The incentives the law gives to ordinary citizens to come forward and report fraud are central to the fantastic success of the False Claims Act.
When a qui tam suit results in a recovery for the government, the Relator is entitled to receive between fifteen percent (15%) and thirty percent (30%) of the proceeds, depending whether the government elected to intervene in the suit. If the government does intervene, the Relator receives Fifteen (15%) to twenty five percent (25%) of the proceeds, depending on “the extent to which the [Relator] substantially contributed to the prosecution of the action.”
If the government does not intervene and the Relator prevails without any government assistance, he or she receives “an amount which the court decides is reasonable” that is between twenty five percent (25%) and thirty percent (30%) of the proceeds. In addition to a percentage of the proceeds, a Relator is also entitled to collect “reasonable attorneys’ fees and costs.”
What are the Proceeds of a Case?
The “proceeds” of a case are simply the total amount of money and/or benefits recovered by the government in the Relator’s qui tam suit, or from any alternate remedy. This money includes both the actual damages that resulted from the fraud, as well as the civil penalties assessed for each violation of the False Claims Act. The proceeds are awarded either by court judgment or by settlement.
Proceeds from Judgment
It is unusual for a False Claims Act case to go to trial, but it does happen. When a case goes to trial and the Relator and government prevail, the jury will determine the total amount of damage suffered by the government. Once the jury decides this number, the judge will treble it and calculate the additional civil penalties incurred by the defendants for violating the False Claims Act.
The proceeds are therefore the trebled damages determined by the jury, plus the civil penalties determined by the judge. Attorneys’ fees and costs, however, are calculated separately and are not part of the proceeds.
Proceeds from Settlement
The vast majority of successful False Claims Act cases result from a settlement with the defendant. Few defendants are willing to risk the possibility of losing at trial and having to pay the full treble damages and civil penalties.
Calculating the proceeds from a settlement is usually the same as calculating the proceeds from a judgment. In a settlement, the parties reach an agreement for an amount of damages and civil penalties that both sides think is fair, and they then present it to the judge for approval. If the judge approves the settlement, the defendant pays that amount and the case is dismissed. The proceeds from a settlement in this case are simply the amount the defendant pays to settle the damages and civil penalties.
However, just as with a successful judgment, a Relator is also entitled to receive attorneys’ fees and costs from a successful settlement.
Determining Proceeds of a Judgment or Settlement
While a Relator is always entitled to a share of the money awarded in his or her qui tam suit, the full proceeds obtained by the government will sometimes include money or benefits from other proceedings. This can happen when multiple Relators file similar qui tam actions against the same defendant, but allege different fraudulent activity, or when the government itself files additional False Claims Act cases or if the government pursues alternate remedies.
Occasionally, a False Claims Act judgment or settlement will also result in non-monetary benefits to the government. In any of these cases, the Relator is still entitled to a share of the proceeds.
Proceeds in Cases with Multiple Relators
When multiple Relators file similar qui tam actions against the same defendant, but allege different fraudulent activity, the government will usually consolidate all such suits into a single action. When this happens, each Relator is entitled to a share of the proceeds, though not necessarily an equal share.
Ideally, the Relators will agree amongst themselves how to divide the proceeds. If not, then it will probably fall to the judge to decide how to divide the proceeds, typically proportionate to the amount of damages resulting from each Relator’s claims. In any event, the total amount awarded to the Relators cannot exceed twenty five percent (25%) of the proceeds of a case in which the government intervened, or thirty percent (30%) of the proceeds if the government did not intervene.
For example, suppose Relator A alleges that a defendant double-billed the government, while Relator B alleges that the same defendant also used defective construction materials, and Relator C alleges that the defendant made false statements in order to get the contract in the first place. If the government intervenes in all three cases, consolidates them, and then prevails at trial, obtaining a judgment for trebled damages and civil penalties of $1,000,000 for Relator A’s claims, $6,000,000 for Relator B’s claims, and $3,000,000 for Relator C’s claims. The judge then decides that the Relators collectively deserve a twenty percent (20%) share of the proceeds, so the Relators will divide $2,000,000 (20% of $10,000,000). If the Relators had previously reached an agreement as to the division of the proceeds, then the proceeds will be distributed according to that agreement.
If they did not reach such an agreement, the judge may find that they are each entitled to a Twenty Percent (20%) share of the damages resulting from their respective allegations.
Proceeds from Related Cases and Alternate Remedies
Calculating the proceeds of a qui tam suit can also be complicated when the government files additional, related, False Claims Act suits or pursues alternate remedies. In either situation, at a minimum, the Relator is entitled to a share of the proceeds that the government could have obtained through his or her qui tam suit.
For example, suppose a Relator files a reverse False Claims Act suit alleging that a mining company had concealed evidence and made false statements to federal inspectors in order to avoid paying fines for violations of the Clean Air, Clean Water, and Mine Safety and Health Acts. The government investigates and discovers numerous such violations. Then, rather than proceeding with the Relator’s qui tam suit, the government prosecutes the company for criminal violations and regulatory violations, obtaining a substantial monetary recovery.
In such a situation, the court would probably find that the government had pursued an alternative remedy, and the Relator would be entitled to receive the same Fifteen Percent (15%) to twenty five percent (25%) share of the proceeds that he or she would have received had it instead obtained the recovery through the Relator’s qui tam suit. The judge would then likely calculate the damages as though they had been obtained through a False Claims Act suit (i.e. trebled plus civil penalties), and award the Relator an appropriate share of that amount.
The government may also choose to pursue its claims by filing additional False Claims Act cases that are similar to the Relator’s qui tam suit. If these additional cases are substantially the same as the Relator’s suit, if they allege the same essential elements of fraud against the same defendants, then a court would probably find that such suits were also alternative remedies and award the Relator an appropriate share.
On the other hand, courts are split as to what happens when the government files a related action alleging a different fraud or against different defendants. Some courts have held that a Relator may still be entitled to an award, while other courts have held that a Relator can only obtain a share of allegations that are substantially similar to his or her own. Still other courts have held that a Relator is completely barred from obtaining a recovery in such suits.
For example, if a Relator files a qui tam complaint alleging that a defendant is double billing the government, and the government then files a separate suit against a subcontractor who was participating in the same scheme, whether the Relator will receive a share of the proceeds from the false claims presented by the subcontractor is entirely dependent upon the court in which the Relator files his or her suit. As such, Relators are strongly advised to make sure their initial qui tam complaint names all relevant defendants and alleges all relevant misconduct.
Several courts have held that the “proceeds” of a case also include non-monetary benefits such as debarring the defendant from obtaining further government contracts, the receipt of replacement products (as opposed to money to purchase replacement products), the release of claims for contractual damages that the defendant might have asserted against the government, and similar benefits. When a judgment or settlement includes such non-monetary proceeds, the Relator is entitled to receive a share of their estimated cash value, as determined by the court.
Determining a Relator’s Share
The False Claims Act states that, when the government intervenes in an action, the Relator is entitled to receive between Fifteen Percent (15%) and Twenty Five Percent (25%) of the proceeds of that action, “depending upon the extent to which the person substantially contributed to the prosecution of the action.” If the government does not intervene and the Relator goes it alone, he or she is entitled to “an amount, which the court decides is reasonable” that is between Twenty Five percent (25%) and Thirty percent (30%) of the proceeds. In either case, the percentage of the Relator’s Share is determined by the court, though it is usually advisable for a Relator to attempt to negotiate this percentage with the government.
Guidelines for Determining the Relator’s Share
When determining the amount of a Relator’s share, a court will usually consider two sets of criteria. First are the so-called “Senate Factors,” which are the three criteria considered by the Senate as part of the legislative history of the 1986 amendments to the False Claims Act. Second, the court will sometimes consider the Department of Justice’s own internal guidelines.
The Senate Factors
In a report produced by the Senate Judiciary Committee explaining the intended application of the Relator’s Share provisions, the Senate declared that the minimum fifteen percent (15%) award should be considered a mere “finder’s fee,” to be awarded when a Relator does nothing more than file a case that leads to a successful recovery. However, when the Relator provides the “facts and supporting documentation necessary to make the case” and “continues to play an active and constructive role in the litigation that ultimately leads to a successful recovery…, the Court should award a percentage substantially above 15% and up to 25%.”
The Senate report then laid out three factors for determining a Relator’s award: (1) the significance of the information contributed by the Relator; (2) the Relator’s contribution to the result; and (3) the government’s prior knowledge of the fraud. Any motion for a Relator’s Share should focus primarily on explaining how the Relator satisfies these criteria.
U.S. Department of Justice Guidelines
The Department of Justice has created its own guidelines for recommending a certain Relator’s Share, which many courts have looked to for guidance. Nevertheless, it is important to remember that the Department of Justice guidelines do not have the force of law and should be relied upon only in situations where they benefit the Relator.
These guidelines are divided into two categories: factors to increase the award and factors to decrease the award.
Items for consideration for a possible increase in the percentage:
- The Relator reported the fraud promptly.
- When learning of the fraud, the Relator tried to stop the fraud or reported it to a supervisor or the government.
- The qui tam filing, or the ensuing investigation, caused the offender to halt the fraudulent practices.
- The complaint warned the government of a significant safety issue.
- The complaint exposed a nationwide practice.
- The Relator provided extensive, first-hand details of the fraud to the government.
- The government had no knowledge of the fraud.
- The Relator provided substantial assistance during the investigation and/or pretrial phase of the case.
- At deposition and/or trial, the Relator was an excellent, credible witness.
- The Relator’s counsel provided substantial assistance to the government.
- The Relator and their counsel supported and cooperated with the government during the entire proceeding.
- The case went to trial.
- The FCA recovery was relatively small.
- The filing of the complaint had a substantial adverse impact on the Relator.
Items for consideration for a possible decrease in the percentage:
- The Relator participated in the fraud.
- The Relator substantially delayed in reporting the fraud or filing the complaint.
- The Relator, or Relator’s counsel, violated FCA procedures:
- complaint served on defendant or not filed under seal, or;
- the Relator publicized the case while it was under seal, or;
- statement of material facts and evidence were not provided.
- The Relator had little knowledge of the fraud or only suspicions.
- The Relator’s knowledge was based primarily on public information.
- The Relator learned of the fraud in the course of their government employment.
- The government already knew of the fraud.
- The Relator, or Relator’s counsel, did not provide any help after filing the complaint, hampered the government’s efforts in developing the case, or unreasonably opposed the government’s position in litigation.
While many of these guidelines are either drawn directly from the text of the False Claims Act or are similar to the Senate Factors, several, in our view, are quite inappropriate and have nothing to do with the Relator’s contributions to the success of the suit. In particular, whether the case exposed a nationwide practice, exposed a safety issue, went to trial, resulted in a relatively small or large recovery, or whether the Relator was a government employee, are entirely outside of the Relator’s control and should not be used to determine his or her share of the proceeds.
Elements of a Motion for Relator’s Share
A motion to award the Relator a share of the proceeds may be made after the judgment or settlement. As with any motion, it should lay out the basis for the requested relief, and will ideally be either filed as a joint motion with the government, or at very least without the government’s opposition. The motion should highlight the legislative history of the False Claims Act and point out that the minimum fifteen percent (15%) award is just a “finder’s fee,” to be awarded when a Relator does nothing more than file a case that leads to a successful recovery.
While the Relator should not ignore the Department of Justice’s guidelines, the motion should definitely point out that they have no force of law and should rely on them only insofar as doing so benefits the Relator’s arguments. Instead, the motion should usually focus on the Senate Factors. The motion should explain the importance of the information provided by the Relator, list each and every important fact and key piece of evidence disclosed by the Relator, especially those about which the government knew nothing, and highlight every other way in which the Relator or the Relator’s attorneys assisted in the success of the lawsuit. Do not be afraid to include a list that is several pages long.
In cases where the government does not intervene and the Relator prevails without the government’s assistance, the motion instead should focus on how well the Relator succeeded (e.g. whether the Relator secured the maximum possible damages or relief).
Negotiating a Relator’s Share with the Government
While it is ultimately up to the court to decide what percentage of the proceeds the Relator will receive, the government has the right to object and can appeal a share that it believes is too high. Even when the Relator has previously enjoyed a very cordial relationship with government attorneys and investigators, it is very common for the government to become aggressive when it comes time to divide the proceeds. Be prepared for the government to aggressively argue that the Relator should receive only the minimum share.
As such, a wise Relator will attempt to reach an agreement with the government as to a Relator’s share before asking the court to decide. If possible, the Relator should attempt to reach an agreement with the government before the case settles or goes to trial, when the Relator still has some leverage as a witness. The government is not always willing to do this, but it is very much in the Relator’s best interest to make the attempt. If the Relator files an unopposed or joint motion with the government, the judge will often simply award the requested amount. On the other hand, if the government refuses to agree to a reasonable Relator’s share, the Relator may have no choice but to ask the judge to decide.
Document all Assistance Provided to the Government
The most important leverage that a Relator has in demanding a high Relator’s share is the amount of assistance that he or she provided to the government. Regardless of whether the government intervenes, it is extremely important that the Relator document all such assistance. Such assistance can include the documentary and testimonial evidence provided by the Relator, the role the Relator played in the government’s investigation (e.g. collecting additional documents or wearing a wire), the Relator’s willingness to participate in a deposition, any assistance provided by the Relator’s attorneys during litigation and trial preparation, and many other factors.
Appealing a Relator’s Share Award
If a Relator does not reach an agreement with the government concerning the Relator’s share of the proceeds, the government may appeal the district court’s award. While the government is probably unlikely to succeed unless the district court has made an egregious error (such as giving an award to a person convicted of criminal conduct related to the fraud), an appeal will delay the Relator’s receipt of his or her share by a year or more. The Relator’s attorneys will also not be awarded any additional fees or costs for the work they perform on the appeal.
If the government appeals a Relator’s award, the Relator should ask the court to order the government to immediately pay him or her the minimum fifteen percent (15%) share, and place an additional ten percent (10%) share into an interest-bearing escrow account pending the outcome of the appeal. If the court finds that the Relator is entitled to more than the minimum share, then the government can pay any additional money at that time.
The Relator can also appeal an award, but should be very cautious about doing so unless the district court has made an egregious error (such as awarding less than the minimum 15%).
Reductions in a Relator’s Share
There are three situations in which a Relator can receive less than the minimum 15% share of the proceeds of his or her qui tam suit. First, the court could find that the information in the Relator’s complaint is “based primarily” on a public disclosure. When this happens, the Relator can receive no more than 10% of the proceeds. For example, if a Relator learns about false claims from a government audit and files a qui tam suit based on that information, but this fact is not discovered until trial so the defendant cannot raise the public disclosure bar, the court could not award more than a 10% share of the proceeds.
Second, the court could find that the Relator “planned and initiated” the False Claims Act violation alleged by the qui tam suit. When this happens, the court can reduce the Relator’s award by any amount it finds appropriate, though it must still take into account “the role of that person in advancing the case to litigation and any relevant circumstances pertaining to the violation.” For example, if a manager at a company comes up with a scheme to double-bill the government and presents a few false claims, a court would probably find that the manager had “planned and initiated” the fraud. If the manager then leaves the department and months later discovers that his subordinates had continued the practice that he or she had started, and files a qui tam complaint, the court could reduce the manager’s Relator’s share by whatever amount it decided was appropriate.
Finally, if a Relator “is convicted of criminal conduct arising from his or her role” in the False Claims Act violation alleged in the Relator’s qui tam suit, the Relator cannot receive any award at all. Thus, if the manager in the previous example was tried and convicted of criminal fraud related to the double-billing, he or she would no longer be able to collect a share of the proceeds of his or her qui tam suit.
Taxes on a Relator’s Share
A Relator’s share of the proceeds of a False Claims Act case are taxable as normal income. However, the proceeds of a retaliation claim are usually considered to be compensatory damages and are usually not taxable. Likewise, attorneys’ fees and costs for both qui tam and retaliation cases are separate from the Relator’s share and are generally not taxable to the Relator. Attorneys’ fees are, however, taxable income for the Relator’s attorneys. Of course tax laws change and state taxes may also vary. When anticipating a large recovery it is wise to discuss in confidence tax law with appropriate counsel. Lawyers who file False Claims Cases may be expert in that area but typically do not practice tax law.
Attorneys’ Fees and Costs
When a Relator receives any sort of Relator’s share from the proceeds of a qui tam action, he or she is also entitled to “reasonable attorneys’ fees and costs.” The award of attorneys’ fees and costs is independent of, and in addition to, the proceeds of the qui tam suit. For example, if a defendant loses at trial receives a judgment of $10,000,000 in damages and civil penalties, and the Relator’s attorneys present a motion for fees declaring that they spent 1,000 hours at $300/hour, then the defendant will owe the Relator an additional $300,000 on top of the $10,000,000 it owes to the government.
The award of attorneys’ fees includes fees for all of the time spent by the Relator’s attorneys related to the qui tam suit, regardless of whether or not the Relator actually paid for that time. Thus, if an attorney represents a Relator on contingency, requiring the Relator to pay nothing up front, the attorney can still recover his or her normal hourly rate for all of the time he or she spent on the Relator’s case.
When a Relator is successful, the award of reasonable attorneys’ fees and costs is automatic and not subject to the court’s discretion. However, the court does have discretion to determine what constitutes “reasonable” fees. A wise attorney will therefore be very careful to keep meticulous records of time spent on the qui tam case and will carefully consider whether to charge for incidental or tangential time.
A Relator is also entitled to reasonable attorneys’ fees and costs from a settlement. Again, this award is separate from the damages resulting from the defendant’s fraud, so it is a good idea to make sure the settlement specifically sets aside an amount for attorneys’ fees. If the settlement does not set aside attorneys’ fees, the Relator can still motion for the court to award them from the proceeds of the settlement, but this may result in a significantly reduced award.
On the other hand, if a Relator is not successful and does not receive any sort of Relator’s share from the proceeds of a qui tam, the Relator is not entitled to any attorneys’ fees or costs.