Tort lawyers are about to get another big payoff from Congress and the Obama administration for the hundreds of millions of dollars they contributed to candidates in the last election cycle (over 75% of which went to Democrats). If it reconciles the differing versions of the so-called Fraud Enforcement and Recovery Act of 2009 that the House and Senate passed (which could happen yet today), Congress will finalize amendments to the federal False Claims Act that will hurt our economy but make the trial lawyers very happy indeed.

The False Claims Act was passed in 1863 to stop fraudulent military suppliers in the Civil War. It allows private plaintiffs to sue on the government’s behalf and imposes stiff penalties, triple damages, and attorneys’ fees and costs on anyone who knowingly submits a fraudulent claim to the government to get paid. While the federal government has recovered $21.6 billion from 1987 to 2008 under the False Claims Act (FCA), private plaintiffs took home $2.2 billion (that’s billion, not million). The law has thus been a bonanza for trial lawyers and individual plaintiffs.

However, the plaintiffs’ bar has been upset over the courts’ proper interpretation of the law, which imposes some limits on vexatious litigation and requires a direct relationship between the fraud and the attempt to receive government funds. In fact, the Supreme Court held in a unanimous opinion last year that a defendant must have intended for the government to pay the false claim. It is insufficient that some government funds might have been used to pay it. This is a very important distinction that has been in the law for 146 years.

The bill being passed by Congress would virtually eliminate that distinction. All that would be required for a successful FCA fraud claim is for a defendant to have also received federal funds that may be spent to advance a government program or interest. Even undesignated federal funds given to a general operating account could suffice. Thus, liability could attach for any false claim made to a college or university, so long as the institution had received some federal grants – as most of them do. Or allegedly false claims made against a non-profit (501(c)(3)) organization that receives grants from federal employees’ charitable donations could expose the claimant to an FCA lawsuit.

This change would transform the FCA into an altogether different law. Instead of a statute designed to protect the American taxpayer, it would become a general federal anti-fraud statute, used in cases where the real federal interest at stake – if any – is only tenuously related to the false claim. It will allow the FCA to be used punitively by trial lawyers against almost any private organization or corporation that receives any federal funds. It opens up huge swaths of the economy to FCA litigation, especially in today’s post-TARP, post-bailout, post-“stimulus” world where federal funds are being injected even into large private institutions that don’t want them. It federalizes claims historically and adequately addressed at the state level – all to the financial benefit of the biggest political contributors to liberal politicians.

The amendments also do something else unprecedented – they give private parties information gathered by Justice Department investigators. The Attorney General currently can obtain information and documentation under the authority of the FCA from anyone who has information relevant to a false claims law investigation. But as is typically the case with the information obtained as a result of a federal investigation, it cannot be shared with private parties. The amendments, however, allow the Attorney General to provide information obtained through a coercive law enforcement investigation to private parties to use in litigation against other private parties. It turns the FCA law on its head – the entire justification for the generous payoffs to private plaintiffs is that they supposedly bring information about fraud to the government. Yet this change would have the government giving information to private plaintiffs to file lawsuits they would otherwise lack the knowledge to bring.

At a time when the costs of abusive litigation to our economy are more important than ever, it makes no sense to increase the number of lawsuits or to use the coercive law enforcement power of the government to benefit private parties. There is no evidence more litigation is needed and no safeguards are in place to prevent misuse of such law enforcement authority. Congress should reject changes to the False Claims Act that undermine the U.S. economy and subject private parties to expanded liability.

Heritage fellow Brian Walsh co-authored this post.

Read their full White Paper: Correcting False Claims about the New False Claims Act Legislation.