Anti-Fraud Law’s Merits Debated : Justice Dept. Decision May Have Big Effect on Whistle Blowers

For several months, Justice Department officials have engaged in intense internal debate over the merits of a 1986 law designed to encourage citizens to become “whistle blowers” and expose fraud against the government.

Some Justice Department lawyers want to challenge the constitutionality of the law, while others contend that this would be a foolhardy decision, according to government sources and attorneys representing both whistle blowers and defense contractors.

The Justice Department’s position could have a significant impact not only on a major constitutional issue but also on efforts to ferret out fraud by defense contractors, Medicare providers and other companies that do business with the government. Millions, perhaps billions, of dollars could ride on the outcome. Since the law was passed, $26 million has been recovered from government contractors in 11 cases. More than 150 lawsuits, many in California, are pending.

The law in question is called the False Claims Act, originally enacted in 1863. As amended in 1986, it permits a private citizen to file a civil suit in the name of the government alleging fraud by a contractor and to share in any financial recovery by the government. The act also provides that any whistle blowers who lose their jobs or experience any career discrimination as a consequence of filing the suit can sue for damages.

The possibility that the Justice Department might challenge the law’s validity has prompted a bipartisan coalition of U.S. senators, led by conservative Iowa Republican Charles E. Grassley, to press Atty. Gen. Dick Thornburgh to take a clear stand supporting the law’s constitutionality.

Grassley also has lobbied Solicitor General Kenneth Starr. The senator maintains that the law has had a significant deterrent effect on fraud and that its impact will grow as knowledge of the statute and how it can be used spreads.

The senator said he is particularly disturbed by reports that the Justice Department, which had supported enactment of the whistle-blower amendments in 1986, might now come out against the law.

The Justice Department’s position could become known as early as this week. U.S. District Judge David Kenyon has given the department until Wednesday to inform him if it plans to take a stand on constitutionality in a Los Angeles suit by former employees of Northrop who have accused the company of knowingly using defective parts on guidance systems for the Air Force’s MX missile.

Deputy Solicitor General Tom Merrill and Gina Talamona, a Justice Department spokeswoman, said the department has “no comment” on its constitutionality stance.

Defense contractors contend that the law violates the separation of powers and appointments clauses of the Constitution and that private citizens do not have standing to sue because they have not been individually injured by the alleged wrongdoing. They also assert that the law encourages unfounded suits by disgruntled, money-seeking employees who file cases hoping that companies will settle simply to avoid costly litigation.

Whistle-blower lawyers maintain that the law is clearly constitutional. They note that the Justice Department has the ability to take over any of these cases or to veto settlements in those it does not take over. The plaintiffs’ lawyers also contend that courts have “consistently recognized the congressional prerogative” to grant standing to a person to sue on behalf of the government.

Solicitor General Starr has held private meetings with lawyers on both sides of the issue. Among those attacking the law in the meetings was former Solicitor General Rex Lee, now president of Brigham Young University, who filed a brief last week in Los Angeles challenging the law on behalf of two defense industry lobbying organizations and Brad Brian and Carolyn Kuehl of Los Angeles’ Muger, Tolles and Olson, a firm defending Northrop and Litton in whistle-blower cases.

Among those supporting it were Robert Montgomery, former chief counsel at the Energy Department who is the attorney for Business Executives for National Security and who represents whistle blowers in cases against Raytheon and Singer Co., and Herbert Hafif, a Claremont lawyer with several cases against Northrop.

This year, three federal judges in California--William D. Keller and Mariana R. Pfaelzer in Los Angeles and Robert Aguilar in San Jose--have upheld the constitutionality of the law. The Justice Department did not take a stand in any of those cases or an earlier one in Ohio.

But sources inside and outside the government said several lawyers in the department’s civil fraud section, including its chief, Michael F. Hertz, believe that the whistle-blower law tramples on government prerogatives to make decisions about who will be prosecuted for fraud. Hertz could not be reached for comment.

Fast Decision Required

Sources said that some Justice Department officials resent the fact that after a private citizen files suit, the department is required to make a decision within 60 days on whether it will join the action. “It’s like having someone looking over their shoulder,” said a source in the Washington legal community who has closely followed the issue.

Other sources said that Hertz also is troubled that the law, by requiring a prompt decision, sometimes forces the civil fraud division to alter its investigative priorities.

If the Justice Department took a position that the law was unconstitutional, this would give weight to the defense industry’s challenges and could have a chilling effect on the campaign to ferret out fraud, said John R. Phillips, a Los Angeles lawyer who has several fraud suits pending against defense contractors and who helped draft the 1986 amendments.

“The whole purpose of the law was to unearth information that otherwise wouldn’t have come to the surface,” Phillips said.

A Defense Department investigator who spoke on condition of anonymity said the 1986 law has “brought people out of the woodwork.”

Sen. Joseph R. Biden Jr. (D-Del.), chairman of the Senate Judiciary Committee, and Sen. Strom Thurmond (R-S.C.), ranking minority member on the committee, are among the 10 committee members who joined Grassley in signing a letter to Thornburgh earlier this month reaffirming the support they gave to the 1986 whistle-blower law “and our belief in its constitutional validity.”

The letter states that one of the major goals in amending the statute in 1986 “was to encourage assistance from private citizens in the fight against fraud by enhancing the qui tam provision of the act.” Qui tam is an ancient Latin phrase that means “he who sues for the king as well as himself.”

How Law Works

The law works as follows: If a private citizen thinks he has a valid claim under the law, he files a suit in the appropriate federal district court under seal and informs the Justice Department that the suit has been filed. The Justice Department has 60 days to investigate the merits of the claim and decide whether to join the suit, though sometimes extensions are granted. Keeping the case under seal enables the department to investigate without informing the company.

When the department has made its decision, it must announce whether it is joining the case, and if not, why not.

Even if the Justice Department decides to take over a case, the private plaintiff retains a role in the litigation. The plaintiff receives copies of all papers filed by the department and has a right to file objections to any settlement agreement.

The citizen plaintiff can gain a substantial share of any recovery, from 10% to 30% depending on the extent of the private plaintiff’s role in prosecuting the case and on whether the Justice Department joined the case.

Since 1986, 167 suits nationwide have been filed under the law, Justice Department spokeswoman Amy Brown said, and a healthy share of them are in California because the state garners about $35 billion a year in defense contracts.

Brown said the Justice Department joined 27 of the suits and declined to enter 66 others. The remaining 74 cases are still under seal pending further Justice Department investigation.

Thus far, 11 of the suits have been settled, resulting in a recovery of $26 million to the federal Treasury, less several million dollars that went to the private plaintiffs, Justice Department officials said. The law was designed primarily to help curb defense procurement fraud, but two of the settled cases involved Medicare fraud.

None of the cases have gone to trial yet.

In several suits, including some currently pending in federal district court in Los Angeles, private citizen plaintiffs could recover more than a million dollars if the cases are successfully prosecuted.

In March, the Justice Department announced that it would take over the largest such suit to date--a case filed in Baltimore by Christopher Urda, a former Singer Co. pricing administrator who asserted that the company overcharged the Pentagon $77 million between 1980 and 1985 by maintaining two sets of books on contracts for flight simulators.

The statute entitles the government to triple damages--in this case up to $231 million. In a False Claims case taken over by the government, the private plaintiff can get up to 25% of the recovery, meaning Urda could take home nearly $58 million.

Defense Firm Challenges

But several constitutional challenges to the law have been launched by large defense contractors, including General Electric, Litton, Lockheed, McDonnell Douglas and Northrop, as well as two industry lobbying groups, the Aerospace Industries Assn. of America and the National Security Industrial Assn.

Thus far, all federal district court judges who have ruled on the issue have upheld the statute. However, other constitutional challenges are pending, including ones raised by Litton and Northrop in Los Angeles. Legal observers said it is likely that at least one of the defense contractors will take a case all the way to the Supreme Court.

In an interview, Sen. Grassley said he was stunned at the possibility that the Justice Department might come out against the law’s constitutionality. He stressed that department officials had supported the whistle-blower amendments, citing a 1986 letter from then-Assistant Atty. Gen. John R. Bolton to Grassley that said the Justice Department “strongly supports” the Senate’s amendments to the False Claims Act.

‘A More Effective Tool’

Grassley’s office also provided a November, 1986, letter from President Reagan, who said after signing the law, “The amendments . . . will make this 123-year-old statute a more effective tool for the prosecution and recovery of losses suffered through fraud against the United States government.”

Rep. Howard L. Berman (D-Panorama City), who spearheaded efforts to get the amendments passed in the House of Representatives, said, “Never once did Justice raise the specter of constitutionality while this bill was moving through the legislative process.”

“There’s nothing” in the 1986 amendments “that fundamentally changes” what President Abraham Lincoln was doing when he pushed for enactment of the False Claims Act in 1863 in an attempt to bring to justice contractors who were selling the government gunpowder diluted with sawdust during the Civil War, the congressman said.

Still, James B. Helmer Jr., a Cincinnati attorney who has successfully prosecuted several qui tam cases against defense contractors, including four settled en masse last March that compelled General Electric to pay $3.5 million to the government, said he would not be surprised if the Justice Department came out against the qui tam provisions of the False Claims Act.

Resistance at Justice

During negotiations on amending the False Claims Act four years ago, representatives of the Justice Department “resisted making it easier for private citizens to sue,” Helmer said.

Paul Gewirtz, a Yale Law School professor, has filed friend-of-the-court briefs on the constitutionality issue on behalf of the Aerospace Industries Assn. and the National Security Industrial Assn.

“One of the central arguments we’re making is that if there is a wrong to the government, a wrong to all of us that is being complained about, a suit should be under the control of public officials, not self-appointed private citizens with their own self-serving objectives,” Gewirtz said. “If private people can claim to speak for all of us, there’s a terrible danger that private interest will govern litigation decisions.” But Los Angeles federal district Judge Pfaelzer spurned this argument in upholding the constitutionality of the law in a decision issued last Monday in a whistle-blower suit alleging that Northrop overcharged the government by at least $2 billion on the B-2 Stealth bomber project. “In authorizing private prosecutorial action on the government’s behalf in the False Claims Act . . . Congress is making a policy decision based on its perception of how best to serve the public interest,” Pfaelzer wrote.

Oral arguments on the next constitutional challenge to the law are scheduled before Los Angeles federal district Judge David V. Kenyon on Sept. 12. That suit alleged that Northrop, based in Hawthorne, defrauded the Air Force by knowingly using defective parts on the electronic guidance system for the MX missile. Northrop has vigorously denied those charges, as well as those leveled in the Stealth bomber case.