The U.S. is said to have amassed over $75 billion in “recoveries” under the False Claims Act (“FCA”) since Congress added whistleblower, or “qui tam,” provisions in 1986 allowing private individuals to sue on behalf of the federal government and share in the recovery.  The Department of Justice reported that FCA qui tam recoveries totaled over $2.3 billion in the last year alone. This arguably abusive program now may be in jeopardy.  The U.S. District Court for the Middle District of Florida, on September 30, 2024, issued a landmark ruling in U.S. ex rel. Zafirov v. Fla. Medical Assoc. LLC finding that these qui tam provisions are unconstitutional.  Read the court’s order here.

The FCA dates to 1863 when President Lincoln and Congress sought to combat rampant fraud by government contractors during the Civil War.  The FCA’s modern-day qui tam provisions generally enable private whistleblowers, “relators”, to initiate lawsuits alleging fraud on the federal government’s behalf.  When a qui tam suit is filed, the government can intervene to take control of the litigation, the relator may remain a party, or decline to intervene, in which case the relator can decide whether to continue the claim.  Relators who bring successful qui tam actions are entitled to 15 to 30 percent of the amount recovered by the federal government from the defendant, including attorneys’ fees.  These whistleblower suits can be lucrative for the government and qui tam relators (and their attorneys) because defendants found to violate the FCA can be liable for treble damages, and penalties specific to each false claim submitted.

The court in U.S. ex rel. Zafirov held that the FCA’s whistleblower program grants private individuals unconstitutional power in violation of the Appointments Clause of Article II of the U.S. Constitution because they effectively act as officers of the United States in prosecuting civil fraud cases on behalf of the government.  The court reasoned that qui tam relators are officers of the United States because they “exercise significant authority pursuant to the laws of the United States,” and “occupy a ‘continuing’ position established by law.”  The Constitution requires officers of the United States to be appointed by the President.  The court held that because qui tam relators are essentially “self-appointed,” they lack authority under the Constitution to prosecute these cases on behalf of the United States.

Although the holding only applies to the specific parties, the mortgage industry should stay tuned to see whether other courts will adopt this reasoning in future challenges.  There may be significant implications for companies whose business involves submitting claims for government funds, including mortgage companies originating government-insured or guaranteed loans (e.g., FHA, VA, etc.). 

Stay tuned for updates as we monitor this important constitutional challenge and its implications for the financial services industry.  For more information, including documents related to the case, or if you have views on these issues, contact Troy Garris at troy@garrishorn.com.