In the October 23, 2025 edition of The Legal Intelligencer, Edward T. Kang and Kandis L. Kovalsky co-authored, “The False Claims Act (FCA) can be a powerful tool to protect veteran health care in the wake of an uptick in private equity’s participation in the sector, in that it is now well-established that private equity companies and their principals can be held liable under the FCA.”

On Sept. 9, 2025, we had the great honor, along with our colleague Jacklyn DeMar, the chief executive officer of The Antifraud Coalition (TAF), of participating in a roundtable meeting at the U.S. House of Representatives Committee on Veterans’ Affairs at the invitation of the Honorable Mark Takano, the Ranking Member of the Committee. The roundtable, titled “Profit Over Quality: Examining the Effects of Private Equity on Veteran Healthcare,” was specifically focused on private equity’s role in the demise of health care for veterans. We discussed with Reps. Mark Takano and Jullia Brownley how the False Claims Act (FCA) can be a powerful tool to protect veteran health care in the wake of an uptick in private equity’s participation in the sector, in that it is now well-established that private equity companies and their principals can be held liable under the FCA.

Under the FCA, a whistleblower, called a “relator,” can file an action for violations of the FCA in federal court on behalf of the U.S. government; this is known as a qui tam action. The FCA requires that the action must be filed under seal and remain sealed for 60 days, during which time the government can investigate the reported fraud and misconduct. The reality is that the seal period in qui tam actions is usually extended many times, and it is not uncommon for the investigations to take several years. Oftentimes, litigation follows the investigation, which can take another few years, and sometimes more. The recent monumental case of Penelow v. Janssen Products, out of the U.S. District Court for the District of New Jersey, which resulted in a $1.64 billion judgment, is a good example. This case was filed in 2012, yet a judgment was not obtained until 2025—13 years later.

We explained to Ranking Member Takano and other members of Congress that to disincentivize private equity companies from participating in fraud on the government, the investigations in qui tam actions must move much quicker than they do now. The speed of the investigation regarding any private equity defendant is critical. This is because, generally, private equity companies exit their portfolio companies within three to seven years, to align with the life cycle of their investment funds. Private equity firms do not typically have a large pot of money sitting in an operating account like other types of companies may. To be able to collect damages under the FCA against a private equity firm, there needs to be liquidity in the specific fund formed for the acquisition of the portfolio company at issue. In situations where qui tam actions, through investigation and litigation, are taking a case to a point where settlement or obtaining a judgment is occurring seven to 10 years after the private equity firm’s acquisition of the portfolio company, it can make it difficult to have any chance of collecting, unless individual liability can also be established. Even so, settlements based on individual liability will almost always be on an ability-to-pay basis (especially when the mandatory trebling of damages and statutory penalties are accounted for).

DeMar explained to Takano that one solution to this predicament is to increase resources and staffing to the civil departments within the Department of Justice that are responsible for investigating and prosecuting qui tam cases. Rep. Takano responded: “I am wondering if some of the members here, we might write a letter to DOJ about the staffing challenges. If we are looking for government efficiency and rooting out fraud, waste, and abuse, I think we have hit a pretty big vein here, and if we could redirect DOGE into things like this, I would hazard to guess what that amount of money would be.”

This is correct. Government fraud is rampant. According to the Government Accountability Office (GAO), the federal government loses between $233 billion and $521 billion annually to fraud, waste and improper payments. Since 2003, federal agencies have reported about $2.8 trillion in improper payments. In 2024, 16 agencies reported improper payment estimates that totaled $162 billion. Specific high-problem areas include government health care programs (Medicare, Medicaid, TRICARE) and government defense contracts. All these statistics directly correlate to taxpayers’ hard-earned money being effectively stolen. According to The Heritage Foundation, this pattern continues to contribute to a taxpayer burden that already exceeds more than $270,000 per household due to the $36 trillion in taxpayer debt.

In 2024, $2.9 billion was recovered under the FCA, 83% of which is attributable to qui tam suits. Since the enactment of Sen. Chuck Grassley’s 1986 reforms to the FCA, FCA actions have returned $78 billion to the taxpayers, with more than 70% of this amount being because of qui tam actions (and the remainder being from FCA actions filed directly by the government). These cases also have a strong deterrent on future fraud, estimated to be in the many billions.

While we were at the U.S. House of Representatives, discussing how to better use FCA to fight fraud, others sought to dismantle its very existence.

On Sept. 10, 2025, an article was published here in The Legal Intelligencer titled “Historical Patterns Cannot Justify Contemporary Violations of Constitutional Guarantees—Renewed Constitutional Attacks on FCA Qui Tam Provisions.” The authors of this article argued that “this is a pivotal moment for defendants to raise and preserve constitutional challenges to qui tam actions.” The article summarizes two court opinions from Judge Kathryn Kimball Mizelle, from the U.S. District Court for the Middle District of Florida, and one concurrence from Judge Stuart Kyle Duncan, from the U.S. Court of Appeals for the Fifth Circuit, in which these judges held that the FCA’s qui tam allowance violates Article II of the Constitution.

The FCA, also known as “Lincoln’s Law, was passed in 1863, during the Civil War. It was passed in response to war profiteers who defrauded the Union Army. The FCA has been good law for 162 years. So, why is there a push to change the law now? More importantly, why is this something defense lawyers would want and celebrate? If the FCA is ruled unconstitutional, the taxpayers will be saddled with billions more in debt each year while fraudsters profit from them, and the government will be left much more powerless to do anything about it. Further, holding the qui tam mechanism of the FCA statute as unconstitutional would not preserve or advance the interests of the Constitution; in fact, it would do the opposite and undermine many decades of precedent.

The constitutionality of the qui tam mechanism has been challenged many times before, and every circuit to consider the issue, including the Second, Fifth, Sixth, Seventh, Ninth, and Tenth Circuits, has held, in decisions ranging from 1993 to 2002, that the qui tam provision is in accordance with the Constitutional separation of powers. This aspiration to dismantle the FCA began with a 2023 dissent by Justice Clarence Thomas, who has authored many FCA opinions since his tenure on the high court began in 1991 without raising this issue, including the infamous Escobar decision in 2016.

In 2023, in the case of Polansky v. Executive Health Resources, Thomas disagreed with the eight-Justice majority, which held that the government has broad discretion to seek dismissal of relators’ qui tam actions. Justice Thomas went further, though, in arguing that the qui tam function of the FCA violates Article II of the Constitution. In his flawed opinion, representation of the United States’ interests is an executive function conferred only to the president and individuals appointed as officers of the United States under Article 2, the appointments clause.

Shortly thereafter, Judge Mizelle, who clerked for Justice Thomas in 2018 and 2019, reached the same flawed conclusion in Zafirov v. Florida Medical Associates. The Eleventh Circuit’s decision in this case will be a defining moment for the FCA. If the court rules in favor of the appellants, it will be the seventh circuit to join the majority view that qui tam actions are constitutional. Suppose it rules in favor of the appellees. In that case, it will create a circuit split on the issue, and with not only Justice Thomas, but also Justices Brett Kavanaugh and Amy Coney Barrett itching to revisit this issue, it is somewhat unclear what the outcome would be.

Justice Thomas said last month that he does not view the high court’s prior rulings as “the gospel” and that any precedent that does not respect the U.S. Constitution or the country’s legal traditions is ripe for reconsideration. Justice Thomas’ attack on the constitutionality of qui tam actions seems to be a part of his larger philosophy to upend any precedent, no matter how longstanding, that he believes is violative of the Constitution. This approach undermines the public’s faith in the judiciary, which is already at an all-time low. In the case of the FCA, there appears to be no upside. More than 75% of the recoveries in FCA actions are from cases filed by whistleblowers. Simply put, the government does not have the resources to achieve what whistleblowers can in the FCA space. To dismantle qui tam actions would be bad for the public. And, for the reasons outlined in all the briefs filed on behalf of the appellants in the Zafirov appeal, particularly the amicus brief filed on behalf of Sen. Grassley, Justice Thomas, and Judges Mizelle and Duncan are wrong in their analysis.

For the sake of this country, let’s hope that the Eleventh Circuit does the right thing in the Zafirov appeal, that more resources can be allocated to the DOJ to fight fraud on the government, and that there can be a bipartisan approach in doing so under the FCA so that the government can recoup more of the billions of dollars that are siphoned off by fraudsters each year.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Kandis L. Kovalsky, a member with the firm, focuses her practice on a broad range of high stakes business-related civil litigation in Pennsylvania, New Jersey, and New York state and federal courts and arbitral tribunals, and representing relators in high stakes qui tam actions filed under the federal and state False Claims Acts.

Reprinted with permission from the October 23, 2025 edition of “The Legal Intelligencer” © 2025 ALM Global, LLC. All rights reserved. Further duplication without permission is prohibited. Request academic re-use from www.copyright.com. All other uses, submit a request to asset-and-logo-licensing@alm.com. For more information visit Asset & Logo Licensing.

In the August 30, 2024 Edition of The Legal Intelligencer, Edward Kang writes, “Going It Alone: Can Whistleblowers Seek Corporate Veil-Piercing in Declined Cases?“

Recently, I received an email from a national public interest organization dedicated to whistleblower advocacy. The message asked whether a relator (i.e., a whistleblower), while not a victim of fraud, has standing to seek corporate veil-piercing in a False Claims Act case where the government declined to intervene. It is an interesting question, and no one seems to know the answer. Having litigated complex veil-piercing cases and complex declined whistleblower cases, I wanted to dig a little deeper.

That answer requires some background. The False Claims Act (FCA), originally enacted in 1863, allows either the Attorney General or a private party to bring a civil lawsuit against anyone who knowingly submits a false claim to the government for payment. See 31 U.S.C. Section 3730(a), (b). In 2023, the government and whistleblowers initiated more than 1,200 new FCA cases, a record-high number, and the DOJ recovered approximately $2.7 billion through settlements and judgments. When an individual files a lawsuit on behalf of the government, it’s known as a qui tam action, and the private plaintiff is referred to as the relator.

When the relator files an FCA case, the suit is filed under seal for at least sixty days to allow the government to review the complaint and decide whether it will intervene. See Section 3730(b)(2), (4). If the government does choose to intervene, it takes the lead in prosecuting the case and is not bound by the relator’s actions. See Section 3730(c)(1). Even if the government does not intervene in the case, it still maintains a role and holds specific legal rights in the case, such as the right to intervene later for good cause (Section 3730(c)(3)) and to block a relator’s attempt to voluntarily dismiss the case (Section 3730(b)(1)).

The “corporate veil” refers to the legal separation between a corporation and its shareholders, which generally protects shareholders from liability for corporate debts. When the corporate entity is used as a sham to advance illegitimate purposes, however, courts may disregard the general rule and “pierce the corporate veil” to make the shareholders and their personal assets liable for corporate debts. Piercing the corporate veil is an equitable remedy and a theory of liability, and the standard of veil-piercing differs from jurisdiction to jurisdiction.

Now, back to the question of whether a relator has the standing to seek corporate veil piercing in False Claims Act cases where the government has declined to intervene. As an initial matter, the government’s refusal to intervene in an FCA action does not strip a relator of his Article III standing in bringing an FCA action when the relator does not suffer an injury in fact. Qui tam actions present a “well-established exception” to the traditional Article III analysis. See Spokeo v. Robins, 578 U.S. 330, 346 n.* (Thomas, J., concurring). In an FCA action, standing for an uninjured relator flows from an assignment theory. A qui tam relator is suing “as a partial assignee of the United States.” See Vermont Agency of Natural Resources v. Stevens, 529 U.S. 765, 774 fn. 4 (2000). The qui tam action is for a redress of the government’s injury, and “it is the government’s injury that confers standing upon the private person.” See Stalley v. Methodist Healthcare, 517 F.3d 911, 917 (6th Cir. 2008). Thus, an uninjured relator has standing when “the FCA can reasonably be regarded as effecting a partial assignment of the government’s damages claim.”

The standard for piercing the corporate veil as a theory of FCA liability is governed by the federal common law. See Dekort v. Integrated Coast Guard Systems, 705 F. Supp. 2d 519 (N.D. Tex. 2010) (“Federal common law (rather than the law of the state where a corporation is incorporated), governs the veil-piercing question in a FCA case.”); see also United States v. Pisani, 646 F.2d 83 (3d Cir.1981) (“Federal law governs questions involving the rights of the United States arising under nationwide federal programs.”) (quoting United States v. Kimbell Foods. 440 U.S. 715 (1979)). The federal common law standard is generally articulated in broad terms and requires a fact-specific analysis of the circumstances in each given case to determine the propriety of veil-piercing. See Exter Shipping v. Kilakos, 310 F. Supp. 2d 1301 (N.D. Ga. 2004) (“Under federal common law, no uniform standard exists for determining when a corporation is the alter ego of its owners; each case must be decided based upon the totality of the circumstances.”) The essential legal test for veil-piercing in all jurisdictions is whether it would be “equitable to look behind the corporate form” under the circumstances presented. See United States v. Emor, 850 F. Supp. 2d 176 (D.D.C. 2012). In FCA cases, courts have held that courts can “pierce the corporate veil to prevent circumvention of a statute or avoidance of a clear legislative purpose.”

Courts have analyzed piercing the corporate veil as a theory of FCA liability in cases where the government declined to intervene. For example, in United States ex rel. Jenkins v. Sanford Capital, 2020 WL 5440551 (D.D.C. Sept. 10, 2020), the plaintiff tenant advanced an alter ego theory to hold the sole principal of the corporate landlord liable for FCA violations when the company deceptively took only superficial steps to remedy regulatory violations in the apartment building while continuing to take Section 8 voucher funds that depended on the building’s compliance with those regulations. The court analyzed and dismissed the veil-piercing liability theory, reasoning that the plaintiff’s allegations regarding the relationship between the principal and company were threadbare and conclusory. In another declined case, Scollick v. Narula, 215 F. Supp. 3d 26 (D.D.C. 2016), the court found that the relator failed to allege that defendant companies’ shareholders were individually liable under the FCA in connection with a purported fraudulent scheme to obtain set-aside government contracts, reasoning that the relator did not allege any fact showing that an inequitable result would follow if the corporate veil remained unpierced. Specifically, the court found that the relator failed to allege that corporations were undercapitalized or that he would be unable to recover damages from them if he succeeded in the action.

Some courts have found that relators sufficiently alleged FCA liability under a veil-piercing theory in declined cases. In Scharber v. Golden Gate National Senior Care, 35 F. Supp. 3d 944 (D. Minn. 2015), former nursing home employees brought a claim against the nursing home’s parent company under the veil-piercing theory for FCA violations arising out of the nursing home’s submission of fraudulent claims for Medicare and Medicaid reimbursement. Denying the defendant’s motion to dismiss the veil-piercing theory of liability, the court found that the relators made sufficient allegations against the parent company. Specifically, the court found that the relators had alleged a level of control by the parent company over the culture, policies, and decision-making at the nursing home sufficient for the parent company to be held liable under a veil-piercing theory. Similarly, in United States v. Kindred Healthcare, 469 F. Supp. 3d 431 (E.D. Pa. 2020), the court found the relator’s allegations of undercapitalization and siphoning of funds were sufficient to allege FCA violations under the alter ego theory between nursing home operators and their nursing facilities. Specifically, the court noted that failing to hold nursing home operators liable for facility conduct “would circumvent the statute by preventing full recovery” because the facilities were grossly undercapitalized and entirely dependent on the operators.

When the government declines to intervene in a relator’s case, it doesn’t necessarily mean that the case is weak or unwinnable. The whistleblower can still pursue the case independently. The decision not to intervene may simply reflect the government’s priorities or limited resources, rather than a judgment on the case’s merits. Whistleblowers and their attorneys can still proceed with the case, bring wrongdoing to light, and recover damages. Piercing the corporate veil provides yet another powerful tool for whistleblowers and their attorneys to fight fraud under the False Claims Act.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Reprinted with permission from the August 30, 2024 edition of “The Legal Intelligencer” © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

Furman asked Kang Haggerty member Kandis L. Kovalsky for her perspective on pursuing claims declined by the U.S. government.Kovalsky explained “This case really shows […]\ that lawyers can make a difference through aggressively handling declined litigation.” Kovalsky also clarified that while the government is more likely to intervene in cases against pharmacies than those against private equity firms, she expects the government to increase its presence in cases against private equity firms in the future. Kovalsky described the potential lasting effect, saying, the settlement with Belhealth Investment Partners serves as a warning to private equity firms in healthcare not to place financial returns above patient well-being.

You can read the Press Release on the settlement here. If you have questions about the False Claims Act, contact the attorneys at Kang Haggerty for more information.

The Qui Tam Section of the Federal Bar Association was started in 2015. It provides education, training, and networking opportunities for attorneys involved with the False Claims Act and other whistleblower statutes. Their award-winning Annual Qui Tam Conference is the section’s premier event. It rallies noteworthy leaders and eminent keynote speakers to foster deep analysis and discussion on contemporary whistleblower-related issues.

To incentivize whistleblowers to assist the Government in combatting fraud on the Government and its taxpayers, the False Claims Act, 31 U.S.C. § 3729, et seq. (the “FCA”) ensures that a whistleblower under the FCA (referred to as a “Relator”) receives at least 15 percent of the proceeds recovered by the Government in any action filed under the FCA by a Relator (referred to as a “qui tam” action). A Relator receives 15 percent of the proceeds of an FCA action just by causing a complaint to be filed; 15 percent is the minimum.

A Relator’s share of a qui tam action’s proceeds can range up to thirty percent of the monies recovered. Where exactly a Relator’s share falls on this 15-30% spectrum depends on many factors. The main factor is whether the Government intervenes in the action. When the Government intervenes in a qui tam action, the Government takes over the prosecution of the case.

Even when the Government does not intervene in a qui tam action, a Relator is still entitled to prosecute the case, through their counsel. When the Government intervenes, the Government uses its resources to prosecute the case, whereas when the Government does not intervene, the Relator uses his or her resources to prosecute the case, which explains why the awards to Relators in intervened cases are almost always a lower percentage of the recovery than in non-intervened cases.

When the Government decides to intervene in a qui tam action, an event that occurs in approximately 20% of qui tam actions, the Relator is entitled to receive at least 15% but not more than 25% of the proceeds of the action, as described in 31 U.S.C. § 3730(d)(1). When the Government does not intervene in a qui tam action, the amount paid to the Relator shall not be less than 25% and not more than 30% of the proceeds of the action or settlement, as described in 31 U.S.C. § 3730(d)(2). The reason the Government still receives the bulk of a qui tam action’s proceeds even when it does not intervene is because, despite not intervening, the Government remains the real party in interest, and the party that was harmed.

After a qui tam case concludes, whether by trial or settlement, the Relator and the Government will engage in discussions about, among other things, the Relator’s share of the action’s proceeds. In practice, the Relator’s share of the proceeds often falls between 18% and 22% for intervened cases, and around 27% or 28% for non-intervened cases. This variation in share percentages can be credited to the different factors considered by the Department of Justice (“DOJ”) in connection with qui tam actions. Certain factors increase a Relator’s share percentage, while others decrease it.

In addition to intervention, another factor that can often influence where on the spectrum a Relator’s award falls is the amount of the proceeds. A larger recovery means the Government will receive a larger sum of money, even if the Relator is awarded a percentage of the proceeds that falls on the high-end of the spectrum. Another factor that can influence the size of a Relator’s award is the Relator’s job title and position.

Where a Relator is a high-level executive, the Government may be incentivized to offer a higher reward than where a Relator is a lower-level employee. This is because the Government is incentivized to encourage high-ranking executives to expose fraud, as high-level executives are more likely than lower-level employees to have direct evidence of fraud at a company.

In intervened cases, the timing of when the Government intervenes can influence the amount of the Relator’s award. If the Government intervened in the early stages of the case, it is likely that a Relator will be awarded a lesser percentage than in cases where the Government intervened in the later stages of the case. This is because the amount of work that the Relator and his or her counsel must do in cases with subsequent Government intervention is greater than in cases where the Government intervenes right away.

Other factors that can commonly influence the size of a Relator’s award include whether the information obtained by the Relator was first-hand, when the Relator learned about the fraud, and the extent to which the Relator participated in the fraud. A Relator can rest assured, however, that they are still guaranteed a minimum of fifteen percent of the monies awarded in a successful qui tam action, with the potential to earn up to 30% of the proceeds.

Kandis L. Kovalsky is a member of Kang Haggerty LLC. Her whistleblower practice focuses on healthcare fraud. Kandis represents relators in high stakes qui tam actions filed under the federal and state False Claims Acts relating to fraud on government healthcare payors such as Medicare, Medicaid, Department of Defense TRICARE, State Children’s Health Insurance Program, Veterans Health Administration, and the Indian Health Service program.

This article will discuss briefly the history of qui tam litigation, its interplay with piercing theories and the particular utility of these types of suits in the health care context.

In the November 4, 2021 edition of of The Legal Intelligencer, Edward T. Kang of Kang Haggerty co-authored “Qui Tam Suits and Veil Piercing: A Powerful Combo for Combating Health Care Fraud.”

In 2019, the United States federal government spent $1.1 trillion, or approximately 25% of the overall federal budget, on just four government health care programs; Medicare, Medicaid, the Children’s Health Insurance Program (CHIP) and the Affordable Care Act (ACA). In addition to these well-known programs, the Department of Defense spends tens of billions of dollars every year providing health care to service members, veterans and their families through programs like TRICARE. Likewise, all states administer their own Medicaid programs and typically match the funding provided by the federal government, pumping even more public money into this sector.

Unfortunately, not all of these expenditures go toward the intended recipients, and some individuals prey on this largesse. While academics and commentators debate the exact proportion of improperly diverted government expenditures, the fact that such diversion exists is noncontroversial. For its part, the Centers for Medicare and Medicaid Services (CMS) estimated that around 7% of Medicare spending in 2019 was improperly reimbursed. See “2020 Estimated Improper Payment Rates for Centers for Medicare & Medicaid Services (CMS) Programs” (Nov. 16, 2020). The problem is even worse for Medicaid and CHIP, with CMS estimating that around 15% of this spending was improperly reimbursed in 2019.

Of course, fraud is not limited to the health care context, nor is this a novel dilemma. To combat this longstanding problem, the federal government has long relied on the False Claims Act (FCA) and the qui tam suits it authorizes to detect and deter fraud. In the modern era, FCA suits often operate in conjunction with veil piercing theories, as fraudulent behavior typically underlies both. This article will discuss briefly the history of qui tam litigation, its interplay with piercing theories and the particular utility of these types of suits in the health care context.

Like many doctrines that developed at common law in England, qui tam is a truncation of a longer Latin phrase. The original “qui tam pro domino rege quam pro se ipso in hac parte sequitur,” translates to “he who brings an action for the king as well as for himself.” While the United States soon soured on having a king, qui tam suits survived, and proto-versions of the FCA can be found in Colonial America. The idea behind qui tam actions has remained fairly consistent over time; to incentivize whistleblowers to come forward, they are given a portion of any amount that the government recovers based on their claim.

Up until the Civil War, qui tam suits in America were typically brought under state or common law. But with the outbreak of this conflict, and the massive wartime spending that ensued, federal contracts were increasingly viewed as easy targets for racketeering and fraud. In an effort to crack down on this abuse, Congress enacted the original False Claims Act of 1863, which was then signed into law by President Abraham Lincoln.

In the century-and-a-half since, Congress has tweaked the FCA on several occasions. The most recent amendments to the statute were specifically promulgated to combat health care fraud, as such cases have become the lion’s share of qui tam actions. For instance, the Fraud Enforcement and Recovery Act of 2009 amended the FCA to impose liability on those who knowingly receive or conceal evidence of overpayments, not just on those who directly submit the false claims. In the health care context, where funds flow freely between pharmacies, hospitals, patients and physicians, these amendments help impose liability on members of that chain that turn a blind eye to obvious wrongdoing to keep the stream of payments unbroken.

The following year, the FCA was further amended as part of the ACA. Suspecting that the increased public funds flowing into the health care industry would also present a greater risk of diversion, Congress amended the FCA to make it easier for whistleblowers to bring suit. Specifically these whistleblowers, or “relators” as they are called in qui tam actions, no longer had to have direct and independent knowledge of the transactions at issue. Instead, relators only need to have knowledge that is independent and “materially adds” to the government’s past understanding of the allegations. See 31 U.S.C. Section 3730(e)(4)(B).

When a relator does bring an action under the FCA, the complaint is first filed under seal and served upon the government. The government then investigates the allegations and decides whether or not to intervene. If it chooses to intervene, the government then prosecutes the suit under the FCA, as well as any other applicable statutes. The factual scenarios underlying FCA suits will often also involve violations of the Anti-Kickback Statute and Stark Law, which prohibit corrupt referral practices in the health care industry.

If the government opts not to intervene, relators can still proceed with the suit on behalf of the United States, but the government retains the ability to intervene later on. If successful, the defendants will be liable for treble the amount of false claims submitted, as well as statutory penalties and attorney fees. The relator’s portion of this recovery will be between 15% to 30%, depending on whether the government intervened and the relator’s level of participation in the fraud. As evidenced by its long history, the FCA has proved fairly effective at deterring and detecting fraud.

With the increasing corporatization of the health care industry, however, the scale and complexity of fraudulent schemes has also grown tremendously. This trend is particularly evident in the pharmaceutical sector, where violations of the FCA have forced corporate behemoths like GlaxoSmithKline and Pfizer into billion-dollar settlements. In addition to the sheer size of the entities that operate in the health care industry, their ownership structures have also become significantly more elaborate. The health care industry is no longer limited to doctors and hospitals, but a veritable thicket of holding companies, LLCs, and private equity firms. Despite this, the typical relator has not changed all that much; they are still often just individuals operating within these organization that grow suspicious of improprieties and decide to take action.

Because of this increasing corporate complexity, piercing the corporate veil in qui tam actions serves an important public function. FCA suits involve some type of malfeasance by definition, and the corporate form is often used to further this fraud. Culpable actors engaged in wrongdoing know the consequences of their actions if discovered, and will seek to minimize any liability they will face. To this end, they will often attempt to take advantage of the corporate form and the limited liability it offers. Courts should be especially skeptical of this use of the corporate form in the qui tam context, as the ultimate victims of these unscrupulous practices will be the public at large.

While the specific criteria for piercing the corporate veil varies by jurisdiction, there are many commonly agreed-upon elements. For instance, in Pennsylvania, the Supreme Court has endorsed the use of the eponymous Lumax factors to determine when to pierce the corporate veil. Lumax Industries v. Aultman, 669 A.2d 893 (Pa. 1995). These factors have been cited by federal courts throughout the U.S. Court of Appeals for the Third Circuit, along with many other iterations of such a list. Despite some variation across jurisdictions, there is broad agreement among courts on one key factor: veil piercing is appropriate when the corporate form is used to perpetrate a fraud. Given the inherent nature of FCA suits, these circumstances arise quite frequently.

The veil piercing analysis in FCA suits is similar to other contexts, although courts often also consider the specific equitable consequences of the misappropriation of public funds. For instance, in United States v. Dynamic Visions, 971 F.3d 330 (D.C. Cir. 2020), the government brought suit against a home health care provider after a routine audit revealed it was unable to substantiate any of the Medicaid reimbursement claims it submitted. After finding against the defendant, the trial court also pierced the corporate veil to impose liability on the corporation’s sole owner, reasoning that he failed to follow corporate formalities and that it would be grossly inequitable to let him keep these illicitly obtained funds. On appeal, the D.C. Circuit agreed and held “that it would be unjust to allow [the owner] to retain funds wrongfully taken from, and now owed to, the government.”

In another FCA suit, this time brought by a relator, the court in Stepe v. RS Compounding, 325 F.R.D. 699 (M.D. Fla. 2017) confronted a scheme to defraud TRICARE’s reimbursement of compound drugs. The government sought to pierce the corporate veil, but the company’s owner argued that there was insufficient evidence to support this remedy. Rejecting his motion to dismiss, the court held that the government had pled fraud with sufficient particularity, and that the owner had “at least deliberately ignored or recklessly disregarded the fraudulent practices.” Like in Dynamic Visions, the court also credited the government’s argument that it would be inequitable for the company’s owner to retain these ill-gotten gains and escape liability.

Steeped in history, the FCA and qui tam suits are still as relevant as ever. The public-private cooperation cultivated by statutes like this is one of the most effective tools at our disposal to prevent fraud, waste and abuse. This is especially true in the health care context, given the sheer volume of public funds involved and the complexity of the transactions at issue. These countermeasures would be impotent, however, if nefarious actors can evade liability through corporate trickery. Courts should not be afraid to pierce the corporate veil when it comes to qui tam litigation, as the ultimate victim of this chicanery is society as a whole.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Kang Haggerty associate Ryan Kirk served as co-author of this article.

Reprinted with permission from the November 4, 2021 edition of “The Legal Intelligencer” © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

Reversing the Fourth Circuit Court’s decision to extend the WSLA to civil offenses, the Supreme Court unanimously held in that the WSLA only applies to criminal offenses, meaning the WSLA does not suspend the statute of limitation for an individual action brought under the FCA.  The Supreme Court further held that the False Claim’s Act’s first-to-file bar applies only while related claims are active.  Once the first filed case is settled or dismissed, the bar does not apply.

In 2005, the whistleblower, Carter, filed a qui tam complaint alleging that his former employer fraudulently charged the U.S. government for water purification services inadequately or fraudulently performed during the Iraq War.  Nearing trial, the complaint (Carter I) was dismissed under the first-to-file rule based on an earlier filing with similar claims in United States ex rel. Thorpe v. Halliburton Co., No. 05-cv-08924 (C.D. Cal., filed Dec. 23, 2005).

The employee, Lorraine Notorfransesco, had worked for her employer, SMA, for three years before being terminated in 2008.  In 2008, she had been promoted to the position of billing manager and, at this point, signed a confidentiality agreement with the company.  Later in the year, however, SMA management learned that Notorfransesco had communicated to other employees that she was planning on disseminating confidential information to competitors. SMA eventually fired Notorfransesco, and in a separate action in the Delaware County Court of Common Pleas, won a preliminary injunction to restrict her ability to communicate with other employees, patients, businesses, or contractors.

A year after her termination in April of 2009, Notorfransesco brought a qui tam suit against SMA. In March of 2014, nearly five years later, the U.S. Government declined to intervene in the action. On April 3, 2014, Notorfransesco filed an amended complaint, and at this time, the documents included with the amended complaint became open to the public.

Upon the unsealing of this case, SMA filed counterclaims against Notorfransesco for “breach of contract, implied contract, and promissory estoppel” for the alleged sharing of confidential materials by filing the complaint, amended complaint, and by sharing information with her attorneys.

Although Notorfransesco had filed a motion to dismiss the counterclaim, as it would counteract the purpose of the False Claims Act and many of the “confidential” information were not confidential, her motion was denied. The court disagreed with her arguments, as the confidentiality agreement that Notorfransesco had signed in 2008 provided a clear and adequate explanation and description of what types of documents and information were confidential. Because the documents filed by Notorfransesco were therefore confidential, the disclosure of these materials were deemed a contractual breach.  Concurrently, the documents that been revealed were now open for competitors and third parties to damage SMA, and even seek out SMA’s customers, thereby placing SMA at a competitive disadvantage.

While the Third Circuit or higher courts have rejected other types of counterclaims in qui tam suits, the question of whether counterclaim for breach of confidentiality agreement should be barred remains open.  The SMA court, following the decision made by the Ninth Circuit in a 1993 opinion United States ex rel. Madden v. General Dynamics, determined that “counterclaims for ‘independent damages’ are permissible.” Similarly in this action, the SMA’s counterclaims were for independent damages. The court continued, citing another Ninth Circuit decision in Cafasso, U.S. ex rel. v. General Dynamics C4 Systems, Inc., that SMA’s request for injunctive relief could be improper if materials removed by Notorfransesco were “reasonably necessary” for pursuing her qui tam claim.

The court has made clearer an interpretation of how counterclaims can survive in respect to existing confidentiality agreements. What was made clearer, however, was that if documents were removed and used with the reasonable necessity to pursue a qui tam action, counterclaims for breach of confidentiality would not survive.

Thus, individuals who intend to bring a whistleblower action should be very careful and talk to her attorney about any potential counterclaim by the target for using the target’s confidential information.  Read more about the False Claims Act here.  If you believe you have a potential claim under the False Claims Act, please contact your attorney.

Bus Driver Whistleblower

Interestingly enough, a similar case, Abbamont v. Piscataway Twp. Bd. Of Ed., 138 N.J. 405 (1994), involved the New Jersey Supreme Court ruling in favor of a teacher without tenure who reported health and safety violations in a school metal shop.  Due to the court’s ruling in that case, the appeals court ruled that Dukin did have merit in his assertion and that the case could not be discarded under summary judgment.  According to plaintiff attorney, the case lays groundwork for how claims filed under the Conscientious Employee Protection Act should be handled moving forward.

Discovery to be Coordinated in Massive $11 Billion Whistleblower Suit

Discovery should be coordinated in two qui tam cases filed against Education Management Corp., or EDMC, an education company…

U.S. District Judge Terrence McVerry of the Western District of Pennsylvania has ruled that discovery should be coordinated in two qui tam cases filed against Education Management Corp., or EDMC, an education company based out of Pittsburgh.  Two former recruiters of the massive campus manager which runs over 100 campuses nationwide allege that EDMC violated the Higher Education Act in using incentives to college recruiters based upon how many students they were able to draw.  Since the allegation, the federal government as well as a number of states have also joined the suit.  According to the allegations, the fraudulent activity cost the federal government upwards of $11 billion.  Furthermore, the second case, which is also assigned to Judge McVerry, involves the company’s collection of student-aid funding despite their knowledge that they did not possess the structure to be eligible for such funds, violating the False Claims Act.

The judge has ruled that, while the scope of the discovery for the two cases could be different, the cases could be coordinated as there are major overlaps in discovery between them pertaining to numerous statistics.  Both actions will continue as discovery is collected in an effort to prove the massive fraudulent claims against EDMC.