California Bill Would Fundamentally Change the State’s False Claims Act

California legislators have introduced a bill (Assembly Bill 1270) that would amend the California False Claims Act to strike the tax bar, allow for prosecution of cases under the act by attorneys retained by the state or locality, and declare that the U.S. Supreme Court’s Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016) decision regarding the materiality element of the federal False Claims Act does not apply to the state’s statute.

Under current California law, those making false or fraudulent claims to state or local governments can be liable for treble damages, attorneys’ fees, and a civil penalty of between $5,500 and $11,000 per violation.  The California False Claims Act currently, however, does not apply to claims made under the Revenue and Taxation Code. As introduced, the bill would amend the California False Claims Act to authorize tax-related false claims actions where the defendant’s reported taxable income, net income, or sales totaled $500,000 or more in any year relevant to the suit, and the damages pleaded in the action total $200,000 or more.  The bill’s author, Assemblymember Mark Stone, asserted that this amendment would help close California’s “tax gap”—i.e., the difference between the taxes owed and paid to the State—which stone stated could be up to “$20 billion.”

If enacted, the bill would also expand the definition of “prosecuting authority” to include “counsel retained by a political subdivision to act on its behalf.” As a result, the bill would open the door for the use of contingent fee lawyers for the prosecution of false tax claims.

Finally, the bill would reject the federal standard for materiality.  Under the bill’s definition, “[m]ateriality is determined by the potential effect of the false record or statement when it is made, not on the actual effect of the false record or statement when it is discovered.”  Martin Goyette, the head of the California Attorney General’s False Claims Unit, explained that there are “many” reasons why the government would not want to automatically cut off payment just because someone says the claim might be false.  According to Goyette, this includes not tipping off the defendant to the government’s investigation, and making sure services remained available during an investigation.  Goyette stated that neither the government nor contractors should want to put the government in the situation where, to preserve a claim under the state’s False Claims Act, the state would have to immediately cut off payment.

May 1, 2019