Whistle Blowers On Trial

Corporate America takes its case to the Supreme Court

Dr. Charles W. Robinson Jr., a courtly 61-year-old pathologist, is an unlikely government informant. But the San Antonio physician is a leading reason the Justice Dept. won a record $325 million fraud settlement against SmithKline Beecham Clinical Laboratories Inc. on Feb. 24. Four years ago, Robinson, medical and records director of a SmithKline lab, uncovered a suspicious bill charging Medicare separately for five tests normally sold together at lower cost. After complaining in vain to his employer about a pattern of billing abuses, he quit, filed a private whistle-blower lawsuit against SmithKline, and worked with federal investigators on the case.

Robinson is among a handful of corporate insiders who helped the government score in its most successful effort ever against health-care fraud: Operation LabScam. The current national campaign against Medicare billing fraud, begun in 1993, has resulted so far in $631 million in civil and criminal settlements against the biggest players in the diagnostic blood-lab industry. It has also "spurred industry reform on a scale rarely seen as a result of government investigation," says Laurence J. Freedman, the Justice Dept. trial attorney who coordinated the cases.

DESPISED. The law that permitted Robinson to take on SmithKline is the little-known False Claims Act. It encourages employees to take the risk of suing employers ripping off federal programs by protecting them from dismissal and promising a maximum of 30% of the damages arising from any resulting case. Originally enacted during the Civil War to prevent government contractors from defrauding the Union Army, it was fortified after the Pentagon billing scandals of the early 1980s and has helped the government recover more than $1.2 billion from fraudsters over the past decade. In addition to defense contractors and blood labs, it has also been turned against book distributors, construction companies, and mortgage lenders doing business with the federal government.

Popular though it is in some quarters, the law is widely despised by the large chunk of Corporate America that does regular business with Uncle Sam. The day after the SmithKline settlement was announced, a broad business coalition begged the U.S. Supreme Court to clamp down. Arguing in Hughes Aircraft Co. vs. Schumer, a case involving claims that Hughes submitted fraudulent bills for a radar system for the B-2 bomber, opponents--including the U.S. Chamber of Commerce, the Electronics Industries Assn., the National Security Industrial Assn., and others--asked the Supreme Court to strengthen corporate defenses against the law.

Specifically, opponents want the high court to block whistle-blower suits if there has been a prior disclosure of the same allegations--even if the prior disclosure is less detailed and is ignored by the government. Lawyers on both sides say that such a change, though technical, could actually drastically lower the number of viable suits. The justices, however, appeared skeptical of some of Hughes's arguments, and the betting is that companies will get little if any new protection. Given the fact that the high court has rejected several earlier appeals to consider the act, the Hughes case is likely to set the tone for whistle-blower claims for years.

What's the corporate lobby's beef? Companies say the law gives too much power to whistle-blowers and is encouraging an onslaught of meritless suits. According to even the Justice Dept., which favors a strong law, only about 11% of False Claims Act cases have produced a recovery. Nonetheless, defending a claim, even if baseless, can run $400,000 or more, says Frederic M. Levy, a defense lawyer at McKenna & Cuneo in Washington. And that doesn't take into account the time wasted by frivolous suits. Employees are forced to spend hours with lawyers, Justice Dept. attorneys are required to investigate every whistle-blower claim, and already overburdened federal judges must push the suits through the courts. "When proponents of the law bandy about the dollars that have been recovered, it ignores the waste and the cost associated with it," says Levy.

In spite of the low success rate, the number of False Claims suits has climbed from 33 in 1987 to 360 last year. One reason: the lotterylike winnings of a few successful whistle-blowers. Medicare fraud whistle-blower C. Jack Dowden, who played a small role in the Smith-Kline case, won more than $20 million from his testimony in federal cases against National Health Laboratories and Metpath Inc. And plaintiffs' lawyers are making out so well that a small False Claims Act bar has actually emerged--a development that many government contractors believe is also fueling much of the litigation.

Ever since the late 1980s, opponents have been trying to persuade Congress and the courts to gut the False Claims Act. But defenders of the law say that the success of Operation LabScam proves why it is so important to keep it intact. Whistle-blowers taking advantage of the law have played important roles in five of the six largest settlements so far against fraudulent companies, say Justice Dept. lawyers.

BUILT-IN SPUR. The most important thing about the False Claims Act, proponents claim, is that it provides incentives for private attorneys to pursue a claim that the government might otherwise ignore. Once a case is filed, the government is required by law to investigate--a built-in spur to action. Take Dowden's case. A former salesman for Metpath, Dowden figured out in 1989 that he was losing clients because rival NHL was offering his doctors a discount for extra blood tests and making up the difference by charging Medicare more. Then he discovered Metpath was doing the same. After his bosses cut back his sales territory (allegedly because of his complaints), he quit, took a job as a low-paid car salesman, and informed the government. He says, however, that federal investigators initially ignored his claims.

But John R. Phillips, a Washington lawyer, eyeing the possibility of a big payoff, agreed to shoulder the costs of the initial investigation. It was his filing of a suit that finally got the government to notice Dowden's claims, Phillips says. "If you go to the government as an individual and say, `Let me tell you about this,' you are just one of many things in a stack on somebody's desk," says Phillips. "But if a lawsuit is filed, then the government has to go see whether it is serious."

While some Justice Dept. lawyers think whistle-blowers are making too much money, others acknowledge that their contributions are invaluable. "It makes a big difference when someone says: `Here's where to look,"' says James G. Sheehan, the Assistant U.S. Attorney in Philadelphia who brought the SmithKline case. That's why, despite Corporate America's complaints, it looks as if the False Claims Act is here to stay.

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