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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

The Minnesota False Claims Act: Is It Minnesota Nice?

Minnesota’s False Claims Act, which will take effect July 1, 2010, differs from its federal and other state counterparts in several key respects that may have a chilling effect on qui tam actions in this state.  Whether it’s “Minnesota nice” or an effective deterrent against fraud remains to be seen.

On May 16, 2009, Minnesota joined 25 other states, as well as the District of Columbia, and passed its own version of a state false claims act.1 Unlike other state statutes, which have either taken effect immediately or shortly after passage, the Minnesota statute does not become effective until July 1, 2010.2

The Minnesota legislature did not provide a specific reason for this unusual delay between passage and implementation of the state’s false claims act. Adding the Minnesota False Claims Act to the federal False Claims Act significantly increases the likelihood for additional litigation, and raises the specter of substantial penalties against putative defendants. The delay of one year between passage and implementation of the statute will allow companies most affected by the Minnesota False Claims Act an opportunity to become conversant with the new statute, to review their internal compliance plans, and to take steps to bring their organizations into full compliance with the new law.

Since its amendment in 1986, the federal False Claims Act, 31 U.S.C. §3729, et seq., (federal FCA) has allowed the U.S. government to recoup over $25 billion from private parties and companies found to have engaged in fraudulent practices in their relationship with the government. Through the extensive use of private whistleblowers (known as “relators”), the federal government has acquired key inside information on fraudulent claims submitted by entities to the government, which is necessary to establish a cause of action under the federal FCA.3 A statute that empowers a private relator with information related to fraud perpetrated against the public fisc to disclose it to the government, and then to commence an action on behalf of the government and themselves, is referred to as a “qui tam” law.

Due to the remarkable success of the federal FCA over the last 24 years, numerous state governments have enacted similar laws to protect the public fisc and recover funds obtained fraudulently. To further this goal, Congress passed the Deficit Reduction Act of 2005 (DRA), which provides an additional monetary incentive to state governments to pass their own qui tam statutes that both establish liability for submitting fraudulent claims to the state’s Medicaid program and incentivize private relators to come forward with necessary information related to state false claims. Under the relevant provisions of the DRA, if a state qui tam statute meets certain requirements demonstrating that the state FCA is “at least as effective [as the federal FCA] in rewarding and facilitating qui tam actions for false or fraudulent claims,” that state is entitled to a 10 percent increase (taken from the federal share of the recoveries) in any Medicaid funds recovered under a compliant state law. Presumably, members of the Minnesota legislature were interested in passing such a statute to avail Minnesota of the 10 percent incentive for having a DRA-compliant statute.

The Minnesota False Claims Act

Although it is modeled after the federal False Claims Act, the recently passed Minnesota False Claims Act contains key differences that may affect both its use and potential recoveries under the statute. As a result, we predict that the Minnesota False Claims Act will not survive the OIG’s scrutiny for DRA compliance, thereby disqualifying Minnesota from the 10 percent increase in Medicaid funds recoveries. Of course, the legislature can always amend the law to make it compliant if our prediction is correct. Some of the areas in which the federal FCA and Minnesota’s FCA statute significantly differ are described below.

1. “Mere Negligence, Inadvertence or Mistake.” Neither the federal False Claims Act nor the Minnesota False Claims Act requires proof of a defendant’s specific intent to defraud the government.4 A person is liable under either False Claims Act if he, she, or it has actual knowledge of information regarding the false or fraudulent claim or acts in “deliberate ignorance” or “reckless disregard” with respect to such information.5 The federal False Claims Act, however, does not expressly provide for the defense of mistake. Gross negligence is sufficient to impose liability under the federal FCA.6

The Minnesota False Claims Act, in contrast, provides that “[a] person is not liable under this section for mere negligence, inadvertence, or mistake with respect to activities involving a false or fraudulent claim.”7  What is implicit under the federal FCA (mere negligence is not enough to impose liability) is made explicit in the Minnesota FCA. The Minnesota statute highlights the mere negligence defense by reciting this language twice. In Section 15C.01.3, the legislature has made clear that “knowing” conduct does not include negligence, inadvertence, or mistakes. In addition, Section 15C.02(d) specifically provides a defense where a person acts with negligence, inadvertence, or mistake in their activities involving false claims. Minnesota’s False Claims Act, therefore, may lose some of its bite as defendants seize the opportunity to avoid liability by diminishing their mens rea or coloring their conduct as “merely” negligent rather than grossly negligent.

Allowing the defense of mistake or mere negligence can lead to several outcomes. First, the “mistake” language in the defense creates a more narrow scope for the application of Minnesota’s False Claims Act. This provision may create a higher burden at the pleading stage where qui tam relators will have to buttress their core allegations to demonstrate that a potential defendant’s actions were not the result of a mistake or mere negligence. Second, the government may decide not to intervene in a relator’s action where the relator cannot factually demonstrate at the outset that a mistake or mere negligence is not a plausible defense to the false claims act case. Third, the defendant could escape liability under the Minnesota False Claims Act at the pretrial stage if the court becomes convinced of the defendant’s mistake or mere negligence defense. This may ultimately result in whistleblowers filing fewer false claims actions in Minnesota, the government’s intervention in fewer cases, and/or fewer false claims act cases surviving aggressive defense motions.

2. Nonmanagerial Employee. The Minnesota False Claims Act contains a provision not contained within the federal False Claims Act that insulates an employer from liability for offenses committed by a “nonmanagerial employee … unless the employer has knowledge of the act, ratified the act, or was reckless in the hiring or supervision of the employee.”8 This provision appears to carve out a safe harbor for would-be fraudsters that does not exist under the federal FCA. It also creates a corresponding obstacle to a relator attempting to bring a false claims action, and, thus may also provide a powerful defense.

The Minnesota FCA could provide employers with a financial incentive to keep their heads in the sand regarding the submission of false claims—a defense to liability. In order to shield itself from liability, an employer could simply argue that nonmanagerial employees committed the fraudulent conduct and that management neither knew of nor ratified the fraud. The federal FCA, in contrast, specifically encompasses this ostrich-like corporate mentality.9 Based on the nonmanagerial employee safe harbor, it is reasonable to conclude that a defendant corporation could escape liability under the Minnesota FCA by successfully arguing that it neither knew nor should have known of the nonmanagerial employee’s violation, as long as the corporation was not reckless in hiring or supervising the employee.10

3. Right to Cure. Another significant provision, which is not contained within the federal False Claims Act, is Minnesota’s “Right to Cure” provision. This provision states that a defendant, who lacked fraudulent intent, is not liable under the statute if the defendant repays the amount of actual damages to the state or political subdivision within 45 days after the person with knowledge of the false claim reported it to the defendant.11 A company that successfully argues that it did not act with the specific intent to defraud the government is not liable under the Minnesota FCA.

This provision was presumably intended to absolve companies for inadvertent mistakes and all forms of negligence, including recklessness or gross negligence, in submitting false claims to the government. Thus, a company that is reckless in submitting false claims can escape liability entirely by simply paying the government the amount of actual damages (without penalties or interest) if it gets caught. This provision may limit both the number of cases filed, as well as potential recoveries under the act.

There is, however, language which limits the employer’s right to avail itself of this safe harbor. The Minnesota FCA states that where an employer has a compliance office, the employer is not deemed “informed” of the fraudulent claim unless the whistleblower reports the false claim to the compliance office.12 There is no underlying legal obligation, however, requiring that the whistleblower report false claims to the employer’s compliance office. Thus, the whistleblower can defuse the right-to-cure provision by simply failing to inform the employer’s compliance office, where one exists. The statute’s unintended effect, then, is that the whistleblower has a disincentive to report fraud to their employer’s compliance officer—which undermines a goal of compliance programs generally.

The federal FCA’s damages provision is quite different from the Minnesota FCA and permits the government to recover double damages where the company cooperates with the government’s investigation once the false submissions are discovered.13 Thus, the culpable defendant under the federal FCA, once faced with the submission of false claims, may, at best, reduce the government’s damages from treble damages to double damages through cooperation with the government. The prospect of double damages provides a powerful deterrent to committing fraud in the first place. The Minnesota FCA, in stark contrast, provides no risk beyond single damages to employers who submit false claims (unless they act with specific intent to defraud).

4. The Civil Investigative Demand. The federal False Claims Act contains an extensive section devoted to the use of civil investigative demands (CIDs) specifically dedicated to the discovery of information relevant to the investigations of false claims.14 Many of the state false claim statutes contain similar CID provisions, and they have proven useful. In contrast, the Minnesota FCA does not incorporate false-claims specific CIDs. Instead, the attorney general’s CID authority emanates from Minnesota law which empowers the attorney general to “investigate violations of the law of this state respecting unfair, discriminatory, and other unlawful practices in business, commerce, or trade,” to obtain documents and/or testimony under the Minnesota FCA.15

In addition, the Minnesota FCA provides only that the prosecuting attorney “may” investigate violations of the act..16 In contrast, the federal FCA and many state false claims acts mandate that the attorney general or other state agency investigate all false claims allegations.17

5. Minnesota Rewards Relators When Government Delays. Under both the federal FCA and the Minnesota FCA, the government may initially decline to intervene (decide not to take the lead in prosecuting the case), only to intervene at a later date “upon a showing of good cause.”18 Often, under the federal FCA, the government initially declines intervention then later reverses course when resolution of the case is imminent. The Minnesota FCA recognizes the efforts of relators who prosecute a qui tam largely without the government’s assistance by creating three methods to calculate the relators’ share of the recovery: 1) 15–25 percent if the prosecuting attorney intervenes at the outset; 2) 25–30 percent if the government never intervenes; and 3) 15–30 percent if government intervention comes later.19 The federal FCA, on the other hand, limits the relator to a 25 percent maximum recovery on every intervened case, even though the relator may have spent years developing a case for trial or settlement without the prosecuting attorney’s assistance and the government intervenes at the last minute as the settlement agreement is executed.

Conclusion

In July, Minnesota’s False Claims Act becomes operational. It will provide the Minnesota Attorney General’s Office, as well as private attorneys general, also known as “whistleblowers,” a powerful potential tool in ferreting out fraud committed against the state and its many agencies. Where the Minnesota false claims statute differs from its federal counterpart, the statute may prove to be “nice” to those it was designed to police. Potential defendants have the “mere negligence, inadvertence, or mistake” defense, which may have a chilling effect on qui tam actions filed in Minnesota. The act also rewards employers who successfully maintain a distance from their nonmanagerial employees committing the fraud. Employers in Minnesota may also escape the deterrent effects of treble damages by coming clean and repaying the government once their false claims are exposed. In addition, the lack of CID provisions specifically tailored to false claims investigations may deprive the prosecuting attorneys of the teeth they need to give a new investigation momentum. Absent redrafting, the current version of the law will not be an effective deterrent to fraud and may ultimately deprive Minnesota of the Medicaid incentive available to other DRA-compliant states whose statutes more robustly support qui tam initiatives.

Notes
1 There are now 27 states, including Minnesota and the District of Columbia, that have passed state versions of false claims acts. These states are: California, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Oregon, Rhode Island, Tennessee, Texas, Virginia, and Wisconsin. Most of these, with the exception of Oregon, have qui tam provisions.
2 Minnesota False Claims Act, Minn. Stat. §15C.01 et seq.
3 The federal FCA attracts informed insiders, without whom “complex economic wrongdoing cannot be detected or deterred.” J. Barger, P. Bucy, M. Eubanks, M. Raspanti, “States, Statutes, and Fraud: An Empirical Study of Emerging State False Claims Acts,” 80 Tulane L. Rev. 465, 475 (2005).
4 31 U.S.C. §3729 (a)(3)(b)(1)(B); M.S.A. §15C.01.3.
5 Id.
6 U.S. v. Krizek, 111 F.3d 934, 942 (D.C. Cir. 1997) (“The best reading of the Act defines reckless disregard as an extension of gross negligence … as the statute explicitly states that specific intent is not required, it is logical to conclude that reckless disregard in this context is not a ‘lesser form of intent,’ … but an extreme version of ordinary negligence.”) (citations omitted).
7 M.S.A. §15C.02(d).
8 M.S.A. §15C.02(e).
9 See, U.S. v. Krizek, supra, 111 F.3d at 942 (defendant healthcare provider who failed “utterly” to review the false submissions made by his wife acted with reckless disregard and was liable under the federal FCA).
10 In re Caremark International Inc. Derivative Litigation 698 A 2d 959 (Del. Ch. 1996).
11 M.S.A. §15C.02(f).
12 M.S.A. §15C.02(f)(2).
13 31 U.S.C. §3729(a)(2).
14 31 U.S.C. §3733.
15 The Minnesota Attorney General, however, has broad CID authority under Minn. Stat. §8.31 subd. 1. See State ex rel. Hatch v. American Family, 609 N.W.2d 1, 3 (Minn. App. 2000)(noting the expansive power of the AG and citing §8.31 in particular). However, it remains to be seen how this authority will be exercised in investigating false claims act allegations.
16 M.S.A. §15C.04.1.
17 See, 31 U.S.C. §3730(a) (the attorney general “diligently shall investigate” FCA violations);
Illinois Whistleblower Reward and Protection Act, 740 ILCS 175/4 (the state police “shall diligently investigate” false claims cases).
18 31 U.S.C. §3730(c)(3); M.S.A. §15C.08(b) (“The prosecuting attorney may intervene subsequently upon … good cause shown.”).
19 M.S.A. §15C.13.

Marc S. Raspanti is a name partner of Pietragallo Gordon Alfano Bosick & Raspanti, LLP, in Philadelphia, where he heads the firm’s white-collar criminal-defense practice. He is also the founder of the firm’s false claims act practice.  For over 20 years, he has litigated complex cases under the federal False Clams Act. He is a graduate of Villanova University and Temple University School of Law. Mr. Raspanti also serves as an adjunct faculty member at Hamline University Law School where he teaches a course in health care fraud and false claims act litigation. He can be reached through his law firm website at www.pietragallo.com
Pamela C. Brecht focuses her practice on state and federal qui tam litigation throughout the United States. Ms. Brecht serves as special counsel to Pietragallo Gordon Alfano Bosick & Raspanti, LLP. She is a graduate of Villanova University and Temple University School of Law, where she served as a member of the Temple Law Review. Ms. Brecht will serve as an adjunct professor of law at Hamline University Law School this summer. She can be reached via email at PCB@Pietragallo.com

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