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Boston Bar Journal

Government Professionals as False Claims Act Whistleblowers, and What Massachusetts Agencies and Municipalities Can Do About It

April 03, 2013
| Spring 2013, Vol. 57, #2

by Chris Barry-Smith

Heads Up

Barry-Smith_ChrisSpurred by federal monetary incentives, the Massachusetts legislature in 2012 amended the Massachusetts False Claims Act, G.L. c. 12, §§ 5A-5O (“MFCA”) to allow government professionals not only to blow the whistle, but potentially profit handsomely for doing so.  This article suggests  some measures by which state agencies and municipalities may be able to avoid a financial windfall to senior employees who bring whistleblower claims.

I.          Background

When Massachusetts enacted the MFCA in 2000, the legislature excluded senior government professionals from the universe of potential relators who could file false claims lawsuits seeking treble damages and civil penalties on behalf of the government.   G.L. c. 12, § 5G(4) (prior to amendment) (excluding any “auditor, investigator, attorney, financial officer, or contracting officer”).   The exemption reflected a line of federal cases that had prevented certain government employees from acting as relators.  Federal courts typically permitted relator suits by government employees who had no explicit obligation to disclose information to their employer, notwithstanding a “legitimate argument that every government employee has a fiduciary obligation to report fraud,” but restricted suits by those whose job responsibilities included detecting fraud.  Boese, Civil False Claims and Qui Tam Actions, § 4.01[b](8), at pp. 4-26 to 4-27.  See, e.g. U.S. ex rel LeBlanc v. Raytheon Co., 913 F.2d 17, 20 (1st Cir. 1990) ; U.S. ex rel. Fine v. Chevron, U.S.A., 72 F.3d 740, 743-44 (9th Cir. 1995) ;  U.S. ex rel Biddle v Stanford Univ., 147 F.3d 821, 829 (9th Cir. 1998) .

In 2012, the Massachusetts Legislature struck this exemption from the MFCA.  The impetus of this Beacon Hill amendment was Senator Charles Grassley (R-Iowa), a champion of relator rights.  Since 2006, the Social Security Act has provided a financial incentive to states that enact false claims acts (“FCA”) to combat Medicaid fraud “that are at least as effective in rewarding and facilitating qui tam actions for false claims as . . . the federal FCA.”  42 U.S.C. §1396(h).  The HHS Inspector General in consultation with DOJ determines if a State FCA is sufficiently favorable to relators, and Senator Grassley monitors to ensure their task reflects relator-friendly rigor.  States that pass the test obtain a 10% increase in the state “share” of Medicaid fraud recoveries (for Massachusetts roughly 60% of recoveries instead of 50%).  Because the Attorney General’s Office’s Medicaid Fraud recoveries can exceed $85 million annually (in 2012, reflecting state and federal shares of recovery), failing this test stood to cost the Commonwealth millions of dollars.  After the HHS Inspector General informed the Massachusetts Attorney General’s Office (“AGO”) in 2010 that the MFCA was not compliant, the AGO worked with the Legislature to enact a small package of MFCA amendments.  With millions of dollars at stake, the State Legislature deleted the exemption.

As a result, government managers, and perhaps even outside professionals hired by the government, may now stand to reap the benefits of acting as relators (ranging from 15 to 30 percent of any ultimate recovery, plus costs and fees).  MFCA, § 5F(1) & (4).  This incentive contrasts sharply with the traditional expectations for government professionals:  to avoid fraud, waste or abuse, or if contracting abuses are detected, to fix the problem — directly and internally rather than through a relator suit.  State and municipal managers can hope and expect that government professionals will report and remedy contracting fraud internally, but — in light of the 2012 amendments permitting their employees to act as relators — they would be wise to consider some more affirmative options.

II.        Potential Options For Government Employers

Any discussion of the tools government employers might employ to avoid or minimize the risk of their employees acting as relators must take into account section 5J of the MFCA, which prohibits agencies from restricting their employees from bringing actions or reporting violations under the MFCA.  G.L. c.12, § 5J(1).  Although this provision almost certainly was not drafted with government employers in mind, no explicit distinction between public and private employers is made.  Therefore, section 5J may well preclude some, but probably not all, tools available to municipal and agency managers.

There is no reason to think that § 5J eliminates existing ethical and conflicts of interest laws that apply to government employees.  These remain the most effective tools available to government employers seeking to address the implications of relator suits by employees.  Massachusetts law demands of government employees, among other things, undivided loyalty, service free from conflict of interest, and prohibits profiting from one’s government service.

See G. L. c. 268A, §§ 4, 6, & 17-19 (similar restrictions for municipal employees); Ethics Commission, Summary of the Conflict of Interest Law, at IV.d.  Given these laws, government employers may wish to consider the following requirements directed to senior employees and others with an obligation to report or detect fraud.

Contractual Prohibition on Government Professionals Serving as Relator?  As a threshold matter, a complete bar on government professionals as relators may run afoul of Section 5J(1) and certainly invites litigation concerning its validity.  Though conflict of interest law might justify a ban on government manager relators, section 5J(1) counsels toward a less onerous approach that still may protect the government’s interests.

 Restricting Relator Recoveries or Requiring Relators to Share their Recovery with the Employing Agency or Municipality.  An agency or municipality could require that a relator’s recovery be directed — in whole or in part — to the government employer.  An employment contract — grounded in ethics laws that prohibit financial benefits (beyond salary) to government employees for performing their work — might be the legal basis for requiring that any financial benefits derived from the employee’s work be directed to the government.  Alternatively, the employer could consider allowing the employee to keep some percentage of the recovery.  This would maintain the MFCA’s financial incentives but direct those incentives to the harmed agency instead of an employee doing nothing more than performing his or her job.

Section5J(1) remains relevant to this “forced sharing” arrangement because it invalidates employment conditions that “limit or deny” relator rights.  But the government employer can point to ethics law — which prohibits employees from financially benefiting from their work (G.L. c. 268A,  §§ 4, 6) and generally forbids conflicts of interest — as a sound basis to restrict not a relator’s whistleblowing itself but the potential windfall for doing nothing more than one’s job.  This approach also serves the overarching FCA principle that fraud should be uncovered and punished, but adjusts the FCA’s financial incentives in light of ethics laws applicable to government employees.  Should litigation arise over this approach, the would-be relator would be in the unenviable position of fighting only for his payday instead of advocating for the broader benefits of exposing and remedying contractor fraud.

Requiring Prompt Disclosure to Employer of Evidence of Contractor Fraud or Abuse.  Government employers would be well served to memorialize, in contracts, manuals or policies, the obligations of employees to report suspected contracting fraud or abuse.  This will serve to instruct employees on the agency’s expectations for all employees.  It also will bolster the position that a would-be relator has violated known policies when the employee chose to file a confidential relator action instead of reporting and pursuing a remedy internally.  To take those rules into the FCA context, an employer could also identify the government alternative to remedying contractor fraud by describing how the particular agency will treat disclosures of fraud or abuse.  For instance:  after investigation, if the allegations appear to rise above typical contract disputes, the agency will refer the allegations to the Massachusetts AGO for investigation under the MFCA.  Further, the agency could instruct that employees may also report suspected fraud directly to the AGO or Inspector General;  although that may invite external reporting, it accounts for the possibility of supervisor complicity in the alleged fraud.  These types of policies highlight in an eventual relator dispute that limiting government relators does not limit FCA investigations and recoveries, because the AGO offers agencies and municipalities an alternative and meaningful route to FCA recovery.  Because the MFCA applies to all “political subdivisions,” the AGO routinely and seriously investigates agency and municipal referrals.

Non-Employee Contractors who provide professional services to the government.  All of the issues raised in this article with respect to government employees may also arise with non-employee professionals hired by the government.  The former section 5G(4) would have exempted certain contractors from relator status but no longer does; and section 5J(1) arguably limits restrictions on relator status for contractors as for employees.  Conceivably, a third party auditor hired by a municipality to assess a supplier’s adherence to a contract could, while providing the audit to the municipality, also file a relator suit seeking FCA recovery.  Therefore, the contractual tools outlined here may be applicable to non-employee contractors as well.

Rather than await the potential uncertainty of a government relator suit, agencies and municipalities should consider affirmative steps that promote reporting and remedying contractor fraud but that avoid financial windfalls for government professionals who do nothing more than the job they are paid to do.

Chris Barry-Smith is a Deputy Attorney General for Attorney General Martha Coakley.  He oversees the office’s civil enforcement matters, including False Claims Act enforcement.  This article represents the opinions and legal conclusions of its author and not necessarily those of the Office of the Attorney General. Opinions of the Attorney General are formal documents rendered pursuant to specific statutory authority.