Issues & Trends
Qui Tam Panel Offers Insight Into State False Claims Act Litigation Landscape
March 18, 2024
Seated from left to right: Karl Racine, Brian Schwalb, Shelly Martin, and Thomas Teige Carroll
The False Claims Act (FCA) serves as the federal government’s main weapon for fighting fraud. It empowers whistleblowers — “relators” — to sue individuals or entities that are defrauding the government and to recover damages and penalties on its behalf. Though it dates to 1863, the FCA remains an important tool today, with FCA settlements and judgments exceeding $2.68 billion in the fiscal year ending September 30, 2023.
At the state level, however, whistleblower protections and financial rewards do not always match federal law. In several states, for example, false claims laws apply only to fraud involving Medicaid or other state health care funds.
State adoption of the FCA was one focus of the Federal Bar Association’s 2024 Qui Tam Conference, held in February at the Hilton Washington, D.C., Capitol Hill. A panel discussion moderated by Hogan Lovells partner and former D.C. attorney general Karl Racine took a closer look at some of the state officials entering the qui tam space. “We play, as attorneys general, an increasingly significant role in qui tam litigation,” Racine said.
Panelists, including D.C. Attorney General Brian Schwalb; Thomas Teige Carroll, chief of the Taxpayer Protection Bureau at the New York State Office of the Attorney General; and Shelly M. Martin, director of the False Claims Unit at the Maryland Office of the Attorney General, agreed with Racine’s assessment, though their respective jurisdictions approach qui tam litigation differently.
New York has its own false claims act, enacted in 2007, which extends the ability to pursue claims to tax fraud. Carroll said that he knew the individual responsible for drafting New York’s version of the law. “He said that it was a pretty easy drafting job because all you had to do was take the federal version of the law” and delete “not” where it says the False Claims Act does not apply to tax claims.
Unlike New York, Martin said Maryland did not strike that clause. “That doesn’t mean we won’t take a tax case. It just means that [when] qui tam comes in, we will be looking at our other enforcement authorities and if, and when, we get to a point of intervention, we may not intervene on the false claims count, but we’ll intervene on the additional counts,” she explained.
The D.C. expansion of its false claims act to encompass tax claims is a relatively recent development, Schwalb said. “It became effective in January 2021. We’re in our nascent stages of developing law in the District, finding cases independently as well as taking whistleblower cases that are brought to our attention,” he said.
In the District, the expansion of the false claims act into the tax space drew pushback from the established tax bar, Schwalb said. “The argument was that the law would open the door to too many cases, too many frivolous cases, and that the incentive structure for plaintiff’s counsel to bring tax cases would deluge the courts and deluge our office,” Schwalb said. “I think there was a sense that tax law was too sophisticated, and its own specialty, to lend itself to false claims. There was also the general sense that there were privacy concerns related to tax return information that shouldn’t be spilling over into the false claims space.” Despite the debate, D.C. Council passed the law.
Martin said that Maryland also had vigorous debate in passing the state’s version of the FCA. “The first version applied only to health care fraud,” she said. “It was proposed because there was the Deficit Reduction Act of 2005,” which required entities receiving more than $5 million in Medicaid to establish written policies about the FCA.
“[Even with] that federal incentive, it took three years to get that [version] passed,” Martin said, noting the concern that including tax fraud would result in unnecessary and duplicative laws, since anti-tax fraud statutes already existed elsewhere in the Maryland Code.
New York’s inclusion of tax fraud has exposed the state to criticism that the attorney general is unfamiliar with the tax code and unable to get a proper perspective on its cases. “To that, we say nothing much because they’re wrong,” Carroll said, noting that their work always involves the state tax authorities. He speculated that one reason for the ongoing pushback is that those being audited and defending against tax claims need to turn over only the documents they want the tax authorities to see, while the attorney general’s office is capable of subpoenaing a wider array of documentation, such as contemporaneous emails, that can be more effective in identifying and prosecuting fraud.
The District sets some limits on its tax fraud prosecution. To qualify under the law, the tax fraud must involve a party with taxable income of at least $1 million and a loss to the District of at least $350,000. Schwalb said this stipulation was to help ensure that the law did not result in the prosecution of “the little guy.” He added that the cases are not typically complicated to prosecute, but relying on whistleblowers was ineffective in identifying fraud in the first instance. “If you can find the right cases, you can bring the right level of scrutiny,” he said.
A growing number of jurisdictions employ their own version of the FCA. Martin said that a total of 29 states plus the District, Guam, and Puerto Rico have some version of the FCA. “There are various carveouts in different statutes. You really need to look at the state statutes, but I would say, again, just because you see a state carveout, don’t just say, ‘Oh well, I guess this isn’t going to work,’” she said. “The other state enforcement authorities didn’t just disappear because the False Claims Act passed, but we can’t do anything if we don’t know, so, go ahead and file that qui tam and we will figure out what to do when it comes through the door.”
