important differences.

Definition of “Prosecuting Authority”

Under the federal FCA, prosecution by government under the Act is vested in the Attorney General. In other words, even if an agency Inspector General discovers program fraud, it must submit the pertinent request for prosecution to the Department of Justice.

By contrast, section 12650(b)(5) of the CFCA broadens prosecutorial authority in a form that should be highly appealing to states considering passage of their own FCA’s: ” ‘Prosecuting authority’ ” refers to the county counsel, city attorney, or other local government official charged with investigating, filing, and conducting civil legal proceedings on behalf of, or in the name of, a particular political subdivision.”

Under section 12652 (a) & (b), the “suit may be brought by the Attorney General where state funds are involved or by the “prosecuting authority” of a political subdivision where the political subdivision’s funds are involved, subject to intervention, and participation by the other official where both state and political subdivision funds are involved.” State ex rel. Harris v. PricewaterhouseCoopers, LLP, 39 Cal.4th 1220, 1223 (2006).

This approach has several advantages in the state context. First, it increases substantially the available prosecutorial resources to pursue CFCA violations. Second, it immediately puts the government officials most closely tied to the fraud investigation in a position to play a leading role in the actual prosecution of the matter. Yet, overall coordination of CFCA litigation remains available through the Attorney General.

The Claim Need not be False

Unlike the federal FCA, to qualify as a false claim under the CFCA need not actually be false. Rather, the test is whether the claim is “underpinned by fraud.” City of Pomona v. Superior Court, 89 Cal.App.4th 793, 802 (2001).

Passive Beneficiary Liability

One innovative provision unique to the CFCA is § 12651(a)(8), the so-called “passive beneficiary” clause. Under this section, any person who “[i]s a beneficiary of an inadvertent submission of a false claim to the state or a political subdivision, subsequently discovers the falsity of the claim, and fails to disclose the false claim to the state or the political subdivision within a reasonable time after discovery” is liable under the Act.

There is hardly any case authority interpreting this section, and there is no comparable provision under the federal FCA. The key decision interpreting this section is Armenta ex rel. City of Burbank v. Mueller Co., 142 Cal.App.4th 636 (2006). As the text indicates, the purpose of this provision is to impose liability for any person who knowingly benefits from the submission of a false claim to the government. It is not necessary for establishing liability that the potential defendant itself submitted the claim; only that it learned of the falsity, benefitted therefrom, and did not immediately inform the government of the false claim. Id. at 647. The Armenta court pointed to the CFCA’s legislative history to substantiate this conclusion, which the dissent rejected. Id. at 648. The court also dismissed the contention that because the section speaks of “inadvertent submission,” the Act did not also reach intentionally submitted false claims. Id.

This section recently popped up in the Average Wholesale Price litigation brought under the CFCA. See, In re Pharmaceutical Industry Average Wholesale Price Litigation, 2007 WL 861178 (D. Mass. March 22, 2007). There the plaintiffs’ contention was that the prices for pharmaceuticals paid by MediCal had been unlawfully inflated due to the state’s reliance upon the manufacturers’ published highly-overstated average wholesale prices in determining reimbursement rates. While the manufacturers themselves did not submit the allegedly false claims for reimbursement to MediCal, pharmacies and physicians did that, the complaint alleged that the manufacturers nonetheless should be considered “beneficiaries” under section (a)(8) because inflated prices paid to their customers helped increase their market share, which in turn increased their profits. Id. at *8-9. While U.S. District Judge Saris rejected this contention, its invocation here suggests the rather extensive potential this type of clause contains to dramatically increase the potential reach of FCA liability.

Definition of “person”

The CFCA further departs from its federal counterpart in its definition of the term “person” in § 12650(b)(5). This definition serves both to delineate potential defendants as well as “qui tam plaintiffs.” Such clarity of definition becomes particularly important in avoiding confusion about which state entities can be sued as false claimants under the CFCA. Wells v. One2One Learning Foundation, 39 Cal.4th 1164, 1179 n. 1 (2006). Thereby, California courts are spared the difficulties faced by federal courts in interpreting the FCA, such as was well illustrated in Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000), and its progeny.

No Minimum Penalty

Unlike the federal FCA, which mandates ranges of penalties (such as $5500 – $11,000 in § 3729(a) for each false claim), the CFCA imposes a penalty “up to” $10,000 for each separate violation of the Act. See § 12651(a). As does the federal FCA, the California Act also imposes triple damage liability for violations. Id. In addition, the CFCA creates joint and several liability for acts committed by two or more persons. § 12651©). Damages, however, can be mitigated and penalties waived under the disclosure provision of the Act. § 12651(b).

Penalties Can Only be Imposed for Submitting “False Claims”

A recent decision indicates a substantial variation from the penalty provision of the federal FCA. In Fassberg Const. Co. v. Housing Authority of Los Angeles, 2007 WL 1502834 at *7-*13 (Cal.App.2 Dist. (May 24, 2007), the court held that documents (specifically change orders and progress reports) submitted in order to get a false claim paid or approved (a violation of § 12651(a)(2)) could not support the imposition of a penalty under the Act. Rather, the court held, the language of the CFCA mandated that penalties could only be imposed for each “false claim.” While this is a somewhat surprising conclusion, there is no question but that the critical language in the two acts differs. The federal FCA simply directs that penalties can be imposed for any violation of the seven component offenses listed in 31 U.S.C. § 3729(a)(1)-(a)(7). The CFCA, however, only speaks in terms of imposition of a penalty for each “false claim.”

Statute of Limitations

There is a marked disparity between the two statutes in regards to their respective statute of limitations provisions. In any action alleging violations of the federal FCA, the statute of limitations provision contained within the FCA controls. See 31 U.S.C. § 3731(b). Under § 3731(b)(1), a six year statute of limitations provision is mandated.2 For FCA purposes, the statute of limitations begins to run once the claim for payment is submitted to the government. SeeUnited States v. Entin, 750 F. Supp. 512, 517-18 (S.D. Fla. 1990). In 1986, the FCA was amended to include a second statute of limitations provision, § 3731(b)(2).3 This dual structure has led to significant litigation as to whether relators are entitled to place reliance upon the (b)(2) provision and thereby possibly bring actions as late as 10 years after the date of violation.

By contrast, the CFCA contains a more concise definition in § 12654(a):

A civil action under Section 12652 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 or, in any event, no more than 10 years after the date on which the violation of Section 12651 is committed.

This section raises several issues, some of which have been resolved by the California courts. First, who is the responsible individual? Generally speaking under the federal FCA, that person would be a Main Justice attorney, Assistant U.S. Attorney, or even an Inspector General official. Because under the CFCA both the state Attorney General or the affected “political subdivision” may prosecute the action under § 12650(5), the issue is somewhat more complicated. It appears that the clock begins to run when either the AG or the affected “prosecuting authority” discovers the violation. Debro v. Los Angeles Raiders, 92 Cal. App. 4 th 940, 949 (2001).

How then is the “date of discovery” to be determined? Given the marked disparity in language between the CFCA and federal FCA provisions, decisions interpreting the federal act are inapposite. However, according to the Debro court, analogous language has long been used in other California statutes of limitations. Drawing an analogy with one of those statutes, the court determined that the statute begins to run “upon the discovery by the aggrieved party of the fraud or facts that would lead a reasonably prudent person to suspect fraud.” Id. at 950.

Therefore, each situation involves a detailed examination of the pertinent facts and whether they would suggest to a “reasonably prudent” prosecuting authority on “inquiry notice” that fraud had occurred. However, as a most recent decision makes clear, the qui tam plaintiff is not the “official” who can start the clock running. California ex rel. Hindin v. Hewlett-Packard Co. ,__Cal.Rptr.3d __, 2007 WL 20197 53 (Cal.App. July 13, 2007). So, for all practical purposes, qui tam plaintiffs have a 10 year statute of limitations within which to file a complaint. Id. at 951. See also, State ex rel. Metz v. CCC Information Services, Inc., 149 Cal.App.4th 402 (2007).

B. Key Qui Tam Provision of the CFCA

Purpose of the Qui Tam Provision

Both the federal FCA and the CFCA contain provisions whereby individuals can initiate actions on behalf of the government and share in the proceeds of any recovery. The CFCA provision is found at §12652(b)-(i). Under the federal FCA, these individuals are referred to as “relators”; the CFCA designates them as “qui tam plaintiffs.” In 1986 the qui tam, or private citizen suit provisions of the federal FCA (found at 31 U.S.C. § 3730), were substantially strengthened and liberalized to provide greater incentives relators to come forward and report fraud against the government. Campbell v. Redding Medical Center, 421 F.3d 817, 823 (9 th Cir. 2005). It was apparently this development that led the California legislature to pass the CFCA, including its qui tam provision. See Taylor & Taugher, 25 Pub. Cont. L.J. at 318.

Both the 1986 federal FCA amendments and the creation of the CFCA reflect a considered judgment by government authorities that the seriousness of fraud committed against government is so severe, that it has outstripped the resources of law enforcement mechanisms.4 Hence, drawing upon the concept of “private attorneys general,” the qui tam provisions seek to enhance the government’s ability to fight fraud against the public fisc. And this is certainly the way that things have developed. Both the California and federal governments have discovered that far greater volumes of recoveries are possible with private individuals having the ability to initiate qui tam suits. In addition, many qui tam cases involve allegations that the government would never otherwise have become aware of, because the relators were insiders with unique knowledge.5

The California legislature attached such great importance to encouraging qui tam actions, that it even wrote into the act inducements which substantially exceed those contained in the FFCA. Under the California Act, if the Attorney General does not intervene in the case, the qui tam plaintiff may recover at least 15 percent but not more than 33 percent of the judgment or settlement. If the government declines to intervene, the qui tam plaintiff can recover between 25 and 50% of any settlement or judgment. See §12652(g)(2) & (3). In addition, the successful qui tam plaintiff is entitled to recover its attorneys fees, costs and expenses. §12652(g)(8).

To further encourage individuals to act as qui tam plaintiffs, the CFCA contains even more extensive “whistleblower” protection than does the federal FCA. See § 12653. For example, in addition to providing protection from retaliation, the section also forecloses an employer from implementing any policy that would prevent employees from disclosing information about fraud to the government. Unlike the FFCA, it also provides for punitive damages for unlawful retaliation.

As is true under the federal act, the CFCA qui tam plaintiff files its complaint in camera and under seal so that it remains secret and unknown to the defendant. It is also the qui tam plaintiff’s responsibility to serve the Attorney General with a copy of the complaint and a disclosure statement comprising all material evidence upon which the complaint is based. The AG then has 60 days to evaluate the complaint and decide whether to intervene or decline intervention. § 12652(c)(4)-(6).

Limitations on Filing Qui Tam Actions

As is true of the federal Act, a qui tam plaintiff can lose its jurisdictional standing if the defendant or the state can demonstrate that its complaint is “based upon” public disclosures of its essential “allegations or transactions.” § 12652(d)(3)(A). However, if the qui tam plaintiff can establish that it is the “original source” of allegations underlying the public disclosure (see § (d)(4)), the so-called “public disclosure bar” will not foreclose jurisdictional standing. See generally, Hawthorne ex rel. Wohlner v. H&C Disposal Co., 109 Cal.App.4th 1668, 1676-79 (2003).

The CFCA, however, contains a further unique provision: § 12652(d)(2). It reads: “In no event may a person bring [a qui tam action] that is based upon allegations or transactions that are the subject of a civil suit or an administrative civil money penalty proceeding in which the state or political subdivision is already a party.” There is no exemption for “original source” under this provision.

Moreover, as with the federal FCA, it makes a great deal of difference who files first under the CFCA. The Act contains a “first-to-file provision in § 12652(c)(10). Demonstrating original source status has no effect if a qui tam plaintiff is not the first to file a complaint regarding the allegations.

Government Unilateral Dismissalof Qui Tam Action

Under the federal FCA, dismissal of a qui tam action at the request of the government is virtually automatic pursuant to 31 U.S.C. § 3730(c)(2)(A). This is seen as an exercise of prosecutorial discretion. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1143 (9 th Cir. 1998). A prescribed test can be applied to make such determinations. The two-step test has been articulated in Sequoia Orange, supra at 1145: “(1) identification of a valid government purpose; and (2) a rational relation between dismissal and the accomplishment of the purpose.” If the government satisfies this test, then the burden shifts to the qui tam plaintiff “to demonstrate that dismissal is fraudulent, arbitrary and capricious, or illegal.”

However, this is not the situation under § 12652(e)(2)(A). The CFCA mandates that the government must be able to demonstrate “good cause” to justify the dismissal. “Good cause” however is not defined in the statute. The California courts interpreting this provision have employed a very broad approach to determining what is “good cause.” For example, in American Contract Services v. Allied Mold & Die, Inc., 94 Cal.App.4th 854, 860-61 (2001), the court declared that the meaning is relative, and depends upon the circumstances of each case. “Essentially, any matter that has a bearing on the issues at hand may be considered.” Particularly important are the relative merits of the action. If the qui tam plaintiff’s allegations do not state a viable CFCA cause of action, then good cause is established. Id.

A later decision established a more precise test for “good cause.” The dismissal must be “rationally related to a legitimate government purpose, and not arbitrary, capricious, made in bad faith, based on improper or illegal motives, founded on an inadequate investigation, or pretextual.” Moreover, “in exercising its discretion the trial court may consider any matter relevant to the issue, including the relative merits of the action, the interest of the qui tam plaintiff, the purposes underlying the False Claims Act, and the potential waste of government resources.” Laraway v. Sutro & Co., 96 Cal.App.4th 266, 275-76 (2002).

No Requirement to Notify the Government Prior to Filing

Unlike the FCA [§ 3730(e)(4)(b)], there is no requirement under the CFCA that relators inform the government of their allegations prior to any public disclosure in order to qualify as an “original source.” United States ex rel. Zaretsky v. Johnson Controls, Inc., 457 F.3d 1009, 1020-22 (9 th Cir. 2006). Therefore, qui tam plaintiffs face one less hurdle than do federal relators in establishing “original source” status.

Joint Management of Qui Tam Litigation

The CFCA recognizes that in cases where the state intervenes, differences of strategy and approach may result between it and the qui tam plaintiff. Several provisions of the CFCA address this potential problem. The court to which the matter is assigned can stay a qui tam plaintiff’s discovery for 60 days if the Attorney General (or other prosecuting authority) can demonstrate it would interfere with any civil or criminal investigation growing out of the same facts. § 12652(h). This provision is similar to § 3730(c) of the federal FCA, although the federal provision is limited to interference with prosecution of the qui tam case, and does not contain a 60-day limit.

More importantly, if the prosecuting authority can establish that “unrestricted participation” by the qui tam plaintiff ‘would interfere with or unduly delay the … prosecution of the case,” or be “repetitious, irrelevant, or for purposes of harassment,” the court can limit the qui tam plaintiff’s participation. Specifically, the court could limit the number of witnesses the qui tam plaintiff wants to call; limit the length of their testimony; place limits on the ability to cross-examine witnesses; or otherwise limit participation. § 12652(I).

C. Other Important Provisions of the CFCA

Act Reaches Only Defrauding the “Public Fisc”

One of the most important parameters of the CFCA is that it is designed to reach only fraud committed against the California state government, involving public funds. § 12650(b)(1); § 12652(c)(1). California v. Altus Finance, S.A., 36 Cal.4th 1284 (2005). This California Supreme Court holding arose out of a request from the Ninth Circuit for clarification of California legal issues. See, California ex rel. RoNo v. Altus Finance, S.A., 344 F.3d 920 (9 th Cir. 2003). The key question at issue was whether when the state’s Insurance Commissioner, acting as conservator, seized the assets of a failed life insurance company, those funds for CFCA purposes temporarily became state funds. Id. at 929.

The California Supreme Court granted the 9 th Circuit’s request. Its opinion flatly rejected this contention. “The legislative history of the CFCA indicates that the statute’s purpose was to protect the public treasury and the taxpayers.” Altus, 36 Cal.4th 1284, 1296. Further noted the Court, “California courts have consistently reaffirmed that the Legislature obviously designed [the CFCA] to prevent fraud on the public treasury,’” citing to numerous California decisions sustaining this limitation. Id. at 1296-97. In light of these considerations, the court found that the Insurance Commissioner’s temporary trusteeship over the escrowed funds did not convert them into public funds under the CFCA. Id. at 1297-98. Other sections of the CFCA, the court found, also supported its conclusion that there was no threat to the “public treasury” that could support a CFCA action. Id. at 1299.6 A federal court most likely would have made a similar holding under the federal FCA.

Award of Attorney’s Fees, Costs and Expenses to CFCA Defendant

Section 12652(g)(9) of the CFCA provides that should a defendant prevail in an action where the government has declined to intervene, “the court may award to the defendant its reasonable attorneys’ fees and expenses if the defendant prevails in the action and the court finds that the claim of the qui tam plaintiff was clearly frivolous, clearly vexations, or brought solely for purposes of harassment.” The language of this section mimics that of the federal FCA. It should sound a note of caution to prospective qui tam plaintiffs.

The Stringent Collateral Estoppel Provision

The CFCA contains a very rigorous collateral estoppel provision very similar to that found in the federal FCA. See 31 U.S.C. § 3731(d). Section 12654(d) virtually guarantees that admissions contained in a plea agreement or verdict will foreclose effectively the ability of the defendant to contest related false claims allegations and to avoid full and complete liability under the CFCA. The identical “essential elements” and “same transaction” tests are employed as in the federal FCA.

Unique Jurisdictional Provision

A provision unique to California law, which is not contained within the CFCA, nonetheless can have a significant impact on actions under the Act. Insurance Code Section 1037(f) presented the issue of whether Commissioner of the California Department of Insurance, in his role as conservator or liquidator of property belonging to insolvent insurance companies, possesses exclusive authority to litigate civil claims in relating to the pertinent transactions under California law, thereby cutting off any action by a qui tam plaintiff or the Attorney General. The Commissioner’s position was affirmatively upheld in State of California ex rel. RoNo v. Altus Finance, 36 Cal. 4 th 1284 (2005). This exception is not likely often to play a role, but it can be devastating to an otherwise viable CFCA claim in the appropriate circumstances. Any state considering implementing its own FCA statute should make sure to survey its existing statutory arrangements to assure that the proposed act complements and is consistent with them.

Conclusion

As states rush to fulfill the mandate of the Deficit Reduction Act, the California False Claims Act stands as a valuable model with proven success. At a minimum, it can serve as a starting point for those charged to develop meaningful drafts for possible enactment by the state legislature. Another useful model is found on the Taxpayers Against Fraud website at www.taf.org/modelstatefca.pdf.


Footnotes

1. This document is reproduced in Appendix I to John T. Boese, Civil False Claims and Qui Tam Actions (3d ed. 2007). See also Appendix K, id., False Claims Acts: A Comparison of the Major Provisions of California and Federal Law, which although somewhat dated is still quite helpful.

2. Sec. 3731(b)(1) reads: A civil action under section 3730 may not be brought
(1) more than 6 years after the date on which the violation of section 3729 is committed, or…

3. A civil action under section 3730 may not be brought–
(2) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.

4. The Center for Law in the Public Interest explained in its analysis of the CFCA that “evidence of fraud on the state and local level had increased dramatically.” Boese, supra, at id.

5. The CFCA does contain some broader limits upon qui tam actions than the federal Act. For example, state employees are foreclosed from initiating actions unless (1) they have exhausted internal reporting procedures for dealing with allegations of fraud, and (2) the government failed within a “reasonable time” to act upon the information they provided. § 12652(d)(4).

6. The qui tam provisions of the Act underline the validity of the court’s conclusion. For example, § 12652(c)(1) states a person may bring a civil action “if any state funds are involved….”

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