Agency Costs and the False Claims Act

The False Claims Act represents the U.S. Justice Department’s most effective tool in detecting, punishing, and deterring fraud against the government. The effectiveness of the False Claims Act is due in large part to the law’s qui tam provisions, which provide a private right of action to whistleblowers who may sue fraudsters on behalf of the government in exchange for a percentage of the recovery. The resulting relationship between the government and whistleblowers has led to increased detection and recoveries from corporate defendants who defraud and abuse government programs. However, these whistleblower provisions also come with social costs where profit-motivated private enforcers bring frivolous claims and overenforce. Unlike much of the literature to date, this Note uses an agency-cost approach to analyze these qui tam provisions. This approach allows for an exploration of the incentives created by the qui tam provisions, the associated social benefits and costs, and possible reforms that augment these benefits and reduce unnecessary costs. Specifically, this Note argues that clearly defined incentives for whistleblowers and corporate defendants, along with a requirement that settlements be publicly filed and include admissions of wrongdoing, will reduce agency costs involved with private enforcement under the False Claims Act.