On April 9, 2007, New York enacted Article XIII of the State Finance Law. See N.Y. State Finance Law, sections 187–194 (hereinafter referred to as “the False Claims Act”). The purposes of the False Claims Act include the prevention and deterrence of frauds against the state and local governments, and the recovery of funds or property fraudulently obtained. The False Claims Act empowers the Attorney General of the State of New York to investigate and initiate civil enforcement actions against parties who, among other things, knowingly present false or fraudulent demands for payments or property to the state or a local government. Additionally, the False Claims Act empowers local governments to investigate and initiate civil enforcement actions on their own behalf. It also allows private individuals to file qui tam enforcement actions on behalf of the state or a local government, and then prosecute these actions on their own if the state or local government declines to intervene in the action.

The Attorney General adopts the emergency rule to enforce the newly enacted False Claims Act, as a matter of necessity, because time is of the essence for the Office of the Attorney General to begin and continue investigations to prevent and deter frauds against the state and local governments and to recover funds and property fraudulently obtained. The rule allows qui tam enforcement actions that have been and that may be filed pursuant to the False Claims Act to be handled in an orderly fashion. The need for the emergency rule will exist until such rule is adopted on a permanent basis.

Indeed, in the absence of the rule, a procedural vacuum exists that is contrary to the public interest. Guidelines or procedures currently do not exist that specify the manner in which the Office of the Attorney General can investigate violations of the False Claims Act. Additionally, government plaintiffs and qui tam plaintiffs currently empowered to investigate and prosecute violations of the False Claims Act cannot effectively and efficiently exercise that power without the attached rule. This vacuum jeopardizes the public interest in the immediate prevention and deterrence of frauds against the state and local governments and in connection with the administration of governmental programs and the recovery of funds or property fraudulently obtained.

Furthermore, in the absence of the rule, no procedures exist to ensure that the Office of the Attorney General is made aware of civil enforcement actions filed by local governments, even though such actions may affect an interest of the state or interfere with or duplicate ongoing investigations or enforcement actions being undertaken by the Attorney General or other state agencies. Without such notification or consultation these actions may likewise interfere with or duplicate ongoing investigations being conducted by the Office of the Attorney General or other state agencies.

Finally, in the absence of the attached rule, insufficient procedures exist for processing qui tam actions, including, but not limited to, critical procedures regarding how qui tam plaintiffs shall proceed when the government declines to intervene or supersede in a qui tam action. Thus, compliance with the normal procedural requirements for notice and public comment would be contrary to the public interest.

1. Statutory authority: Section 194 of the State Finance Law gives the Attorney General of the State of New York power to adopt such rules and regulations as is necessary to effectuate the purposes of the Article XIII of the State Finance Law. See N.Y. State Finance Law, sections 187–194 (hereinafter referred to as the “False Claims Act”).

2. Legislative objectives: These rules and regulations are in accordance with the public policy objectives the Legislature sought to advance by passing the False Claims Act, which include the prevention and deterrence of fraud against the state and local governments, and the recovery of funds or property fraudulently obtained. The investigative procedures authorized by the rules and regulations (hereinafter referred to as “the rule”) empower the Attorney General to investigate frauds that constitute a violation of the False Claims Act, and thereby facilitate his or her ability to bring civil enforcement actions and other actions against parties that commit such violations. Also, the rule ensures that civil enforcement actions and qui tam actions will be handled in an orderly fashion.

3. Needs and benefits: The rule is needed to effect the purposes of the False Claims Act: the prevention and deterrence of frauds against the state and local governments, and the recovery of funds or property obtained through false or fraudulent conduct. It establishes how the Attorney General can begin and continue investigations of potential violations of the False Claims Act. It ensures that civil enforcement actions and qui tam enforcement actions that have been and that may be filed will be handled in an orderly fashion.

Indeed, in the absence of the rule, a procedural vacuum exists that is contrary to the public interest. Guidelines or procedures currently do not exist that specify the manner in which the Office of the Attorney General can investigate violations of the False Claims Act. Additionally, government plaintiffs and qui tam plaintiffs currently empowered to investigate and prosecute violations of the False Claims Act cannot effectively and efficiently exercise that power without the attached rule. This vacuum jeopardizes the public interest in the immediate prevention and deterrence of frauds against the state and local governments and in connection with the administration of governmental programs and the recovery of funds or property fraudulently obtained.

Furthermore, in the absence of the rule, no procedures exist to ensure that the Office of the Attorney General is made aware of civil enforcement actions filed by local governments, even though such actions may affect an interest of the state or interfere with or duplicate ongoing investigations or enforcement actions being undertaken by the Attorney General or other state agencies. Without such notification or consultation, these actions may likewise interfere with or duplicate ongoing investigations being conducted by the Office of the Attorney General or other state agencies.

Finally, in the absence of the rule, insufficient procedures exist for processing qui tam actions, including, but not limited to, critical procedures regarding how qui tam plaintiffs shall proceed when the government declines to intervene or supersede in a qui tam action.

The benefits derived from the rule are that:

(A) The Attorney General can investigate any violation of the False Claims Act with the power to take proof and make a determination of the relevant facts and to issue subpoenas in accordance with the Civil Practice Law and Rules. The rule specifies that the Attorney General may use section 2308(b) of the Civil Practice Law and Rules, or other applicable law, to compel compliance with an investigation. Furthermore, the rule ensures that the Attorney General's powers to investigate granted therein do not terminate by reason of a local government, or any person, including a qui tam plaintiff, filing a complaint. The rule thus enhances the Attorney General's ability to investigate and bring enforcement actions under the False Claims Act.

(B) The Attorney General will be notified of local government enforcement actions, and consulted with prior to a local government filing an action related to the Medicaid program, so that he or she can protect the state's interest in local enforcement actions and notify other state agencies if necessary. This notification protects the state's interest in litigation initiated by local governments, avoids duplicative actions and investigations, and allows for the cooperation and the sharing of resources by the state and local governments.

(C) Qui tam actions will be handled and processed in an orderly fashion. If the government decides not to intervene in a qui tam action, the rule establishes a time period and procedures for the qui tam plaintiff to either proceed or discontinue the action.

Together, these benefits enhance the ability of the state and local governments and qui tam plaintiffs to bring enforcement actions, recover funds and property fraudulently obtained, and prevent and deter other frauds.

4. Costs: There are de minimis costs to the rule.

5. Local government mandates: A local government filing an action under section 190(1) of the State Finance Law shall provide the Attorney General with a copy of the complaint on or about the date such complaint is filed. A local government shall consult with the Attorney General prior to filing any action related to the Medicaid program.

6. Paperwork: There are no additional reporting requirements or paperwork requirements as a result of this rule.

7. Duplication: The rule will not duplicate any existing state or federal law.

8. Alternatives: The rule as originally proposed granted the Attorney General the power to investigate violations of the False Claims Act with the same powers, procedures and devices that he possesses to investigate violations of Section 352 of the General Business Law. In response to objections raised by the New York Association of Homes and Services for the Aging and the New York State Health Facilities Association, the reference to the General Business Law has been replaced with specific authorization to investigate violations of the False Claims Act by taking proof and making a determination of the relevant facts and issuing subpoenas.

9. Federal standards: The rule does not exceed any minimum standards of the federal government for the same or similar subject areas.

10. Compliance schedule: Compliance with this rule could be achieved immediately upon effect of the adoption of this rule.

The revisions made to the proposed 13 N.Y.C.R.R. Part 400 do not necessitate revisions to the previously published Regulatory Flexibility Analysis or previously published Rural Area Flexibility Analysis.

On September 10, 2007, the Attorney General adopted Part 400 to Title 13 of the New York Code of Rules & Regulations (“N.Y.C.R.R.”) on an emergency basis and proposed the rule for permanent adoption by filing the required documents with the Department of State in accordance with the State Administrative Procedure Act.

The rule was published for comment in the State Register on September 26, 2007. The rule, adopted pursuant to the authority granted to the Attorney General under section 194 of the State Finance Law, establishes procedures by which the Attorney General may begin and continue investigations of potential violations of Article XIII of the State Finance Law. See N.Y. State Finance Law, sections 187–194 (hereinafter referred to as the “False Claims Act”). It also ensures that civil enforcement actions and qui tam enforcement actions filed by local governments and qui tam plaintiffs will be processed and handled in an orderly fashion.

In response to the publication of the Notice of Emergency Adoption and Proposed Rule Making for 13 N.Y.C.R.R. Part 400, the Department of Law received two comments objecting to the addition of 13 N.Y.C.R.R. section 400.2 (hereinafter referred to as “section 400.2”). One comment was submitted by the New York Association of Homes and Services for the Aging (“NYAHSA”), a not-for-profit association that represents over 600 not-for-profit and public long-term care providers. The other comment was submitted by the New York State Health Facilities Association (“NYSHFA”), a not-for-profit association representing approximately 260 long-term care providers statewide.

NYASHA and NYSHFA object to the fact that section 402 grants the Attorney General the investigatory powers, procedures and devices of section 352 of the General Business Law to investigate violations of the False Claims Act. They express concern that section 402 improperly creates the potential for criminal liability, and goes beyond the scope of the False Claims Act by granting the Attorney General the power to issue subpoenas and interrogatories.

Additionally, NYAHSA argues that: the additional investigative and subpoena powers raise potential substantive and constitutional due process concerns; it is unclear whether and how the Department of Law plans to employ the investigatory powers established by section 400.2; and that the Department of Law should have provided an opportunity for the public to comment on the rule prior to promulgating it.

In light of the comments, the Department of Law is filing a Notice of Emergency Adoption and Revised Rule Making to revise section 400.2. Additionally, the Department of Law hereby responds to the central points of the comments as follows:

1. The Potential for Criminal Penalties

NYASHA and NYSHFA contend that section 400.2 is improper because the grant of the “powers, procedures and devices” of section 352 of the General Business Law to investigate violations of the False Claims Act could result in the imposition of criminal penalties.

There is no merit to this objection. Section 400.2 does not, and was never intended to, create potential criminal liability related to investigations or prosecutions of a violation of the False Claims Act. Nevertheless, to avoid any future misunderstanding, section 400.2 has been revised to eliminate all references to the “powers, procedures and devices” of section 352 of the General Business Law and replace them with specific authority to take proof and make a determination of the relevant facts and issue subpoenas in accordance with the Civil Practice Law and Rules. Also, the revised rule makes clear that the Attorney General may only enforce an investigative demand by civil contempt proceedings under section 2308(b) of the Civil Practice Law and Rules, or by making a motion to compel pursuant to that section, or by taking any other action already authorized by law.

2. The Scope of the False Claims Act

NYASHA and NYSHFA contend that the grant of investigatory powers to issue subpoenas and take proof contained in section 400.2 goes beyond the letter and intent of the False Claims Act.

This contention is without merit. Section 400.2 as originally proposed, and as hereby revised, is both proper and necessary to effect the purposes of the False Claims Act. Section 189 of the False Claims Act makes any person liable to the state for committing certain acts that result or that could result in defrauding the state or local government of money or property. Section 190(1) of the False Claims Act specifically grants the Attorney General the power to investigate any violations under section 189. The False Claims Act, however, does not define the contours of this statutory grant of investigative authority. Instead, section 194 of the False Claims Act delegates to the Attorney General broad power to promulgate rules and regulations specifying the investigative authority “necessary to effectuate the purposes of the statute.”

Authority to issue subpoenas prior to filing a complaint is an investigative technique necessary to effectuate the purposes of the statute. The text and statutory scheme of the False Claims Act require the Attorney General to investigate a violation of the False Claims Act prior to filing a civil enforcement action and prior to the unsealing and service on the defendant of a qui tam complaint. Indeed, the act mandates that all qui tam cases are kept under seal and not disclosed to the defendant for at least 60 days for the sole purpose of giving the Attorney General the time to investigate the allegations while the defendant remains unaware of the pending complaint. This requires the Attorney General, in appropriate cases, to take proof and issue subpoenas prior to the service of a complaint on the defendant.

Both NYASHA and NYSHFA point to the legislature's rejection of the so-called “Martin Act for Health Care Fraud” as evidence that the legislature intended to withhold authority for pre-complaint subpoenas, but they are mistaken. The Martin Act for Health Care Fraud would have, among other things, created several new criminal offenses relating to private and public sector health care fraud, and allowed the Attorney General to investigate and criminally prosecute offenders. The legislative rejection of that statute cannot be construed to indicate any legislative intent to limit the investigative techniques by which the Attorney General may investigate and enforce the False Claims Act, which authorizes only civil remedies for fraud that deprives, or that attempts to deprive, the state or a local government of money or property. Indeed, one of the signature features of the False Claims Act is the establishment of a procedure for qui tam actions specifically designed to allow the Attorney General to investigate violations prior to a complaint being filed or served on the defendant. Thus, the legislature's rejection of a sweeping criminal health care fraud statue is not evidence of the invalidity of section 400.2.

3. The Use of Investigatory Powers Granted Under Section 400.2

NYASHA expresses concern that it is unclear whether and how the Department of Law plans to employ the investigatory powers established by section 400.2.

The revised rule makes it clear that the Attorney General may use the investigatory powers granted therein prior to a complaint being filed or served on a defendant. To the extent NYASHA is concerned about the Attorney General's use of broad new investigatory powers in investigations of its member health care organizations, that concern is misplaced. Revised section 400.2 does not expand the Attorney General's power to investigate health care providers or businesses suspected of violating the False Claims Act. Section 63(12) of the Executive Law currently allows the Attorney General to take proof and issue subpoenas upon suspicion that any person has engaged in repeated fraudulent or illegal acts in the conducting of business. A suspicion that a health care provider or some other business has presented a false or fraudulent claim to a state or a local government in violation of the False Claims Act currently provides the necessary predicate for the Attorney General to take proof and issue subpoenas under section 63(12) of the Executive Law. Additionally, the Attorney General has other powers to investigate Medicaid providers, including but not limited to those granted under 18 N.Y.C.R.R. sections 504.3(a) and 504.3(g).

4. Due Process Concerns

NYASHA asserts that there are due process and constitutional concerns with regard to the powers granted by section 400.2.

The use of investigatory devices contained in the original and revised rule have been repeatedly held constitutional as they relate to civil fraud investigations.

5. Adoption of the Rule on an Emergency Basis

NYASHA asserts that the Department of Law should have published Part 400 under the proposed rulemaking process, with an opportunity for public comment and a dialogue with affected stakeholders, prior to promulgation.

The Attorney General has complied with the requirements of the State Administrative Procedure Act (“SAPA”) for adopting Part 400 on an emergency basis and proposing the rule for permanent adoption. The Attorney General has and will continue to accept comments from the public concerning the revised rule in accordance with SAPA. Indeed, the Attorney General is hereby revising the proposed rule, and will allow the prior emergency rule to expire in favor of the revised rule, specifically to address points raised by NYASHA and NYSHFA.