The 1994 False Claims Act and Qui Tam Year in Review is published by Taxpayers Against Fraud, The False Claims Act Legal Center (TAF). This publication provides a general overview of 1994's major False Claims Act and qui tam case decisions, Department of Justice interventions, and settlements.
TAF is a nonprofit public interest organization dedicated to combating fraud against the Federal Government through the promotion and use of the qui tam provisions of the False Claims Act. TAF's mission is both activist and educational. Established in 1986, TAF serves to: (1) collect and evaluate evidence of fraud against the Federal Government and report such fraud through the filing of False Claims Act qui tamsuits; (2) work in partnership with the Government to effectively prosecute qui tam suits; (3) inform and educate the general public, the legal community, and other interested groups about the False Claims Act and its qui tam provisions; and (4) advance public, legislative, and government support for qui tam.
TAF is based in Washington, D.C., where it maintains a comprehensive False Claims Act library for public use and a staff of lawyers and other professionals who are available to assist qui tam plaintiffs and counsel.
The "public disclosure" bar and its "original source" exception as set forth at ¤3730(e)(4) continued to be one of the most complex and controversial areas of litigation under the False Claims Act (FCA) in 1994. Five major decisions were rendered on "public disclosure" by five Federal Circuit Courts of Appeals (4th, 8th, 9th, 11th and D.C.). While the courts remain less than uniform in their interpretation and application of the public disclosure/original source provisions, the overall legal landscape improved some for relators as a result of the 1994 appellate court decisions.
Notably, all five precedential opinions from the Federal Circuits on the "public disclosure" bar reversed and rolled back more restrictive district court interpretations. While the Supreme Court also had an opportunity this year to jump into the fray on "public disclosure", it declined and let stand a 4th Circuit ruling favorable to relators. (See U.S. ex rel. Siller v. Becton Dickinson, discussed below.)
1994's major decisions regarding "public disclosure" are summarized below in chronological order (with appellate decisions first).
In U.S. ex rel. Springfield Terminal v. Quinn, the D.C. Circuit Court held that the public disclosure bar applies only when all of the critical components of the alleged fraud -- a misrepresented state of facts and a true state of facts -- are disclosed.
Springfield Terminal's qui tam suit alleged that Quinn had billed the Government for services not actually performed in connection with arbitration proceedings. Quinn, an arbitrator, had been appointed by the federally-funded National Mediation Board to resolve a labor dispute between Springfield, a rail common carrier, and its union.
Springfield's qui tam suit followed a complicated chain of arbitration decisions by Quinn unfavorable to Springfield and an earlier federal action filed by Springfield in Maine challenging the arbitration. During discovery in the Maine action, Springfield obtained the arbitrator's pay vouchers. Springfield filed the relevant materials with the court and appended a claim that Quinn had billed the Government for activities unrelated to the arbitration. The Maine District Court remanded the case to the arbitration panel without addressing Springfield's allegations regarding Quinn's billing.
After the remand of the Maine action, Springfield filed a qui tam action alleging that Quinn had fraudulently billed the Government. Based on its own involvement in the arbitration, Springfield recognized that Quinn had no arbitral function to perform on several of the days for which he sought pay. Springfield then conducted further investigation that revealed, for example, that Quinn was away at a conference on days he had billed for arbitration.
The D.C. District Court dismissed Springfield's qui tam case, finding that it was "based upon" information unearthed during discovery in the Maine litigation and thus barred by the public disclosure provision. The court found that, because information received through discovery is necessarily obtained from an intermediary, Springfield could not satisfy the "original source" exception. The D.C. Circuit reversed, finding that the district court had "operated under an unduly broad reading of the jurisdictional bar."
The D.C. Circuit ruled that discovery material is "publicly disclosed" in a "civil hearing" for purposes of ¤3730(e)(4)(A). However, the court restricted its ruling to only that discovery material which is actually made public through court filing, as opposed to discovery material that has not been filed with the court and is only theoretically available upon the public's request.
The court addressed in some detail the type of information that triggers the public disclosure bar, focusing on the provision's "allegations and transactions" language. In this case, some of the information relied on by Springfield (i.e., pay vouchers and telephone records) was disclosed through discovery. Recognizing a distinction between ordinary information and false claims "allegations and transactions," the court found that the pay vouchers and telephone records were not enough, in and of themselves, to constitute "allegations or transactions" of fraudulent conduct. The pay vouchers and phone records were, at most, vehicles by which Springfield could pursue its independent investigation. While the pay vouchers revealed the false set of facts (i.e., the alleged false billings), the true set of facts (i.e., that the arbitrator was allegedly not working on the days billed) was not disclosed in the discovery material.
The court used an equation to illustrate its conceptual analysis and the principle that it adopted:
. . . if X + Y = Z, Z represents the allegation of fraud and X and Y represent its essential elements. In order to disclose the fraudulent transaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e., the conclusion that fraud has been committed.
The court reasoned that many potentially valuable qui tam suits would be aborted prematurely by a reading of the jurisdictional provision that barred suits when the only publicly disclosed information was itself innocuous: "[W]hen X by itself is in the public domain, and its presence is essential but not sufficient to suggest fraud, the public fisc only suffers when the whistle-blower's suit is banned."
The court distinguished Springfield's case from a case where all elements of the fraud are disclosed but the relator provides additional evidence or expertise:
[A] qui tam action cannot be sustained where all of the material elements of the fraudulent transaction are already in the public domain and the qui tam relator comes forward with additional evidence incriminating the defendant . . . Similarly, there may be situations in which all of the critical elements of fraud have been publicly disclosed, but in a form not accessible to most people, i.e., engineering blueprints on file with a public agency. Expertise in the field of engineering would not in itself give a qui tam plaintiff the basis for suit when all the material elements of fraud are publicly available, though not readily comprehensible to nonexperts.
Because Springfield had in its earlier Maine lawsuit disclosed its allegation of Quinn's false billings (i.e., Z), the court undertook an analysis of whether Springfield was the original source of that allegation. The court ruled that the FCA does not require that the qui tam relator possess direct and independent knowledge of all of the vital ingredients of a fraudulent transaction. Instead, it is sufficient that the relator have direct and independent knowledge of any essential element of the fraudulent transaction (e.g., Y).
Here, because Springfield started with innocuous public information (i.e., pay vouchers and phone records) and completed the fraud equation with information independent of any preexisting public disclosure, the court found that Springfield had direct and independent knowledge of the "information" underlying the allegation and was therefore an original source.
U.S. ex rel. Siller v. Becton Dickinson represents one of the most detailed treatments of the public disclosure and original source provisions to date. The decision is notable not only for its ruling that "based upon" in the context of the public disclosure analysis means "derived from," but also for its lengthy and direct criticism of contrary rulings and assumptions by the 2nd Circuit and other courts.
Siller's case involves allegations that Becton Dickinson & Co. (BD), a medical products manufacturer, lied to the Government about its pricing and caused overcharges. Siller was an employee of a former distributor of BD that filed a state court action against BD alleging, among other things, that BD overcharged the Government. That state court action was dismissed with a confidential settlement. Siller maintained that he learned of BD's actions through his own investigation and not as a result of the state court action. The District Court for the District of Maryland dismissed Siller's case as "based upon" public disclosures in the state court complaint because it found that both cases involved the same operative facts.
In its review, the 4th Circuit closely examined the statutory language of the public disclosure bar and Congress' intent to prevent "parasitic" qui tam suits. The court concluded that reading "based upon" to mean "derived from" is the "only fair construction of the statutory phrase:"
Section 3730(e)(4)(A)'s use of the phrase "based upon" is, we believe, susceptible to a straightforward textual exegesis. To "base upon" means to "use as a basis for." Webster's Third New International Dictionary 180 (1986) (definition no. 2 of verb "base"). Rather plainly, therefore, a relator's action is "based upon" a public disclosure of allegations only where the relator has actually derived from that disclosure the allegations upon which his qui tam action is based. Such an understanding of the term "based upon," apart from giving effect to the language chosen by Congress, is fully consistent with section 3730(e)(4)'s undisputed objective of preventing "parasitic" actions. . . .
The court acknowledged that, contrary to its interpretation, the 2nd Circuit in John Doe Corp. 960 F.2d at 324, had ruled that a qui tam plaintiff's action is "based upon" a public disclosure where the relator's allegations are "the same as those that have been publicly disclosed . . . regardless of where the relator obtained his information." The court noted, however, that the 2nd Circuit's ruling came "without a single word of analysis."
Because the district court made no finding on whether Siller actually derived his allegations from the state court complaint, the 4th Circuit remanded the action to enable the court to address that factual question.
The circuit court affirmed the lower court ruling that the disclosures in the state court complaint constituted public disclosure of allegations in "a civil hearing" under the False Claims Act. The court noted that this ruling was supported by every court of appeals to have addressed the question, that is, that any information disclosed through civil litigation and on file with the clerk's office is considered a public disclosure of "allegations in a civil hearing" for purposes of section 3730(e)(4)(A).
Finally, the 4th Circuit soundly rejected the district court's application of a third prong to the "original source" test. That prong (established by the 2nd Circuit in U.S. ex rel., Dick v. Long Island Lighting Co., 912 F.2d 13 (2d Cir. 1990), and followed by the 9th Circuit in U.S. ex rel., Wang v. FMC Corp., 975 F.2d 1412 (9th Cir. 1992)) requires that, in order to be considered an original source, a qui tam plaintiff must not only (1) have direct and independent knowledge of the information on which his allegations are based, and (2) have voluntarily provided that information to the Government, but also must (3) have "been a source to the entity that publicly disclosed the allegations on which a suit is based." In applying the plain language of the False Claims Act, the 4th Circuit found that the third prong simply does not exist:
We reject the 2nd Circuit's standard, and the district court's adoption of that standard, as imposing an additional, extra-textual requirement that was not intended by Congress.
In an unflattering assessment of the reasoning in Dick, the 4th Circuit summed up the 2nd Circuit's analysis as a "misreading" that is "not merely unpersuasive, but implausible" and "wholly indefensible."
On a separate issue, the 4th Circuit ruled that the Government's failure to meet filing deadlines did not justify dismissal of the United States from the lawsuit. The district court had dismissed the Government after it missed two filing deadlines for declaring whether it intended to intervene in the action or request extension of the seal period. Finding that the filing deadlines were not jurisdictional, the 4th Circuit ordered reinstatement of the United States as a plaintiff in the action.
In October, 1994, the Supreme Court denied Becton Dickinson's petition for review of the 4th Circuit's decision.
In U.S. ex rel. Cooper v. Blue Cross & Blue Shield of Florida, the 11th Circuit examined both the scope of "public disclosure" and the "original source" definition in this action involving allegations that Blue Cross & Blue Shield of Florida (BCBSF) submitted false claims to Medicare. While the appellate court found that there were public disclosures, it held that Cooper was an "original source" because he acquired his knowledge of the fraud independent of any public disclosure and through his own experience and research.
Cooper's case stems from his own experience from 1988 to 1990 with medical claims submitted to BCBSF. Cooper was over the age of 65 but still working, meaning that he qualified for both Medicare and private BCBSF insurance through his employer. For people like Cooper, referred to as the "working aged", Medicare Secondary Payer (MSP) law requires the private primary insurer to pay on the claims before sending the balance to Medicare, the secondary insurer. However, with Cooper's claims, BCBSF either returned the claims or submitted them to Medicare, stating that Medicare must pay first.
After conducting his own research of the applicable law, Cooper repeatedly informed BCBSF of his status as a "working aged" and of the MSP law that applies. Despite this information, BCBSF continued its submissions to Medicare, and Medicare paid several of Cooper's claims. Cooper also informed the Health Care Financing Administration (HCFA) about his dealings with BCBSF and asked HCFA to investigate. In 1990, Cooper filed a qui tam suit alleging that BCBSF filed false claims by submitting his claims to Medicare when it knew that it was required to act as the primary payer.
Before Cooper's qui tam suit was filed, a variety of reports had emerged regarding widespread MSP fraud among private insurers. For example, allegations of MSP fraud appeared in GAO reports, Inspector General reports, news articles, other lawsuits, and a congressional hearing. According to the 11th Circuit, these are all "methods" of public disclosures contemplated by the Act's public disclosure bar. However, in assessing the content of the disclosures, the appellate court distinguished between those that did from those that did not specifically identify BCBSF as an alleged offender. The court ruled that reports of MSP fraud that did not name BCBSF would not trigger the bar. To rule otherwise, the court reasoned, would preclude qui tam suits once widespread fraud in an industry was revealed and thereby hamper private citizen assistance in the discovery of specific instances of fraud.
The court then analyzed two disclosures that did name BCBSF. One, a GAO report on intermediaries and MSP laws, criticized BCBSF by name and noted that it had a potential conflict of interest when it acted both as an intermediary responsible for monitoring certain payments by providers under MSP laws and as a primary insurer governed by MSP laws. The report did not, however, allege that BCBSF actually engaged in wrongdoing in its capacity as a primary insurer. As a result, the 11th Circuit found that the report was not a "public disclosure" that BCBSF knowingly violated MSP law.
On the other hand, the court found that the second disclosure, testimony at a congressional hearing, did constitute a public disclosure of the allegations in Cooper's complaint. At the hearing, an Office of Inspector General (OIG) witness testified that OIG had begun an investigation of five insurance companies, including BCBSF, that may have violated MSP law.
Cooper had argued that his suit was not "based upon" the congressional hearing disclosure because he had evidence of BCBSF's wrongdoing before the hearing. But, according to the 11th Circuit, "based upon" generally means "supported by." The court also rejected the argument that "based upon" means "based solely upon." Because Cooper's attorney attended the hearing some five weeks before the qui tam suit was filed, the court found that Cooper's suit may have been partially based upon the hearing disclosure.
Nevertheless, the court easily found that Cooper was an original source. Because Cooper acquired his knowledge through years of his own claims processing, research, and correspondence with the Government, Cooper's knowledge was both direct and independent.
The 11th Circuit specifically declined to apply a third requirement that the qui tam plaintiff be a source to the disclosing entity in order to qualify as an original source. (As noted above within the discussion of U.S. ex rel. Siller v. Becton Dickinson, the 2nd and 9th Circuits have adopted this third requirement.) In rejecting this additional original source requirement, the court stated that "[t]his rule does not appear in the plain language of the statute, and we find no support for it in the legislative history."
Ironically, Cooper's ability to pursue his qui tam suit may be hampered, if not extinguished, by a settlement in another action against BCBSF. A settlement was recently finalized in U.S. ex rel. Burr v. Blue Cross & Blue Shield of Florida that releases BCBSF for a range of conduct, including certain MSP violations. While Cooper's suit was filed before the Burr suit, the Justice Department intervened in and settled Burr. Cooper had earlier tried to intervene in the Burr case to protect his claim, but was unsuccessful.
In U.S. ex rel. Fine v. Chevron, et al. & U.S. ex rel. Fine v. Univ. of California, et al., the 9th Circuit revived two qui tam actions brought by a former Department of Energy auditor, finding that he satisfied the "original source" test. In reinstating the action, the circuit court ruled that there is no automatic prohibition against Inspector General (IG) employees bringing qui tam actions based on information obtained from IG investigations. The decision may affect several other qui tam suits that relator Harold Fine has filed since leaving his auditor position.
The District Court for the Northern District of California had earlier ruled that the FCA, when construed together with the Inspector General Act, bars IG employees from bringing qui tam actions. The 9th Circuit rejected this "judicial inference" of an additional jurisdictional bar in the FCA, observing that the Act's exclusions are straightforward and precise. The appellate court also relied on cases finding no general exclusion of government employees under the FCA, and noted that the Act's legislative history makes frequent mention of the Inspector General Act without any implication that IG employees could not bring qui tam suits.
In both of Fine's actions, he conceded that his allegations had been publicly disclosed, but argued that he was an original source. The district court ruled that Fine did not meet the "direct and independent knowledge" prong of the original source test because he received his information from field auditors he supervised and entities he audited. The lower court also found that Fine had not "voluntarily" provided the Government with the information prior to filing the lawsuit because, as a government employee, Fine had a duty to disclose fraud to his supervisors. The court also found that Fine was not a source to the public disclosure audits because he was a recipient, not a source, of the information collected through the audits.
In its examination of whether Fine was an original source, the 9th Circuit applied a three-part test. First, with respect to whether Fine had "direct and independent knowledge," the court reasoned that this was not a case in which the relator would not have acquired his information "but for" the public disclosure of audit reports; rather, Fine acquired his knowledge prior to the public disclosure while reviewing audit sheets and other financial reports. Moreover, Fine's own labor led to his discovery of the allegedly fraudulent payments, thereby satisfying the "direct and independent knowledge" prong of the original source test.
Second, the appellate court rejected the concept that, because a government employee is required to report fraud, the employee cannot, by definition, "voluntarily" provide the information to the Government. If such were the case, government employees could never meet the original source definition. The court concluded that, given the concern evident in the legislative history about the failure of government employees to report fraud, it would be "incongruous" to read the "voluntary disclosure" requirement to bar a government employee who has gone to his supervisors to report fraud from bringing a qui tam action.
Finally, relying on its earlier decision in Wang v. FMC Corp., 975 F.2d 1412 (9th Cir. 1992), the court undertook an analysis of whether Fine met a third requirement. (Adding a requirement not stated in the False Claims Act, Wang states that an original source must be a source to the entity that made the public disclosure.) The court ruled that Fine met the third prong because he helped to report the allegations of fraud to the Government (the disclosing entity) before the allegations were publicly disclosed through the audits. While clearly reaffirming the application of the Wang third prong, the court clarified and seemed to slightly loosen the requirement:
It is important to note that, under the rule we adopt today, all those who "directly or indirectly" disclose an allegation might qualify as its original source. Anyone who helped to report the allegation to either the Government or the media [in this case] would have "indirectly" helped to publicly disclose it. If, however, someone republishes an allegation that already has been publicly disclosed, he cannot bring a qui tam suit, even if he had "direct and independent knowledge" of the fraud. He is no "whistleblower."
The 9th Circuit's holding follows a similar ruling by the New Mexico District Court in another Harold Fine case in which similar issues were raised. In U.S. ex rel. Fine v. MK-Ferguson Co. et al., U.S. Dist. LEXIS 12834 (D.N.M. Aug. 29, 1994) (discussed below), the district court refused to read into the FCA a bar of all IG employee lawsuits, citing generally the same reasons as the 9th Circuit.
U.S. ex rel. Rabushka v. Crane et al., 1994 U.S. App. LEXIS 32274 (8th Cir. Nov. 16, 1994).
In U.S. ex rel. Rabushka v. Crane et al., a case of first impression for the 8th Circuit, the court ruled that, while various news articles and other reports disclosed much of the factual background and transactions involved in the qui tam case, the reports did not expose the essential elements of the fraud at issue. As a result, the public disclosure bar was not triggered. In reversing the lower court, the 8th Circuit panel relied heavily on similar reasoning in U.S. ex rel. Springfield Terminal v. Quinn, 14 F.3d 645 (D.C. Cir. 1994) (discussed above), and noted that embracing too broad a definition of "public disclosure" would threaten to "choke off" efforts by relators to protect the public fisc.
Rabushka's lawsuit alleges that, when Crane spun off its subsidiary CF&I, it fraudulently understated CF&I's unfunded pension obligation so that Crane could avoid the pension liability and shift it to the Government's Pension Benefit Guaranty Corporation (PBGC). At the time of the spin-off, Crane represented the pension liability as approximately $46 million. Five years later, the subsidiary filed for bankruptcy and the PBGC ultimately took over the pension plan, which by then had increased its liability to $270 million. Rabushka claims that, as a major shareholder, he had discussions with Crane executives at the time of the spin-off in which the executives acknowledged that they knew the pension liability was much greater than represented.
The District Court for the Eastern District of Missouri had dismissed Rabushka's case as barred by ¤3730(e)(4)(A) because the spin-off, bankruptcy, and growing underfunded pension woes had been publicly disclosed prior to Rabushka's suit. In its reversal, the 8th Circuit ruled that such "transaction" disclosures are not enough to trigger the bar since "they do not raise the inference that Crane officials intentionally and fraudulently understated the pension problem in an attempt to avoid liability." The court also noted that, while none of the various news and corporate reports cited by Crane were sufficient to invoke the bar, corporate reports in any event are not contemplated as public disclosures under the False Claims Act.
The 8th Circuit's majority decision is followed by a lengthy and strongly worded dissent. Ironically, in urging dismissal, the dissent goes to great pains to conclude that a combination of various public disclosures clearly reveals the defendant's false representations and motive to commit fraud. According to the dissent, these disclosures were sufficient to place the Government on notice of the need for an investigation and thus should be sufficient to invoke the public disclosure bar. While the dissent does not claim that Rabushka relied on the disclosures for his information, it nevertheless concludes that the action was "based upon" the disclosures, specifically rejecting the 4th Circuit's "based upon" interpretation in U.S. ex rel. Siller v. Becton Dickinson (discussed above).
In U.S. ex rel. Fine v. MK-Ferguson Co. et al., the New Mexico District Court held that the False Claims Act does not prohibit Inspector General employees from bringing qui tam suits based upon information they gathered while working for the Government. (The 9th Circuit later adopted a similar ruling in U.S. ex rel. Fine v. Chevron, discussed above.) In its decision, the court also ruled:
Equating public disclosure with the existence of documentation would be tantamount to barring qui tam actions based on information in the possession of the Government -- exactly the situation Congress was attempting to eliminate in 1986. If the mere existence of a "no action" recommendation buried in a unreleased internal audit report has the effect of foreclosing qui tam actions, the 1986 amendments were for naught.
Nevertheless, because a DOE audit report had been affirmatively disclosed, the court proceeded to analyze the overlap between the information in the audit report and Fine's claims.
In U.S. ex rel. Prawer, et al., v. Fleet Bank, et al., 24 F.3d 320, 1994 U.S. App. LEXIS 9747 (1st Cir. May 5, 1994), a case of first impression for the 1st Circuit, the court reinstated a qui tam case that had been dismissed pursuant to ¤3730(e)(3), which states:
In no event may a person bring [a qui tam action] which is based upon allegations or transactions which are the subject of a civil suit or an administrative money penalty proceeding in which the Government is already a party.
The court found that, while there were similarities between the qui tam allegations and allegations raised against third parties as a defense in a collection action brought by the FDIC against the qui tam plaintiff, the allegations were not "the subject of" the collection case because, in that case, the FDIC did not and could not proceed against the qui tam defendants for fraud.
The entire matter involved a series of financial transactions between New Maine National Bank (NMNB), an insolvent bank, the FDIC, Fleet Bank, and Prawer, a grocery store. Under an agreement with the FDIC, Fleet was allowed to "put" (cause FDIC to repurchase) any loans that Fleet acquired from NMNB. Ultimately, Fleet "put" to the FDIC certain promissory notes given by Prawer to Fleet to satisfy an unsecured line of credit for $2 million of which Prawer used $1.6 million to pay previous NMNB loans. These "puts" occurred after Prawer had sold all of its assets to C&S Wholesale Grocers Inc. (C&S) and notified Fleet of the sale.
Thereafter, the FDIC instituted a collection case against Prawer, C&S, and individual defendants to collect upon the notes "put" back to it. Prawer responded with third-party claims against Fleet and several affirmative defenses, one of which was that the Prawer notes were not properly "putable" to FDIC.
Prawer also filed a qui tam action alleging that Fleet and others submitted false claims to the FDIC. The district court sua sponte dismissed Prawer's complaint on the grounds it was jurisdictionally barred by ¤3730(e)(3). The district court found that the qui tam allegations were already at issue in the collection case and that the Government (FDIC) was a party to that case.
On appeal, the 1st Circuit noted that whether or not fraud was "the subject of" the collection case would depend on whether "the subject of" was given a broad or narrow reading. Relying on the legislative history of the 1986 FCA Amendments, the appellate court concluded that a narrow reading, looking to whether the qui tam action was "parasitic," was intended. The court then examined the two related actions to see if they had the qualities of a host/parasite relationship. According to the court, such a relationship would be one where the qui tam case is "receiving support, advantage, or the like from the host case. . . without giving any useful or proper return to the Government (or at least having the potential to do so)."
Applying this test, the court found that the qui tam action was not parasitic. In the collection case, the Government was not proceeding against the defendants for fraud, whereas in the qui tam case the plaintiff was attempting to remedy fraud that the Government had not yet attempted to remedy. Furthermore, the FDIC could not have sued Fleet for fraud in the collection case without violating F.R.C.P. 14(a), because it would have been asserting a claim against a third party under an entirely different "transaction or occurrence." In reaching its conclusion, the court specifically rejected Fleet's argument that, once the Government is put on notice of fraud allegations, a qui tam action is unnecessary.
U.S. ex rel. Kelly v. Boeing Co., 9 F.3d 743 (9th Cir. 1993), cert. denied, 114 S.Ct. 1125 (1994).
In February 1994, the Supreme Court declined to review the 9th Circuit's holding in U.S. ex rel. Kelly v. Boeing Co. that the qui tam provisions of the False Claims Act are constitutional. The 9th Circuit had ruled that the qui tam provisions do not violate the separation of powers doctrine, the Appointments Clause of Article II, the standing requirements of Article III, or the Due Process Clause of the Fifth Amendment. The petition for Supreme Court review had provoked substantial industry interest, with amicus briefs supporting the petition filed by Hughes Aircraft Co., Lockheed Corp., Rockwell International Corp., Litton Industries, Northrop Corp., Blue Cross and Blue Shield Association, and the Aerospace Industries Association of America.
U.S. ex rel. TAF and Walsh v. General Electric, 1994 U.S. App. LEXIS 33529 (6th Cir. Nov. 30, 1994).
In U.S. ex rel. TAF and Walsh v. General Electric, the 6th Circuit upheld the constitutionality of the qui tam provisions. With its ruling, the 6th Circuit became the fourth consecutive circuit court of appeals to uphold the constitutionality of qui tam. No court has ruled otherwise.
In the appeal, G.E. raised the now oft-repeated claim that the qui tam provisions violate the Separation of Powers doctrine and Appointments Clause. The court responded that the qui tam provisions were drafted with "particular care" to avoid contradicting the principle of separation of powers and to "maintain the primacy of the Executive Branch" in fraud prosecutions. Qui tam does not run afoul of the Appointments Clause because the relator is not "vested with governmental power" and is not an "officer" within the meaning of the constitutional provision.
The court noted that Congress has often enacted statutes allowing private individuals to protect the public fisc, and many of those statutes contain fee-shifting provisions. In upholding the constitutionality of qui tam, the court affirmed that the FCA and its qui tam provisions are also "in pursuit of an important public policy."
In U.S. ex rel. John Doe v. X Corp. (now known as U.S. ex rel. Levin v. Tandem Computers), 862 F.Supp. 1502, 1994 U.S. Dist. LEXIS 14031 (E.D.Va. Sept. 26, 1994), the district court held that neither Levin's status as in-house counsel, nor his use of a letter merely referencing his complaint to satisfy the "written disclosure" requirement under ¤3730(b)(2), bars Levin from being a relator; nevertheless, Levin cannot be a relator because he does not possess enough information that he may legally disclose to form the basis of a valid complaint against the defendant.
This opinion was preceded by several district court and appellate decisions involving the same parties. As in-house legal counsel for Tandem Computers, Levin reported to his supervisors his concerns that Tandem was committing fraud against the Government. He began a thorough investigation of Tandem's practices. A couple of years later, after Levin was transferred and continued to express dissatisfaction with Tandem's compliance efforts, he was fired. When he left Tandem, Levin took over 4,000 confidential documents to corroborate his allegations.
Tandem sued Levin to enjoin him from voluntarily disclosing the documents to the Government. Applying Virginia law, the district court ruled that a former in-house counsel could make such a disclosure only if a reasonable attorney would conclude that the documents and information clearly established ongoing or planned fraud. X Corp. v. Doe 805 F.Supp. 1298 (E.D.Va. 1992), aff'd , Under Seal v. Under Seal, 17 F.3d 1435 (4th Cir. 1994) ("X Corp. I").
Next, the district court applied the X Corp. I standard and ruled that fraud was not clearly established. The court enjoined Levin from voluntarily disclosing the confidential documents and information to the Government. X Corp. v. Doe, 816 F. Supp. 1086 (E.D.Va. 1993) ("X Corp. II").
Subsequently, the Government and Tandem reached a $300,000 settlement while the qui tam case remained under seal. Tandem then moved to have Levin dismissed as a relator and precluded from sharing in the proceeds of the settlement. Tandem argued that corporate counsel are barred from being relators and that Levin failed to satisfy the FCA filing requirements.
In rejecting Tandem's first argument, the court looked to the plain language of the statute, which allows any person to bring a qui tam suit except those who fall under one of the specific jurisdictional exclusions. Nothing in the statute suggests that an in-house attorney is barred per se from filing a qui tam suit against his employer-client.
The court also discounted Tandem's concern that allowing corporate counsel to be relators would impinge upon the common law attorney-client relationship. Nothing in the FCA preempts state regulations and laws concerning attorney-client confidentiality. In bringing a qui tam suit, an attorney still has to adhere to relevant state laws. Furthermore, to the extent that state law allows the disclosure of client confidences to prevent an ongoing or future fraud, then attorneys' use of the qui tam mechanism should be encouraged, not prevented.
Tandem's second argument for dismissing Levin was that he did not satisfy the ¤3730(b)(2) requirement of serving a "written disclosure" on the Government, because the injunction in X Corp. II required the Government to relinquish Levin's written disclosure. After X Corp. II, Levin submitted a letter to the Department of Justice (DOJ) stating that all of the material evidence and information that he possessed and legally could disclose was contained in his complaint. The court found this sufficient to satisfy the ¤3730(b)(2) requirement. The court suggested that, although the statute requires two separate documents, a relator is not precluded from including all of his evidence and information in the complaint, and it would be elevating form over substance to require a "pointless repetition" of information already contained in the complaint.
Nevertheless, the court concluded that Levin could not be a relator in the action, because he could not serve a copy of the complaint on the Government, as required under ¤3730(b)(2), without violating the injunction issued in X Corp. II. The information in Levin's complaint contained confidences and secrets that fell within the information covered by the injunction. Levin thus was enjoined from using the complaint to satisfy the ¤3730(b)(2) requirements. In sum, the court stated: "In essence, this case presents the situation where state law has the incidental effect of precluding an attorney from being a relator in certain circumstances."
U.S. ex rel. Precision v. Koch, 31 F.3d 1015, 1994 U.S. App. LEXIS 20313 (10th Cir. Aug. 2, 1994).
In U.S. ex rel. Precision v. Koch, 31 F.3d 1015, 1994 U.S. App. LEXIS 20313 (10th Cir. Aug. 2, 1994), the 10th Circuit held that two sole stockholders who moved to add themselves as plaintiffs to an existing qui tam action brought by their corporation are not intervenors within the plain language of ¤3730(b)(5) and therefore not barred from entry into the litigation; further, the district court erred in deciding that the addition of plaintiffs to pending litigation is governed by F.R.C.P. 21 and not by F.R.C.P. 15(a).
Precision, a corporation formed by the two whistleblower stockholders to bring the qui tam suit, was initially dismissed by the district court as not satisfying the "original source" requirements under the jurisdictional bar. The stockholders, Koch and Presley, then filed an amended complaint adding themselves as parties. The district court, however, ruled that ¤3730(b)(5) prohibits intervention in an existing action by anyone other than the Government, and that Precision violated F.R.C.P. 21 by attempting to add parties without seeking the court's permission.
Reversing the district court, The 10th Circuit ruled that the word "intervention" in ¤3730(b)(5) is meant in the narrow F.R.C.P. 24 sense, rather than an expansive sense that includes any form of joinder. In short, the addition of parties does not constitute intervention prohibited by ¤3730(b)(5). Congress meant for ¤3730(b)(5) to prohibit parties unrelated to the original plaintiff from filing suit based on the same facts. This comports with the Congressional intent to prohibit "multiple separate suits based on identical facts and circumstances." Furthermore, the district court's faulty interpretation would bar a single qui tam action by multiple relators, while nothing in the statute or legislative history indicates such a limitation.
In addition, the district court ruled that Koch and Presley could not be added as plaintiffs "as a matter of course" under F.R.C.P. 15(a); rather, it applied Rule 21 and refused to grant Precision leave to amend its complaint. The 10th Circuit, however, held that Rule 15(a) governs the addition of a party and, because the amendment was made before the defendants had filed a responsive pleading, the plaintiffs were entitled to the amendment as a matter of right.
U.S. ex rel. Walle v. Martin Marietta Corp., 1994 U.S. Dist. LEXIS 13865 (E.D.La. Sept. 21, 1994).
In U.S. ex rel. Walle v. Martin Marietta Corp., 1994 U.S. Dist. LEXIS 13865 (E.D.La. Sept. 21, 1994), Martin Marietta filed a motion to dismiss the defective parts allegations added in the relator's amended qui tam complaint on the grounds that they constituted a "new" claim that had not been scrutinized by the Government. The Government had earlier declined to intervene in the action after an eight-month investigation. The district court held that the defective parts allegations in the amended complaint were an expansion of the phrase "other false and/or fraudulent claims" in the original complaint; Walle could amend his complaint and did not have to file a new claim under seal.
The court suggested that the defendant's concern that the Government was deprived scrutiny of the defective parts claim "borders on being specious." Having investigated Walle's allegations for eight months, having received a copy of the amended complaint, facing continuing press scrutiny, and having its budget significantly decreased, "NASA is not going to walk away from any viable allegations that might put money back into the Government's pocket." Further, ¤3730(c)(3) explicitly allows for intervention by the Government at a later date, such as when additional allegations arise through discovery or otherwise.
U.S. v. General Dynamics Corp., 19 F.3d 770, 1994 U.S. App. LEXIS 4830 (2d Cir. Mar. 17, 1994).
In U.S. v. General Dynamics Corp., 19 F.3d 770, 1994 U.S. App. LEXIS 4830 (2d Cir. Mar. 17, 1994), the 2nd Circuit held that the Anti-Kickback Act of 1946 (AKA) does not preempt the remedies of the United States under the False Claims Act.
The case involved the Construction Differential Subsidy (CDS) program, which encourages ship purchasers to place orders for construction with American shipyards (rather than foreign ones) by paying a subsidy to make the domestic price competitive. The CDS program requires the ship purchaser and the American shipyard to submit backup cost data. It was alleged that General Dynamics (GD) improperly passed on to the Government the costs of subcontractor kickbacks by including the kickbacks in cost estimates submitted to the Government.
The district court had dismissed all claims against GD, holding that the AKA preempted any other federal remedies against GD, even though the AKA law at the time did not provide the Government with a remedy against prime contractors such as GD. The district court's holding rested on the principle that "when Congress states in a statute's legislative history that, outside the statute, Congress knows of no remedy to cure the ill which the statute was passed to cure, Congress' statement indicates that Congress intended the statute to create an exclusive remedy which preempts all other facially applicable remedies."
In reversing the lower court, the 2nd Circuit noted that "well established jurisprudence strongly disfavors preemption of federal statutory law by another federal statute absent express manifestations of a preemptive intent." The court expressed reluctance to find preemptive intent in legislative history that is not supported by the language and structure of the statute. Further, given that the AKA's overriding purpose was to eliminate the practice of subcontractors paying kickbacks, the court reasoned that Congress would not have intended to preclude other federal remedies in areas that the AKA did not address. (The AKA, as amended at the time of the activities at issue, provided no remedy against prime contractors, only subcontractors.)
In addition, the court asserted that the statement in the legislative history which suggested that Congress knew of no other available remedy was no longer applicable. At the time of this statement, the FCA had not been interpreted to include the payment of kickbacks not resulting in a direct claim to the Government; it was only subsequent case law and legislative amendments that established a clear remedy under the FCA for such. Finally, the court noted that other courts have allowed the United States to seek recovery for kickbacks under the FCA without finding preemption by the AKA.
In U.S. ex rel. Killingsworth v. Northrop Corp., 25 F.3d 715, 1994 U.S. App. LEXIS 11732 (9th Cir. May 23, 1994), and a companion case, U.S. ex rel. Roland Gibeault et al., 25 F.3d 725, 1994 U.S. App. LEXIS 11733 (9th Cir. May 23, 1994), the 9th Circuit ruled that, except during the initial seal period, the Government does not have an absolute right to block qui tam settlements in cases in which it has not intervened. However, the Government does have the right to seek court review of a proposed qui tam settlement. The court ordered the District Court for the Central District of California to hold hearings on whether the proposed settlements represent fair allocations.
Killingsworth filed his qui tam action in November 1988. After an eighteen-month investigation, the Government declined to intervene in the action. In May 1990, Killingsworth and Northrop agreed to a $500,000 settlement, but it fell through after a dispute on several issues. Killingsworth then retained new counsel and amended his complaint to include new claims, including wrongful termination claims. In June 1990, the district court entered an order recognizing the Government's decision not to intervene and required that "the consent of the Attorney General be solicited before the granting of a dismissal, settlement or other discontinuation of this action."
In December 1991, Killingsworth and Northrop reached a settlement: Northrop would pay $1 million for the False Claims Act claim and $3.2 million for the wrongful termination claim, conditioned by Northrop on the Government's approval. The Government expressed concern that the parties had structured the settlement to shift the bulk of the money to the wrongful termination claim, thereby reducing the amount that the Treasury would recover. The Government also questioned why Northrop failed to raise a statute of limitations defense to the termination claim. After several months of discussion with the Government, Killingsworth moved to have the district court approve the settlement and dismiss the case. The Government objected, but still declined to intervene in the action. Killingsworth and Northrop reopened negotiations and agreed to shift $500,000 from the termination claim to the FCA claim.
The district court then ordered the Government to inform the parties whether it consented to the settlement or, if not, to intervene. The Government informed the court that it did not consent, but once again declined to intervene. Finally, the district court entered an order of dismissal. The Government filed a motion seeking leave to intervene for purpose of appeal, and the court denied this motion.
The 9th Circuit first ruled that the Government had a right to intervene for purpose of appeal under F.R.C.P. 24(a). Moreover, the Government has a right, with or without formal intervention, to have a settlement reviewed by a court to ensure that the funds are properly allocated among the various claims.
Next, the court addressed whether the Government has an absolute right to block a settlement. The Government pointed to the language in ¤3730(b)(1): "The action may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting." The court in turn read this provision in the context of the legislative history and other provisions outlining the relationship between the Government and the qui tam plaintiff.
The court found that Congress intended to "place full responsibility for False Claims Act litigation on private parties, absent early intervention by the Government or later intervention for good cause." This Congressional intent is "fundamentally inconsistent with an asserted 'absolute' right of the Government to block a settlement and force a private party to continue litigation." The Government's reliance on ¤3730(b)(1) was misplaced, because that provision only applies to the initial sixty-day seal period (or extended period if granted). An absolute right also is expressly contradicted by ¤3730(b)(4)(B), which gives the qui tam plaintiff "the right to conduct the action." Finally, the court suggested that an absolute right to block a settlement may in fact represent a meaningless privilege; after all, the Government may not force the parties to continue litigating, and, if the parties settle the action without dismissal and thus effectively stop litigating, the trial court would eventually dismiss the suit for failure to prosecute.
While the Government does not have an absolute right to block a settlement after the initial seal period, the court found that, upon a showing of good cause, the Government does have the right to present its objections to a settlement in a hearing. This right exists whether or not the Government intervenes. The FCA explicitly grants such a right to the relator when the Government reaches a settlement with the defendant, and the court found that the Government should have a similar right. The court suggested that the various provisions of the FCA granting the court discretion over the relator's share indicate an important role for the court in allocating proceeds. Therefore, the trial court has the power to review a settlement to ensure that the Government receives its proper share.
Finally, the court found that the Government had made a good cause showing that the Killingsworth-Northrop settlement may not be fair. On remand, the district court is to hold a hearing to determine whether the proposed settlement fairly and reasonably allocates the settlement funds so as to give the Government its due.
After granting the hearing as required by the 9th Circuit, the district court reinstated the $4.2 million settlement reached between Killingsworth and Northrop, despite the Government's objection and effort to intervene. At the hearing, the Government, after arguing for years that Killingsworth's suit against Northrop was worth only a few hundred thousand dollars, insisted that the $4.2 million settlement be overturned so that it could seek over $100 million for Northrop's alleged defective pricing. The Government said its changed position resulted from newly discovered evidence.
In Under Seal v. Under Seal (now known as U.S. ex rel. Levin v. Tandem Computers), 1994 U.S. App. LEXIS 16117 (4th Cir. June 27, 1994), the 4th Circuit held that the district court acted within its discretion in refusing to impose a permanent seal on a qui tam complaint. The relator, formerly in-house legal counsel to the defendant, alleged that the defendant sold used computer equipment as new in violation of its contract with the GSA.
The suit was settled between the Government and the defendant, and the latter moved to seal the complaint to prevent disclosure of the relator's identity. The Government opposed the motion, arguing that the district court record is subject to a common law right of public access. The defendant argued that the disclosure of the relator as its former in-house counsel would cause it embarrassment and that the complaint contained privileged attorney-client information.
The court rejected these arguments, recognizing the long-established common law right of public access to judicial records filed in court. This interest is especially strong when the Government is a party to the case or the subject matter is of particular public interest. To the extent there are exceptions to the presumption, the burden is on the party seeking to maintain the seal.
The court discounted the reputational harm argument because such harm is insufficient to overcome the public access presumption. The contractor's argument that the complaint contained privileged information was belied by the fact that the information was essentially the same as in the settlement agreement which had already been made public. Finally, the court noted that the FCA itself contemplates only a temporary seal period; once the Government intervenes or declines intervention, the complaint is unsealed and served upon the defendant. In short, the defendant failed to show why its interest should overcome the public's interest in access to judicial records.
United States v. Barnette, 10 F.3d 1553, 1994 U.S. App. LEXIS 175 (11th Cir. Jan. 7, 1994).
In United States v. Barnette, 10 F.3d 1553, 1994 U.S. App. LEXIS 175 (11th Cir. Jan. 7, 1994), the 11th Circuit reversed a district court holding barring the Government from recovering civil damages in excess of the restitution the defendant had been ordered to pay in a criminal proceeding. The case was remanded for further proceedings, including a determination of the total loss to the Government caused by Barnette, so that the doctrine of U.S. v Halper, 490 U.S. 435, 109 S.Ct. 1892, 104 L. Ed. 2d 487 (1989), could be properly applied.
From 1977 to 1981, Barnette defrauded the Government under a contract for laundry services for the U.S. Army in Germany. In 1984, Barnette was criminally convicted on 17 different counts and ordered to pay $7 million in restitution. After the conviction, the Government filed a civil False Claims Act action against Barnette seeking between $18.1 million and $50.5 million.
To assess whether the Double Jeopardy Clause of the Fifth Amendment would be violated, the court framed the controlling question under Halper as whether the civil penalty sought by the Government was so grossly disproportionate to the Government's total loss as to constitute deterrence or retribution instead of compensation. The court concluded, however, that it could not decide that question because the total amount of the Government's loss, including investigation and prosecution costs, had never been determined. Nevertheless, before remanding to the district court to establish the Government's total loss, the court determined whether a total recovery of $50.5 million would violate the Double Jeopardy Clause, assuming that the Government suffered losses of at least $15.75 million as it claims.
The court noted that in Halper the ratio between the recovery sought and the Government's direct loss was about 222 to 1; the ratio between the recovery sought and the Government's total loss, including detection and investigation costs, was just over 8 to 1. In Halper, the Supreme Court found this ratio bore "no rational relation to the goal of compensating the Government for its loss" and instead was punitive. Nevertheless, in Halper the court carefully limited its holding as "a rule for the rare case" and explicitly recognized that "in the ordinary case fixed-penalty-plus-double-damages provisions can be said to do no more than make the Government whole."
The court concluded that the Barnette case was "ordinary" under Halper, assuming that the Government could prove a loss of $15.75 million, in which case a $50.5 million recovery would result in a ratio of 3.2 to 1. A 3.2 to 1 ratio does not approach the 8 to 1 ratio found in Halper and does not lack the necessary rational relation. Instead, such a ratio is close to a penalty roughly proportionate to the damage caused plus double damages, and "[t]he rule of Halper permits 'at least' that much."
U.S. ex rel. TAF and Walsh v. General Electric, 1994 U.S. App. LEXIS 33529 (6th Cir. Nov. 30, 1994).
In U.S. ex rel. TAF and Walsh v. General Electric, 1994 U.S. App. LEXIS 33529 (6th Cir. Nov. 30, 1994), the 6th Circuit held that qui tam defendants are not obligated to pay the relator's attorneys' fees for litigation regarding the size of the relator's share. While the False Claims Act directs defendants to reimburse successful relators for their fees and expenses, the court concluded that the Act does not address the prospect of collateral litigation between the Government and the relator. Although conceding that, in this case, G.E. "eagerly assisted" in the Government's efforts to reduce the relators' share, the court found that the record did not suggest that G.E. initiated or prolonged the litigation, or could have hastened its conclusion.
The underlying case began in 1990 when Chester Walsh filed a qui tam suit alleging that G.E. Aircraft had billed the Government for million of dollars in false claims. In a 1992 settlement of the case, G.E. paid the Government $59.5 million in civil damages, $9.5 million in criminal fines, and over $6 million in restitution. After the settlement, the district court dismissed the case except to determine the relators' share of the qui tam settlement and the relators' attorneys' fees. After protracted discovery and a hearing, the district court awarded the relators 22.5 percent of the recovery (later reduced to about 19 percent by settlement). In its award of attorneys' fees, the court included approximately $1 million in fees and expenses incurred by the relators in the relators' share litigation.
On appeal, G.E. argued that it was not a party to the relators' share litigation and therefore should not be obligated to pay the fees and costs. Relators pointed out that G.E. encouraged the Government's efforts to reduce the relators' share through a number of actions, including assigning a legal team to support the Government, attending depositions, and submitting a 13-page "proffer" to the court. According to the relators, G.E.'s efforts prolonged the parties' settlement efforts thereby leaving G.E. with only itself to blame for much of the relators' share litigation cost.
Relators also argued that, because the intent of the FCA is to encourage private citizens to assume the heavy initial burden of bringing a qui tam action with the incentive that success will lead to a significant recovery, Congress intended that the blameworthy defendant would have to pay all of the relator's costs of bringing the qui tam action, including whatever is necessary to reach a final determination of the relator's award. Otherwise the Government would be able to intimidate successful relators into giving up substantial portions of their rightful gains for fear that they might otherwise be compelled to expend all of their anticipated recovery litigating against the Government.
Despite finding that the relators' argument had "some appeal" and noting a "certain hypocrisy in G.E.'s stance," the court reversed the relators' share attorneys' fees award relying on Bigby v. City of Chicago, 927 F.2d 1426 (7th Cir. 1991), where the court rejected the contention that "wrongdoers should bear the cost of defending third party interests."
The 6th Circuit Court remanded the attorneys fee award for further fact-finding on a variety of issues including the timing of the relator's lawsuit and ethical considerations pertaining to the fee arrangement among the relators and their counsel.
Neal v. Honeywell Inc., 33 F.3d 860, 1994 U.S. App. LEXIS 23785 (7th Cir. Aug. 31, 1994).
In Neal v. Honeywell Inc., the 7th Circuit became the first court of appeals to interpret ¤3730(h) of the False Claims Act, ruling that the ¤(h) retaliation claim could proceed notwithstanding that no FCA case was ever filed.
Section 3730(h) provides a remedy for any employee who suffers retaliation because of the employee's conduct "in furtherance of . . . an action filed or to be filed under this section. . . " Honeywell had argued that ¤3730(h) was inapplicable because the Government had settled with Honeywell before any suit was filed under the False Claims Act; moreover, Neal's retaliation claim should be dismissed under the Illinois state law five-year statute of limitations period.
The key ¤3730(h) language interpreted by the court was "in furtherance of an action under this section" and "filed or to be filed." According to the court, ¤3730(h) expressly covers investigatory activities preceding litigation. The "filed or to be filed" language linked protection to events as they were understood at the time of the investigation or report; and when Neal had reported what she learned, litigation was a distinct possibility. The court suggested that Honeywell's interpretation would allow it to "purchase an option to retaliate" by settling the suit; further, the court saw no reason to believe that "Congress wanted to protect employees in doubtful cases (the kind that breed litigation) but leave them unprotected when the fraud is so clear that the employer capitulates, averting litigation."
In the end, the court interpreted the "filed or to be filed" and "action" language as limiting ¤3730(h) coverage to situations in which litigation could be filed legitimately (i.e., consistently with F.R.C.P. 11). And, in Neal's case, "two guilty pleas and a hefty settlement show that civil litigation was a real possibility."
To answer the statute of limitations question, the court looked to the "plain language" of ¤3731(b)(1), which allows six years to file a "civil action under ¤3730" from the time the "violation of ¤3729 is committed." Neal had filed her ¤3730(h) action within six years of Honeywell's false claims but outside of the state's 5-year statute of limitations for wrongful termination claims. Honeywell painted the adoption of the ¤3731(b)(1) limitations period as absurd, because under it the time to file suit may expire before the retaliation even occurs. In response, the court cited other statutes of repose that have the potential for blocking litigation before the violation of the law occurs. Further, the court suggested that in most cases the false claims, the reports, and the retaliation will occur close in time; moreover, equitable tolling or estoppel may apply to ¤3731(b)(1) if the employer "patiently waited until six years from the false claims and then sacked the troublesome employee."
In addition, the court rejected a bold damages theory asserted by Neal; namely, that she was entitled to the recovery she would have had under ¤3730(d)(1) had she filed a qui tam suit, because Honeywell had not informed her that she could do so. The court asserted that nothing in the False Claims Act requires an employer to inform an employee of the qui tam option. Further, "[d]amages under ¤3730(h) compensate an employee for harm caused by the harassment and discharge; they are not a substitute for the recovery an employee could have had in a qui tam suit."
In Robertson v. Bell Helicopter Textron Inc., the 5th Circuit affirmed the district court judge's JNOV verdict for the defendant, overriding a jury verdict for the plaintiff's retaliation claim under ¤3730(h). The district court judge determined that there was insufficient evidence to support the jury's findings that Bell Helicopter knew of Robertson's alleged investigations in furtherance of a qui tam action, that Bell Helicopter discharged Robertson because of such investigations, or that Bell Helicopter's non-retaliatory explanation for the discharge was pretextual.
Robertson alleged that he had been discharged in retaliation for investigating possible overcharging of the Government by Bell Helicopter, his employer. Over a one to two year period, Robertson had voiced his concern to several different supervisors about unsubstantiated charges. Eventually, Robertson was laid off as part of a general reduction in the work force. Five months later, he filed suit against Bell Helicopter under ¤3730(h), as well as for age discrimination, wrongful discharge, and estoppel. Eight months after that, he filed a qui tam action; the Government elected not to intervene, and Robertson filed a notice of voluntary dismissal.
The 5th Circuit approved of the district court's jury instruction that, to find for Robertson, the jury "had to find that Bell Helicopter knew Robertson was investigating alleged fraud in an effort to bring, or to help the Government to bring, a FCA suit." The court asserted that the legislative history clearly indicates that the employer must know the employee is engaged in protected activity.
According to the court, the "case turns on whether the record supports an inference that (1) Robertson engaged in protected activity, and (2) that Bell Helicopter knew about it." First, the court rejected Robertson's contention that his expression of concern to his superiors constituted protected activity under the FCA. Recognizing that several district courts have held that ¤3730(h) protects internal whistleblowing, the court suggested that Robertson's internal reporting was qualitatively different than the reporting that occurred in those cases. In the other cases, the employee specifically told the employer that she was concerned about the company defrauding the Government; in contrast, Robertson never used explicit terms such as "illegal," "unlawful," or "qui tam action" in characterizing his concerns about Bell Helicopter's charges.
Next, the court rejected Robertson's argument that his investigation into the possible overcharging constituted protected activity. The court found that Robertson did nothing to rebut his supervisors' testimony that they had no knowledge that he was conducting investigations outside the scope of his job in furtherance of a qui tam action. Robertson did not express any concerns other than those typically raised by a contract administrator, and Robertson's actions were consistent with performing his job duty of substantiating requests for additional funding. Robertson failed to identify any "change in his conduct that might have objectively demonstrated his qui tam intentions." The court thus concluded that, without knowledge that Robertson's investigations were in furtherance of a qui tam action, Bell Helicopter could not have the retaliatory intent necessary to establish a ¤3730(h) violation.
In U.S. ex rel. Moore v. University of Michigan, the district court held that the plaintiff's ¤3730(h) claim against the state university was barred by the Eleventh Amendment. Because ¤3730(h) is silent on the issue of 11th Amendment immunity and does not make the United States a party to the claim, the court concluded that a ¤3730(h) claim abrogates the states' 11th Amendment sovereign immunity.
The court reasoned that, while the 11th Amendment is not an absolute bar to creating federal jurisdiction for state liability, Congress must use "unequivocal statutory language to abrogate the states' Constitutional immunity." For example, sufficient language was cited by the Supreme Court in Dellmuth v. Muth, 491 U.S. 223 (1989), wherein the statute at issue stated: "A State shall not be immune under the 11th Amendment of the Constitution of the U.S. from suit in Federal court for a violation of [several enumerated provisions]. . . ." In contrast, ¤3730(h) is silent on the issue of state immunity.
Furthermore, the court rejected the plaintiff's argument that application
of the 11th Amendment would be inappropriate because the lawsuit was brought on
behalf of the United States. Unlike the other provisions of the Act, ¤3730(h)
does not specify the United States as a party to the claim. And the court
rejected the plaintiff's argument that the failure of other provisions to
differentiate between the main qui tam action and a ¤3730(h) claim
suggests that the United States is a party to a retaliation claim under ¤(h).
In April 1994, a California district court judge ruled that General Dynamics could not assert defenses of government knowledge, estoppel based on government knowledge, unclean hands, and failure to mitigate damages. The court also ruled that certain claims were "false" as a matter of law because they represented information that was not objectively true. The qui tam suit alleges that General Dynamics' employees billed the Government for working full shifts even though they were often idle or left work early.
In granting partial summary judgment for the Government, District Court Judge Pfaelzer ruled that General Dynamics' claims based on records showing that employees had worked a full eight hours when they had not worked that amount were "false" under the FCA. General Dynamics argued that the claims were reasonable because the company had actually incurred the expenses in paying the employees full-time wages rather than lay them off. However, Judge Pfaelzer stated: "Whether or not the costs could reasonably be allocable to the contract, although relevant to both scienter and causation, is not relevant to falsity."
General Dynamics also argued that the Government knew of and did not object to the company's practice of allowing employees to work less than full days. Judge Pfaelzer ruled that government knowledge is not in and of itself an affirmative defense to a FCA violation, although it is relevant to the issues of scienter and causation. The court also disposed of the defenses of unclean hand and estoppel, finding that General Dynamics' assertion of such defenses was akin to the concept of laches, which is unavailable against the Government. Finally, the court ruled that it would be inconsistent with the qui tam provisions to allow failure to mitigate damages as a defense.
In June 1994, Judge Pfaelzer denied General Dynamics' motion to apply the pre-1986 FCA statute of limitations to its case.
In May 1994, the district court ruled that qui tam suits must meet the pleading requirements of F.R.C.P. 9(b) and that nothing in their nature warrants a relaxed standard. The relator was given 45 days to amend his complaint to bring it into compliance with F.R.C.P. 9(b).
In June 1994, the 9th Circuit overturned nearly $24,000 in sanctions against relator's counsel, finding that the statement made by a government prosecutor which prompted the sanctioned behavior by relator's counsel was "factually inaccurate." Further, the court characterized counsel's invective against the prosecutor as mere "harmless hyperbole" and not warranting sanctions; given that relator's counsel justifiably believed that the prosecutor had lied and thus undermined the relator's case, the use of strong language did not support the imposition of sanctions.
In August 1994, U.S. District Court Judge Pfaelzer granted a motion to dismiss a qui tam suit because the relator violated the "seal provisions" of the FCA. Shephard served the defendant with a summons and complaint while the qui tam allegations were under investigation by the Government during the seal period.
In April 1994, DOJ intervened in this qui tam suit, filed in 1991, alleging that Rockwell International shifted cost overruns on fixed price Air Force contracts to cost-reimbursable contracts for the NASA space shuttle. Mr. Vosoughkia was a machinist and supervisor at Rockwell's Space Transportation System in Downey, California.
In May 1994, DOJ intervened in this qui tam suit alleging that Martin Marietta was awarded a Navy contract as the result of an artificially low bid and that it set up a separate research program to mischarge the Government as much as $30 million in cost overruns. The relator is a former Martin Marietta employee. The relator's counsel is Robert L. Vogel (Washington, D.C.).
In May 1994, DOJ intervened in this qui tam suit brought in 1992 by Henry Anderson, a manufacturing processor at Equipment and Supply Inc. Mr. Anderson alleged that the company supplied nonconforming parts, sold old government surplus equipment back to the Government as new, and painted and relabeled old parts to appear new. William J. Hardy (Washington, D.C.) is representing Mr. Anderson.
In June 1994, the Department of Justice (DOJ) intervened in this qui tam suit alleging that G.E. jet engines do not meet federal requirements for electromagnetic interference and are subject to malfunction or failure. The complaint alleges that G.E. knew but failed to inform the Government of the jet engine problems. According to DOJ, the suit involves as many as 7,000 engines and damages that could reach $100 million. The relator is an electrical engineer who discovered electrical bonding problems in G.E. engines. The relator's counsel is Helmer, Lugbill, Martins & Neff (Cincinatti, Ohio).
In July 1994, DOJ intervened in this qui tam suit, brought by the CEO of a radio manufacturing company against four company officials, alleging that the defendants ordered workers to produce defective radios for the U.S. Army and to falsify test and inspection results to hide the defects. Richard Boyston of Benesch, Friedlander, Coplan & Arnoff (Cincinatti, Ohio) is representing the relator.
In July 1994, DOJ intervened in this qui tam suit brought by two former employees of Allied Labs, a chain of blood testing labs based in Nashville, Tennessee. The complaint alleged that Allied billed Medicare for blood tests that were not reimbursable under the program. Allied allegedly inserted false diagnosis codes into its Medicare billings. In addition, Medicare pays for certain "limited coverage" blood tests only if a physician provides an appropriate diagnosis showing medical necessity; Allied billed Medicare even though such diagnoses were not provided.
In August 1994, DOJ intervened in this qui tam suit alleging that Science Applications International Technology (SAIT) defrauded the U.S. Air Force on a $13 million contract to manufacture a liquid crystal display device for aircraft cockpits. The complaint alleges that SAIT made false and misleading statements about its technological progress in order to obtain additional LCD display and other contracts even though the company knew its design was not viable; SAIT used Watchman television and laptop computer parts to make LCD displays to mislead the Air Force that SAIT had successfully developed the new technology. Mr. Hollis, an electrical engineer at SAIT, filed his suit in March 1993. Cathryn Chinn and Peter Friesen (San Diego, California) are representing Mr. Hollis.
In August 1994, DOJ intervened in this qui tam suit alleging that Accudyne failed to properly test electronic land mine detonators for the U.S. Army. Upon testing by the Army, the electronic assemblies experienced failure rates as high as 40 percent. The group of relators includes several former employees of Accudyne and a nonprofit environmental organization.
In March 1994, United Technologies Corp. (UTC) agreed to pay $150 million to settle this qui tam suit alleging that its Sikorsky Aircraft Division prematurely billed for work not yet performed on its helicopter contract with the U.S. military. The suit also alleged that UTC attempted to suppress disclosure of the improper practices after entering the DOD Voluntary Disclosure Program. The relator, Mr. Keeth, was an executive vice president at UTC and a member of the voluntary disclosure team. The UTC settlement represents the largest qui tam recovery to date. The relator's share was 15 percent or $22.5 million. The relator's counsel was David Golub (Greenwich, Connecticut).
In April 1994, Teledyne Industries agreed to pay $85 million to settle this qui tam suit, filed in 1990, alleging that its Teledyne Relays division falsely certified that relay switches sold to the U.S. military for use in a wide variety of weapons and satellite systems met testing requirements. Mr. Stache was a manager of quality control and Mr. Muehlhausen a test lab manager for Teledyne Relays. The relators' share was 21 percent or $18.5 million. The relators' counsel was Phillips, Cohen & Goldstein (Los Angeles, California and Washington, D.C.).
In April 1994, Teledyne Industries agreed to pay $27.5 million to settle this qui tam suit, filed in 1989, alleging that Teledyne Systems arbitrarily inflated the cost data that it represented to the Government as being current, accurate, and complete. Mr. Kirchhoff learned of the fraud while working as a pricing specialist for Teledyne. The relators' share was 23.5 percent or $6.46 million. The relators were represented by Phillips, Cohen & Goldstein (Los Angeles, California and Washington, D.C.), Paul R. Hoeber and Terrence Young of Marron, Reid & Sheehy (San Francisco, California), Robert L. Palmer of Meyer, Hendricks, Victor, Osborn & Maledon (Phoenix, Arizona), and Ronald Lovitt of Lovitt & Hannan, Inc. (San Francisco, California).
In July 1994, Litton Industries agreed to pay $82 million to settle this qui tam suit, filed in 1988, alleging that its Litton Systems subsidiary passed commercial data processing costs on to the Government. Mr. Carton discovered the mischarging while working as a technical director in the Litton Computer Services division. The relators' counsel was Phillips, Cohen & Goldstein (Los Angeles, California and Washington, D.C.).
In July 1994, the University of Utah and University of California agreed to pay $950,000 and $625,000 respectively to settle this qui tam suit, filed in 1989, alleging that Dr. Ninneman falsely reported to the National Institutes of Health (NIH) his research results on the causes of immune system suppression after burn injury. The universities were accused of being aware of the false reports and failing to properly monitor Ninneman's research.
In July 1994, Novell agreed to pay $1.7 million to settle this qui tam suit alleging that, in violation of T.I.N.A., it failed to fully advise government negotiators about pricing policies, and that companies selling Novell products to federal agencies under separate contracts received rebates. The relator's share was $310,500.
In August 1994, the district court approved a $10 million settlement between the Government and BCBS over the objections of the relator in this qui tam suit. BCBS was accused of mishandling claims: the company erased thousands of claims, overcharged the Government, and knowingly chose a data processing firm that could not handle the claims volume. The relator's counsel was Lowenthal & Abrams (Bala Cynwyd, Pennsylvania).
In September 1994, BCBS agreed to pay $2.75 million to settle this qui tam suit, filed in 1993 by a former employee of a BCBS subsidiary, alleging that it submitted false Medicare reports. In periodic reports submitted to the Health Care Financing Administration (HCFA), BCBS allegedly inflated the number of claims it processed and exaggerated the speed with which it processed claims, resulting in BCBS receiving larger government reimbursements than it was entitled to receive. The relator's share was 20 percent or $550,000. The relator was represented by John M. Kahn of Hill & Barlow (Boston, Massachusetts).
In October 1994, Teledyne Industries agreed to pay $850,000 to settle this qui tam suit, filed by TAF in 1992, alleging that it engaged in defective pricing. The complaint alleged that Teledyne failed to disclose that it was using equipment already in stock when providing pricing data for U.S. military contracts. The price of the equipment in stock was less than the proposed market price which Teledyne charged the Government. The relator's share was 20 percent or $170,000. The relator was represented by Robert M. Ornstein of Ornstein & Harris (Santa Barbara, California).
In October 1994, Teledyne agreed to pay $5.65 million to settle this qui tam suit, filed in 1992 by a former senior program manager, accusing Teledyne of charging nonproductive time to government contracts and failing to properly test "identification friend or foe" systems for military aircraft. The relator's share was $869,000. The relator was represented by Phillip E. Benson (Newport Beach, California).
In October 1994, UltraMed agreed to pay $2.1 million to settle this qui tam suit, filed in 1993 by two UltraMed customer service representative, alleging that UltraMed submitted claims to Medicare for home model pneumatic compressors (commonly called lymphedema pumps) that did not meet Medicare's engineering requirements. Under the agreement, Curative, UltraMed's parent company, will guarantee UltraMed's settlement payment. As of October, the relators planned to challenge the adequacy of the settlement.
In December 1994, General Electric (G.E.) and Martin Marietta agreed to pay $5.87 million to settle this qui tam action brought by TAF and G.E. engineer Zie Hak. The lawsuit involved claims of wrongdoing associated with foreign military sales of radar systems to Egypt by G.E.'s Aerospace, Ocean Radar & Sensor Systems Division. G.E. was alleged to have improperly charged the Government for the cost of a subcontract it had with an Egyptian company and for payments to Egyptian government officials for certain living expenses. The relators' counsel was Phillips & Cohen (Washington, D.C.).
In December 1994, the State of New York and several New York state colleges agreed to pay $26.97 million to settle this qui tam case filed in November 1992 by a former New York state employee. The lawsuit alleged overbilling and misuse of federal funds designated for training of social service workers over a 12 year period. The relator's share was 15 percent or $4.05 million.
In December 1994, Fairchild Industries, Inc. and Fairchild Space & Defense Corporation agreed to pay a total of $8.1 million to settle this qui tam case alleging that the companies mischarged the Government on several NASA contracts and failed to inform the Government about equipment malfunctions under an Air Force contract. Mr. Aliksanian, a former Fairchild employee, filed the suit in July 1988.
In early 1994, GTE Government Systems Corp. agreed to pay $3.25 million to settle allegations that it improperly characterized capital equipment leases as operating leases, thus increasing the overhead rate it billed the Government.
In April 1994, Boeing Co. agreed to pay $75 million to settle allegations that it systematically overcharged and mischarged the Government on military contracts. The settlement resolved three investigations involving allegations of FCA violations from 1980 to 1991. Boeing was accused of charging R & D costs to the Government that it should have absorbed itself. Boeing also admitted that the company improperly charged several million dollars in foreign aircraft sales costs and hazardous waste disposal costs.
In April 1994, TRW agreed to pay $29 million to settle a mischarging case originally filed under the False Claims Act by three former TRW employees in April 1986. The employees were dismissed from the suit in 1991 after the court ruled that their suit was based on information already known to the Government and therefore barred under the pre-1986 False Claims Act. The 6th Circuit affirmed the dismissal of the relators, and the U.S. Supreme Court declined to review that ruling. TRW pled guilty and two of the three relators were convicted of federal crimes in connection with the case.
In June 1994, National Medical Enterprises Inc. (NME) paid $379 million in criminal fines and civil damages and penalties to settle allegations that it defrauded Medicare and other federally funded insurance programs. NME psychiatric hospitals in more than 30 states were accused of paying kickbacks for patient referrals and providing unnecessary treatment. The NME settlement represents the largest government recovery in a health care fraud case to date.
In July 1994, heart valve maker Shiley Inc. and its parent Pfizer Inc. agreed to pay $10.75 million to settle allegations that they made false claims with respect to potentially fatal artificial valves manufactured from 1979 to 1986. The valves were transplanted into 83,000 patients, most of whom were Medicare beneficiaries, and 230 of them died when tiny struts that held the valves together snapped. FDA approval of the valves was based on false statements.
In September 1994, Parker-Hannifin Corporation agreed to settle False Claims Act allegations of mischarging and defective pricing for a total of $7.8 million. The case involved a 1988 disclosure by Parker-Hannifin to the DOD Voluntary Disclosure Program regarding improper overhead charges. At that time, Parker-Hannifin repaid the Government $2.5 million for admitted mischarges. However, according to DOJ, the Government's subsequent investigation revealed that the company had made "several misrepresentations in its voluntary disclosure" and that the company had not fully disclosed the results of its internal investigation.
In October 1994, Raytheon Company agreed to a $4 million settlement of a False Claims Act lawsuit alleging that the company had knowingly overstated the number of employees with certain skills that would be needed for a contract to upgrade missile detection sites. DOJ alleged that, by overstating the skill mix of employees, Raytheon inflated the contract price and more than doubled its originally estimated profits.
In October, 1994, the Department of Justice (DOJ) reported total qui tam recoveries of more than $800 million over the eight year period since passage of the 1986 False Claims Act Amendments. Fiscal year 1994 was by far the most productive year for qui tam cases, with $378 million in recoveries, more than twice the total from the previous year. Overall False Claims Act recoveries topped $1 billion in 1994.
The $800 million in recoveries resulted from 90 cases in which DOJ intervened. Qui tam relators who proceeded without DOJ collected approximately an additional $9 million in recoveries. The total recoveries by fiscal year are approximated as follows:
FY 1987: $200,000 FY 1991: $36 million
FY 1988: $400,000 FY 1992: $125 million
FY 1989: $32.5 million FY 1993: $185 million
FY 1990: $40 million FY 1994: $378 million
Approximately 840 qui tam lawsuits have been filed since the 1986 Amendments, with the number of cases increasing each year.
FY 1987: 32 cases FY 1991: 90 cases
FY 1988: 60 cases FY 1992: 119 cases
FY 1989: 95 cases FY 1993: 130 cases
FY 1990: 82 cases FY 1994: 220 cases
DOJ reports that nearly half of these cases (402) involve DOD fraud and almost a quarter of the cases (189) involve fraud in HHS programs (Medicare, Medicaid, etc.).
Approximately half of the 840 qui tam cases filed are still pending. DOJ has intervened in 127 cases (with 90 resolved), declined 455 cases, and is currently investigating about 222 cases.
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1995 by Taxpayers Against
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