Legal Commentary

Yuval Feldman and I have been studying regulatory, organizational and behavioral effects on compliance and reporting. Our first study forthcoming in the Regulation and Governance is here. Recently, we received a grant from the ABA section on litigation to help us with the next stages of our studies.

The qui tam bounty program under the False Claims Act (FCA) is a particularly interesting strategy of regulatory enforcement. The FCA provides employees a percentage of the recovery from a report of fraud by a government contractor. Enacted during the Civil War, the FCA was designed to encourage reports of fraud by defense contractors. Employees who file a qui tam suit on behalf of the public and are compensated by up to thirty percent of the recovery in a successful suit. Mini-FCAs have subsequently been enacted by a few states. In 1986, the FCA was amended to prohibit retaliation against employees who sue under the Act, but the bounty provisions remain the leading feature of its reporting scheme. To date, the courts have awarded over 3 billion dollars to whistleblowers who filed qui tam suits. Our study is designed to identify empirically the comparative advantages and competences of systems that incentivize litigation on behalf of government. It also aims to provide insights into the internal motivations, benefits and costs of initiating such civil litigation by an organizational player.

The False Claims Act (FCA) encourages external reporting of illegality by rewarding the original source of information for governmental investigations and encouraging the filing of a suit in order to receive the dollar share of non-compliance recovery. Under the FCA, the whistleblower must initiate litigation on behalf of the government in order to be eligible for the reward. The FCA requires that the private individual, the relator, file a written disclosure statement that lists all known relevant facts. After filing the complaint, the court seals the complaint and government has sixty days to investigate the charges and decide whether or not to intervene in the case. A relator also has the right to file a protest claiming that government had settled the case too low.  Only when the violation is recovered does the informant receive a share of the recovery. Moreover, the FCA precludes recovery if the information is already in the hands of the government agency at the time the informant reports the information. The courts have struggled to define the effective boundaries of this mechanism. Recently, the United States Supreme Court opined, in a 6-2 vote, that a qui tam plaintiff cannot rely upon information previously disclosed to the public. Rockwell Int'l Corp. v. United States, 05-1272 (U.S. Mar. 27, 2007). In this case, the court overturned a qui tam claim of a former employee who won a $4.1 million judgment for reporting radioactive contamination at nuclear weapons plant. In a dissenting opinion, Justice Stevens argued that ?the Court has misinterpreted these provisions to require that an ?original source? in a qui tam action have knowledge of the actual facts underlying the allegations on which he may ultimately prevail.?

We plan to study the FCA as well as other bounty programs such as those of the IRS and SEC. Our predictions are that the effectiveness of regulatory incentives for the initiation of enforcement litigation will be affected by the objective cost-benefit analysis for the initiating individual as well as the individual?s subjective expectations and moral motivators.

If you have experience with litigating false claims act cases or have ideas about the empirical and theoretical aspects of these structures, we very much welcome your thoughts, references and input.