Tuesday, May 12, 2015

Maryland's New False Claims Act

Last month, the Maryland General Assembly passed a long-overdue measure to strengthen the state’s False Claims Act. Maryland’s old version of the False Claims Act was limited to frauds against the state’s medical care programs. Past efforts to expand the law had failed, largely because of opposition from the state’s high-tech and research institutions.

When SB 374 takes effect, those who commit frauds against the State of Maryland will become liable for three times the amount they defrauded from the state, and up to an additional $10,000 for each fraud. This later provision will be particularly significant for ongoing schemes of fraud that involve repeating the same type of claim over and over again. Even if a small amount is at stake in each claim, the extra penalty can pile up.

Section 8-102(a), however, exempts from liability those who commit a fraud “related to state or local taxes.” Apparently, Maryland’s General Assembly seeks to curry favor with taxpayers by protecting them from this additional liability if they choose to commit a fraud against the state.

One of the big advantages for states in enacting their own False Claims Acts comes from a 2006 provision inserted into the federal False Claims Act by Sen. Charles Grassley (R-Iowa). This “Grassley Amendment” increases the state’s share of funds recovered under the federal False Claims Act by ten percent (10%), but only if the state has its own law that meets the minimum standards of the federal law. A state’s potential recovery under the Grassley Amendment can be millions or billions of dollars, depending on the federal government’s success in its own cases. About half of the states have qualified for this benefit.

However, it appears that Maryland’s new law still falls short of the requirements for the Grassley Amendment. The Inspector General of the Department of Health and Human Services published its requirements for qualifying for the Grassley Amendment. At 71 Fed. Reg. 48554 (published August 21, 2006), the HHS OIG listed among the requirements that, “If the State elects not to proceed with the action, the relator may conduct the action[.]”

Maryland’s SB 374, at Section 8-104(A)(7) and (B)(3)(II)(2), provides that if the state declines or withdraws from the action, then “the court shall dismiss the action.” This is the opposite of what the Grassley Amendment requires. It also limits the application of Maryland’s law to only those cases that the state Attorney General decides to pursue. Many frauds against the federal government have been proven by whistleblowers in cases they chose to pursue without any help from the government, and Maryland is going to lose the revenue that could flow from such cases. Maryland also stands to lose the millions of federal dollars that it could otherwise receive through the Grassley Amendment.

On the plus side, SB 374 creates a new protection from retaliation. Employees and contractors are protected when they investigate, initiate, testify in, or assist a lawful action against a fraud. Section 8-107(A). They are protected when they disclose a fraud to a supervisor or the government. They are also protected when they refuse to engage in a fraud against the state. This provision parallels a federal statute that provides the same protection for those opposing frauds involving federal funds. 31 U.S.C. § 3730(h).

Victims of retaliation may seek an injunction to stop the retaliation. They may get double their back pay and punitive damages. The law provides a statute of limitations of at least three years. Section 8-108(A).

Other shortcomings of SB 374 are that it omits a provision allowing the state to recover through alternative means. So, if a whistleblower files a lawsuit and the state decides to make a recovery through a related criminal case, for example, the whistleblower could get nothing.

If the whistleblower participated in the fraud, SB 374 permits a court to reduce the whistleblower’s award. Section 8-105(B). If the whistleblower is convicted of any crime in connection with the violation or the fraud claim, then the law bars the whistleblower from receiving any award, and requires that any award already paid be returned. These provisions fail to appreciate that it often takes a crook to catch a crook, and we want especially to encourage crooks themselves to report the frauds they know so well.

Section 8-105(C) permits a court to order a whistleblower to pay the defendant’s attorney’s fees if the court finds that the action was brought in bad faith. Unless the courts set a high standard for a showing of bad faith, then this provision could become a serious deterrent for whistleblowers considering whether to disclose a fraud through this law.

The law exempts elected officials from liability if they can show that the government knew about the fraud. Section 8-106(A). The law severely limits claims made by public employees who would know about the fraud through the performance of their duties. Section 8-106(B). This provision fails to recognize the role public employees can play in cases where their supervisors decide to let a fraudster get away with the fraud.

The law does not permit the state to recognize a whistleblower’s contributions once a public disclosure is made. Section 8-106(D). Finally, SB 374 prohibits any retroactive effect – allowing fraudsters to breath freer if they complete their frauds before the law’s effective date.

Maryland Attorney General Brian Frosh pushed for passage of this law, saying it is an important fraud-fighting tool that will recoup millions for the state budget. “The False Claims Act is a proven tool and I am confident it will recoup millions for the state, while creating a level playing field allowing honest businesses to thrive,” Attorney General Frosh said in a press release. “It has been effective for the federal government. It has been effective in states all over the country. And it is going to work in Maryland.”

Frosh reported that the state has recovered nearly $62 million over the past four years from Medicaid-related cases initiated by whistleblowers and others. The federal government recouped $5.6 billion in the 2014 fiscal year from its version of the False Claims Act, with $3.1 billion coming from cases involving banks and financial institutions.

Strangely, the Department of Legislative Services issued a Fiscal Note that looked only at the costs for the state in pursuing fraud cases. It estimates that the annual cost would be over $500,000, but makes no estimate of the potential or likely recovery for the state. The Department of Legislative Services made a similar overestimate of costs to the state for the Civil Rights Tax Fairness Act that passed in 2013.

Maryland’s False Claims Act passed the Maryland House of Delegates by a vote of 88-51. It is now waiting for the signature of Gov. Larry Hogan. Thereafter, the Maryland General Assembly would do well to revisit the False Claims Act and have it conform fully to the Model State False Claims Act published by Taxpayers Against Fraud.

By Richard Renner


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