April 15, 2003

U.S. Supreme Court Unanimously Holds Municipalities Liable Under False Claims Act

Holland & Knight Newsletter
Christopher A. Myers

On March 10, 2003, the United States Supreme Court held that local governments are “persons” within the meaning of the False Claims Act and can be held liable for violations of the Act.  The Court’s decision in Cook County, Illinois v. United States ex rel. Chandler, No. 01-1572 (March 10, 2003), resolved a split that had developed between the Seventh Circuit’s approach – the view that the Court upheld – and that of the Third and Fifth Circuits, which had determined that localities were immune from liability under the Act.  See United States ex rel. Chandler v. Cook County, 277 F.3d 969 (7th Cir. 2002); cf. United States ex rel. Dunleavy v. County of Delaware, 279 F.3d 219 (3rd Cir. 2002); United States ex rel. Garibaldi v. Orleans Parish School Board, 244 F.3d 486 (5th Cir. 2001).

The federal False Claims Act, 31 U.S.C. § 3729 et seq., is commonly referred to as the whistleblower statute because it allows private citizens to file a civil lawsuit in the name of the United States when they believe that an entity has submitted false claims for payment from the federal government.  The federal government then investigates the claims and can intervene, or take over the lawsuit.  If the government chooses not to intervene, the whistleblower (frequently a former employee or other insider of the target) can pursue the action alone.  If fraud is found and a recovery made, the whistleblower receives a substantial portion of the proceeds.  Under the current version of the Act, violators can be liable for up to $10,000 per false claim submitted, plus three times the amount of damages that the government has sustained, plus attorneys’ fees. 

In recent years, the federal government has been able to recover more than $3.5 billion through False Claims Act litigation initiated by whistleblowers.  Whistleblowers have received hundreds of millions of dollars.  Not surprisingly, attorneys who represent whistleblowers in these actions have made substantial efforts to find situations where the False Claims Act may apply.

The Chandler case involved a municipally owned hospital and an affiliated nonprofit research institute that had received a federal grant for a study related to the treatment of drug-addicted pregnant women.  The former director of the study filed a False Claims Act lawsuit pursuant to the whistleblower provisions.  She alleged that the hospital had submitted false claims to the government including, for example, claims for the treatment of “ghost” patients.  Further, she alleged that when she reported the problem, the hospital and the research institute retaliated against her by terminating her employment.

Although the government chose not to intervene, or take over the lawsuit, the whistleblower moved forward.  The hospital filed a motion to dismiss the case, arguing that the Supreme Court’s decision in Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000), where the Court held that the False Claims Act did not apply to states or state agencies, also applied to local governments.  The hospital contended that the rationale in Stevens – that states did not fall within the definition of “person” under the Act – should be applied to municipalities.  It also relied on the Court’s observation in Stevens that the False Claims Act’s damages scheme is essentially punitive in nature, and that governmental entities were not intended to fall within its scope.

These arguments were rejected by the U.S. Court of Appeals for the Seventh Circuit last year, and the Supreme Court has now affirmed that ruling.  The Court reasoned that the Stevens result simply does not apply to municipalities, which have long been treated as “persons” under the law.  “[M]unicipal corporations and private ones [are] simply two species of ‘body politic and corporate,’ treated alike in terms of their legal status as persons capable of suing and being sued.”  This view of local governments was understood by Congress at the time it passed the False Claims Act in the mid-1800s as a response to Civil War abuses.  Nothing in the original language of the Act suggests that Congress intended to limit the scope of “persons” to which the law applied.  “In sum,” the Court wrote, “neither history nor text points to exclusion of municipalities from the class of ‘persons’ covered by the FCA in 1863.”

The Court likewise rejected the hospital’s contention that when Congress amended the False Claims Act in 1986 to provide for treble damages and an increased penalty for each violation, it implicitly excluded municipalities from the Act’s coverage in accordance with the common law rule that local governments should not be subject to punitive damages “unless expressly authorized by statute.”  Such a result, the Court reasoned, would be a “remarkable consequence” of the amendments.  Although the punitive character of the treble damages provision of the Act is sufficient reason “not to read ‘person’ to include a state [per Stevens], it does not follow that the punitive feature has the force to show congressional intent to repeal implicitly the existing definition of that word, which included municipalities.” 

The Court went on to note the remedial aspects that the False Claims Act’s treble damages provisions can address.  While acknowledging that innocent local taxpayers may be burdened with paying the bill for “an undeserved benefit” solicited by the local government, the Court determined that those issues should be resolved by “a combination of the judge’s discretion and the Government’s power to intervene and dismiss or settle an action.”  Regardless of the potential costs to taxpayers, the Court concluded that “[i]t is simply not plausible that Congress intended to repeal municipal liability sib silentio by the very Act it passed to strengthen the Government’s hand in fighting false claims.” 

The Chandler decision eliminates the ability of municipalities, county governments, and any entities owned or operated by a local government to argue that they cannot be held liable under the False Claims Act because of their governmental status.  Any local government or municipally owned entity that receives federal funding of any sort is a potential target for False Claims Act whistleblowers and their lawyers.  Targets may include:

  • county hospitals
  • ambulance/emergency services
  • water treatment facilities
  • municipally owned utilities
  • schools
  • community colleges
  • library systems
  • transit authorities
  • sanitary districts
  • airports

Attorneys at Holland & Knight LLP have represented numerous clients who have become subjects of False Claims Act allegations.  Holland & Knight also counsels clients on how to avoid potential False Claims Act lawsuits, in particular through the design and implementation of effective compliance programs that can prevent, detect, and correct inadvertent errors in submitting claims and reports to, or otherwise participating in, federal government programs. 

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