July 17, 2020

ILR Briefly: Third Party Litigation Funding in Qui Tam False Claims Act

The federal False Claims Act (FCA) is the principal statutory mechanism for combating fraud against the U.S. government—but it seems the third party litigation funding (TPLF) industry is also trying to make it a new source of revenue. They are specifically targeting the qui tam provision of the FCA, which allows private citizens (relators) to bring lawsuits on behalf of the government alleging violations of the Act in return for a certain percentage of any resulting recoveries, with the rest going to the government. The vast majority of FCA actions in any given year are brought by qui tam relators. In each action, the government may decide to whether nor not to take over the case (with the relator getting paid either way), or to move for dismissal if it doesn’t think the case has merit.

Enter the funders, who are eager to profit from the legal activities of the U.S. government by investing in qui tam FCA cases through the relator and/or relator’s counsel without revealing their involvement to anyone else—including the U.S. government, the real-party-in-interest.

The Department of Justice recently moved to address this state of affairs. During a June 2020 presentation to the U.S. Chamber Institute for Legal Reform, Principal Deputy Associate Attorney General Ethan Davis announced that DOJ would take concrete steps to remedy the information gap. Specifically, DOJ will begin to ask a series of questions at each relator interview, including:

  1. whether there is an agreement with a third party funder;
  2. the identity of the funder;
  3. whether information has been shared with the funder;
  4. whether there is a written agreement with the funder; and
  5. whether the agreement entitles the funder to exercise any direct or indirect control over the relator’s litigation or settlement decisions addressing it.

This is an important first step in helping the government and the taxpayers it represents understand the role of TPLF in qui tam FCA suits brought in its name. As it gathers more answers to these questions over time, DOJ’s experience may inform its exercise of discretion to dismiss qui tam suits, and it may decide that a more in-depth inquiry into TPLF in qui tam suits is warranted and that transparency should go further than disclosure to the government alone.

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