But is it a “Material” Violation?

If the violation isn't material, you don't have good False Claims action.

If the violation isn’t material, you don’t have good False Claims action.

Some whistleblowers don’t understand they must allege material violations to qualify for a qui tam award.  They reason that any violation is enough.  It’s not that simple.  Some violations are relatively benign.  Those types of violations won’t adequately fuel a False Claims action. Qui tams, in general, are much more complicated than proving some defendant violated some government regulation.  What kind of violation is being alleged?

FCA complaints must be about “material violations.”  Whistleblowers understand the “violation” part; they frequently misunderstand the “material” part.  Like most people, they also assume that violations are prosecuted with equal vigor.  They aren’t.  Sometimes, a prosecutor will look at a violation and shrug.  If the violation is benign, and you are a prosecutor with limited time, you will put your energy into other violations that matter more.

Prospective qui tam clients struggle with this annoying fact of life, and sometimes, they get suspicious.  As we chat more, I recognize one of my old problems.  I used to misunderstand what was going on in the judicial system.

Would-be relators often have idealized perceptions of the judicial system.  They imagine it to be more “black and white” than it really is. I thought this way too.  I used to think that I understood justice, and it was simple.  Someone broke a rule; the government caught and punished the rule breaker.  If the rule breaker wanted to be obnoxious about the whole thing, someone would ask the courts to get involved, and then the judge would say the rule breaker should be punished and detail the punishment.  However the dispute got resolved, I figured it ended with some type of personal validation for the whistleblower (me).   In my head, this validation ranged from the judge ruling in a way that simply endorsed my point of view to me getting a cash award from the action.  Whatever happened, in my idealistic way of looking at things, the defendant was proven to be guilty of breaking the rules, and I was congratulated for bringing this violation to everyone’s attention.

Not even close.

The courts, and the qui tam system, are not in place to provide personal validation to whistleblowers. The qui tam system is in place to help the government address misuse of the public fisc. Courts exist to resolve disputes between parties.  Neither the courts nor the qui tam system exists to tell whistleblowers that they are good people.  And they don’t get excited about run of the mill regulation violations.

Bummer, right?

Most folks will say that they understand the courts don’t care about making a whistleblower feel better.  They talk about how pragmatic and cynical they are.  But I know they want some sort of endorsement from the process; I can hear little hints as they speak.  They want a judge to write something saying that they are right, and the defendant is wrong, and, of course, bad.  This is more than a desire; it’s an expectation.  Whistleblowers believe that the misconduct of the defendant is self-evident.  As soon as the violation is explained, the whistleblower will be validated and rewarded handsomely.  That’s how it works, right?

Not usually.  Qui tam relators, those that I know, learn quickly that punishing defendants for breaking rules is a complicated business.  We’re mostly concerned with “material violations.”  Prosecutors aren’t sitting around waiting for a whistleblower to show up and give them something to do.  Prosecutors and government investigators have a lot to do; they have to be convinced to devote time and energy to the qui tam.  It’s not enough for a whistleblower to simply reveal what the whistleblower perceives to be a rule violation.  Prosecutors see rule violations all day long.  A qui tam relator has to credibly reveal a rule violation that is “material.” In False Claims work, “material” means the government would have rejected some sort of funding to the defendant, if it had known the defendant was breaking the rule.

For an example, let’s took a look at my favorite, fictitious fraudster, MegaCorp.  MegaCorp hires an accountant who never got an accounting degree.  The whistleblower, not a great employee herself, points out that the lack of an accounting degree violates a government regulation.  MegaCorp says, “Meh.”  The whistleblower finds out MegaCorp is not keeping hard copy records of transactions, which violates another government regulation.  The whistleblower complains about both violations.  MegaCorp shrugs its shoulders.  The whistleblower wants to file a False Claims action.  Can she file a qui tam?  Not with my help, but sure, she can probably get some attorney to file one.  Should she?  No.

Even assuming that MegaCorp is absolutely in violation of the two rules mentioned, it’s hard to imagine such a complaint passing the test for materiality.  More than simply breaking a rule, the violation must be material to the government’s decision to give money to the defendant.  Here, the whistleblower must be able to show that if the Treasury had known about the accountant and had known that MegaCorp was now storing all its records in electronic format, then Treasury would never have given MegaCorp any money.

Unlikely.

I guess I know this because I used to undergo regulator reviews when I ran non-profit agencies. Anyone who has experience with government regulators knows better than to think all regulatory violations are pursued with equal vigor.  Violations have different levels of importance.  MegaCorp is subject to a zillion rules.  Some violations matter when the time comes to make a decision about giving MegaCorp some government funds, and some don’t.  I don’t think the two violations described in our example matter much.  I don’t believe the violations would be material to the government’s funding decisions.

One can find regulatory violations anywhere, and there is probably some financial penalty listed for almost every violation.  Finding a violation and reporting it is not enough to sustain a qui tam complaint.  The violation must be material to the decision to give the defendant money from the Treasury.  If you don’t have a material violation, you don’t have a meritorious False Claims action.  If you don’t know whether the violation is material or not, check into it.  One thing you can do is call us.  We’ll give you a free candid opinion.  Just don’t be surprised if I shrug and say “meh.” I make sure I abide by the materiality requirement.

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