Case Could Increase False Claims Act Litigation Alert - November 12, 2009
Supreme Court Case Could Increase False Claims Act Litigation Against Government Contractors and Other Organizations
November 12, 2009
On November 30, 2009, the Supreme Court will hear oral argument in Graham County Soil & Water Conservation District v. United States ex rel. Wilson, (No. 08-304), a qui tam action1 brought under the False Claims Act, 31 U.S.C. §§ 3729-33 (FCA), and appealed from a decision of the U.S. Court of Appeals for the Fourth Circuit. The Court will use the case to resolve a split among the circuits over the scope of the FCA’s “public disclosure” bar.
Background
In Graham County, the Fourth Circuit concluded that the public disclosure bar applies only to federal administrative audits, reports, hearings or investigations, and not those conducted or issued by a state or local governmental entity. In so holding, it joined the Third2 and the Sixth Circuits3 in allowing qui tam relators to base their lawsuits on information disclosed in state or local administrative audits, reports, hearings or investigations. The decision is contrary to decisions by the Eighth, Ninth and Eleventh Circuits that bar suits based on publicly disclosed information regardless of whether it is derived from federal, state or local sources.4
If the Court affirms the Fourth Circuit’s decision, it will increase the risk that organizations in a broad range of industries could be sued under the qui tam provisions of the FCA. These organizations include health and life sciences companies, government contractors and grant recipients, construction contractors, institutions of higher education and other recipients of federal dollars. Litigation risks would increase even if the federal dollars involved are only indirectly implicated through the conduit of state and local government agencies. The Supreme Court’s decision in Graham County may be especially significant in light of the American Recovery and Reinvestment Act (ARRA), which provides hundreds of millions of dollars in federal funds to state and local governments.
The public disclosure bar became part of the FCA as a result of the 1986 Amendments to the Act, the specific purpose of which was to encourage more enforcement through qui tam actions by private persons acting on behalf of the government.5 Congress was concerned that the FCA’s qui tam provisions might be abused by opportunist relators with no personal knowledge of the facts.6 It adopted the public disclosure bar to control such abuses.7 The bar strips courts of subject matter jurisdiction over qui tam actions that are based upon public disclosures in: (1) “criminal, civil, or administrative hearing[s]”; (2) “congressional, administrative or Government Accounting Office report[s], hearing[s], audit[s], or investigation[s]”; and (3) “the news media”, unless the relator is an original source of the information.8 31 U.S.C. § 3730(e)(4)(A). Not surprisingly, parties to qui tam actions have long argued about the scope of the bar, including whether the public disclosure categories are wholly federal in nature, or include state and local sources.
By virtue of the federal government’s reliance on the FCA as its primary weapon in combating procurement fraud, any jurisdictional construction of the Act has the potential to affect the number of cases filed against companies doing business with the government. Government contractors were targets of qui tam actions long before the Fourth Circuit’s decision in Graham County, but the decision may spur even more litigation. Justice Department statistics show that 1,199 qui tam cases were filed between federal fiscal years 1987 and 2008.9 This remarkable growth in lawsuits has been driven by the substantial financial rewards that are available to successful qui tam relators. A company subject to an adverse judgment under the FCA faces mandatory treble damages, civil penalties up to $11,000 per claim, as well as the payment of attorneys’ fees and costs. A relator who files a successful qui tam action is entitled to share in any recovery with the government, whether or not the Justice Department intervenes in the case. When the government intervenes, the relator’s share can be 15 to 25 percent of the damages recovered. If the government declines to intervene, the successful relator’s share jumps to between 25 and 30 percent. Since the 1986 FCA amendments, qui tam relators have recovered more than $2.2 billion. Overall, during that period qui tam cases accounted for 63 percent of all FCA settlements and judgments recovered by the United States.
Potential Impact of the Decision
The significance of Graham County is reflected by the number of amicus curiae and amicus briefs filed with the Supreme Court. Briefs have been filed by 42 amici: 30 individual states (including Virginia); the Chamber of Commerce of the United States, joined by the American Health Care Association, the Pharmaceutical Research and Manufacturers of America and the American Hospital Association; the National League of Cities, joined by the U.S. Conference of Mayors, the Government Finance Officers Association, the National Association of Counties, the International City/County Management Association, and the International Municipal Lawyers Association; and the Washington Legal Foundation, joined by the Allied Educational Foundation.
The petitioners and amici in Graham County have expressed concerns that government contractors may wish to consider in the event the Supreme Court leaves the Fourth Circuit’s decision undisturbed. These concerns include:
- The decision encourages the filing of parasitic qui tam actions, which undercut the purpose of the public disclosure bar. It permits opportunistic plaintiffs, with no independent knowledge of any fraud upon state and local governments, to base their qui tam actions on reports or investigations that are easily obtainable through Internet searches or routine state FOIA requests.10
- The decision makes it less likely that true whistleblowers will be able to successfully pursue legitimate qui tam actions based on their independent knowledge of fraud on the government. If a complete stranger to the fraud wins the race to the courthouse and files a qui tam action based on publicly available information from a state audit or investigation, the “first to file” bar (31 U.S.C. § 3730(b)(5)) precludes any action by a true whistleblower.11
- The decision creates an impermissible risk for the wide variety of business/commercial enterprises that do business with state and local governments. These businesses are routinely subjected to governmental audits and investigations that assess compliance with statutory and regulatory requirements for government programs that receive federal funds. The results of these investigations and audits are usually publicly available. Qui tam actions are increasingly based upon allegations of noncompliance with conditions of program participation.12
- The proliferation of non-meritorious qui tam suits could threaten the legitimate business activities of state and local grant recipients and other government contractors.13
- Vexatious qui tam suits have the effect of increasing already burdensome litigation costs, and place pressure on defendants to quickly settle regardless of the merits. They also create settlement pressure based on the possibility of exclusion or debarment from future government programs.14
- At common law, private citizens have no right to assert causes of action that belong to the federal government. The qui tam provisions of the FCA grant private citizens a limited exception to this common law rule. If allowed to stand, Graham County will expand this exception and empower qui tam relators beyond the limits prescribed in the FCA.15
Although the foregoing concerns are those of advocates for particular points of view, the issues are sufficiently serious to warrant the close attention of all government contractors and other recipients of federal dollars. If affirmed by the Supreme Court, Graham County has the potential of increasing qui tam litigation against organizations that do business with, or receive federal money through, federal, state and local governmental entities. In that sense, it would further expand the reach of the FCA to any state or local program involving the use of federal funds.
1 Qui tam is short for “qui tam pro domino rege quam pro se ipso in hac parte sequitur,” which means “who pursues this action on our Lord the King’s behalf as well as his own.” Rockwell International Corp. v. United States, 549 U.S. 457, 463 n. 2 (2007). A qui tam relator is entitled to recover a portion of the proceeds of the action or settlement of the claim if the government intervenes and takes over the case.
2 U.S. ex rel. Dunleavy v. County of Del., 123 F.3d 734, 745 (3d Cir. 1997).
3 U.S. ex rel. Burns v. A.D. Roe. Co., 186 F.3d 717, 725 (6th Cir. 1999)(dicta).
4 Hayes v. Hoffman, 325 F.3d 982, 988 (8th Cir. 2003); U.S. ex rel. Bly-Magee v. Promo, 470 F.3d 914, 917-19 (9th Cir. 2006); and Battle v. Bd. of Regents, 468 F.3d 755, 763 (11th Cir. 2006).
5 See S. Rep. No. 99-345, 99th Cong. 2d Sess. 2, 23-24 (1986), reprinted in 1986 U.S.C.C.A.N. 5266. FCA actions by private persons are addressed in 31 U.S.C. §§ 3730(b)-(d). 6 The Supreme Court has recognized the overarching monetary motivation of qui tam relators. See Hughes Aircraft Co. v. United States ex rel. Schumer, 520 U.S. 939, 949 (1997). (“As a class of plaintiffs, qui tam relators are different in kind than the Government. They are motivated primarily by prospects of monetary reward rather than the public good.”)
7 See U.S. ex rel. Doe v. John Doe Corp., 960 F.2d 318, 321 (2d Cir. 1992); U.S. ex rel. Putnam v. Eastern Idaho Regional Med. Ctr., 2009 WL 2981233, at *2 (D. Idaho 2009) (“The FCA discourages opportunistic qui tam relators by depriving the courts of subject matter jurisdiction in actions where the fraud allegations were publicly disclosed via a source listed in (31 U.S.C. § 3730(e)(4)(A)), unless the relator was the original source of the allegations,” citing U.S. ex rel. Haight v. Catholic Healthcare W., 445 F.3d 1147, 1154 (9th Cir. 2006)).
8 The Supreme Court requires that an “original source,” described in 31 U.S.C. § 3730(e)(4)(B), have direct and independent knowledge if the information on which his allegations are based. Rockwell International Corp., 549 U.S. at 476.
9 Fraud Statistics – Overview, October 1, 1986 – Sept. 20, 2008 (Civil Division, U.S. Dept. of Justice).
10 Brief for the Petitioners in Graham County at 29-30 (Aug. 2009).
11 Id. at 31.
12 Brief of Amici Curiae Chamber of Commerce et al. in Graham County, at 6 (Sept. 2009).
13 Id. at 24.
14 Id. at 25-26.
15 Id. at 29-31.
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