The U.S. Chamber of Commerce’s Institute for Legal Reform recently released a report on the False Claims Act (FCA)—the primary whistleblower legislation utilized by the federal government. Unfortunately, its analysis presents a fundamentally defective approach to addressing fraud in business.
In short, the Chamber’s report concludes the following: there is a lot of fraud in American commerce, particularly the kind of fraud (much of it in healthcare) that costs American taxpayers billions and billions of dollars annually (in excess of $70 billion according to the Government Accountability Office). In fact, fraud is such a big problem that Congress needs to amend the FCA and reduce protections and rewards available for those who risk their careers to report that fraud.
The reality is that the FCA is an example of how the government works at its best and most efficient. In fact, another recent study by the Taxpayers Against Fraud Education Fund concludes that the government actually recovers $20 for every $1 it invests in fraud investigations pursuant to the FCA.
And there is a reason for it. It is because it may be the one area where government appropriately harnesses the private sector profit motive. It is the one area where government outsources ordinary people, driven by their own morality, conscience, and, yes, desire for money, to help do government’s work and provide a public good in the process. In fact, some would call it the free market.
The substance of the Chamber’s polemic deserves retort in numerous places, but it also highlights a larger political truth. The U.S. Chamber of Commerce has ceased to be an advocate for the kind of free market, entrepreneurial ideals it was founded to embody. Instead, the Chamber has become little more than a shill for Big Business. Its mission is more about protecting the turf of its most powerful constituents (even if it means making anti-fraud enforcement more difficult) than about promoting growth and innovation. Moreover, for a Republican Party desperately seeking to connect with American voters and demonstrate that it has not abandoned the small business owner-type that should form its core constituency, affiliating with this kind of posture is dangerous.
The Chamber’s “study” has numerous highlights. Perhaps the most troubling, however, is the Chamber’s long desired policy change—which it has advocated for in the context of the Dodd-Frank whistleblower law as well—that whistleblowers be required to report fraud internally before filing a whistleblower suit. The Chamber argues that the FCA promotes opportunistic whistleblowing. Yet, by the same token, the Chamber downplays the significance of its suggestion by conceding that “90 percent of employees who filed a qui tam case had initially reported their concerns internally.”
The reality is that most whistleblowers strive to do the right thing, and as much as the monetary incentive may push them to become relators in some cases, there is often great stress, reservation, trepidation, and sacrifice associated with that decision. And as if the Chamber didn’t already know it, telling your boss that there’s fraud right under his nose (and sometimes he’s part of it), often tends not to be a great career move.
Another suggestion that the Chamber puts forth is a tiered recovery formula for whistleblowers where the percentage share that a whistleblower receives would decrease as the recovery increases in size, going down to 1 to 3 percent for government recoveries above $100 million. This is a change from the Chamber’s prior suggestion of a cap on awards. The Chamber’s theory is that whistleblowers should be incentivized no more than absolutely necessary to report fraud. How the Chamber knows what the right number is will remain mystery but it sounds an awful lot like politicians who advocate for raising taxes on people who make above a certain amount of income. Because after all, when is enough enough?
The Chamber also proposes many reforms to the FCA where safeguards are already built into the legislation. For instance, the study proposes a scienter (or intent) requirement even though a whistleblower is already required to plead allegations of fraud with particularity and to allege that a defendant acted either willfully or recklessly. Otherwise, the case can be dismissed. Additionally, companies that self-report fraud, which the Chamber says it wants to encourage, already are eligible to receive a reduction in penalties.
While the Chamber says that it wants to discourage frivolous claims—as everybody should want—the FCA statutorily addresses that by making defendants eligible to receive fees for frivolous or vexatious complaints. Moreover, as effective attorneys know, an FCA complaint done well requires extensive vetting and often expense. And in cases where the government does not intervene (more than three-quarters of cases), settlements result in less than 10 percent of the time. So attorneys and their clients are incentivized to bring meritorious cases.
As part of its proposal to water down the government’s best tool in fighting fraud, the Chamber also would require companies who want to fully take advantage of the proposed reforms to implement a Sarbanes-Oxley-like corporate compliance program with independent accreditors. The reality is many companies engaged in fraud—and certainly the big ones—already have compliance and ethics programs in place. They are fine, but they are also designed by lawyers for the purposes of creating documentation, and they are only as good as the people behind them. They do not stop fraud, just as employee manuals do not eradicate sexual harassment in the workplace.
Yes, it is true that many American industries are over-regulated and that our regulatory structure is often far too byzantine. It is also true that government prosecutors wield enormous power and not every settlement is necessarily a just result. The U.S. Chamber of Commerce should focus on highlighting how overly complex regulations are hindering growth in the American economy and costing Americans jobs. But lessening awards and protections for individuals who report fraud is certainly not the way to improve a system that will always be imperfect. And for the Chamber of Commerce, it certainly should not be the way to promote so-called free enterprise.
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