Local Governments Subject to Qui Tam

On March 10, 2003, in Cook County v. United States ex rel. Chandler, 123 S. Ct. 1239 (2003), 30 TAF QR 1 (Apr. 2003), the Supreme Court handed down an important decision holding that local governments are "persons" subject to qui tam liability. The Court also clarified that FCA treble damages have compensatory as well as punitive traits and cannot be equated with classic punitive damages.

The False Claims Act imposes liability on "[a]ny person" who violates its provisions, but the term "person" is not defined in the liability section. See 31 U.S.C. § 3729. In Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000), 19 TAF QR 1 (July 2000), the Supreme Court ruled that states and state agencies are not "persons" subject to FCA liability in qui tam suits, but left open the question whether local governments, local government agencies, and other public entities that do not qualify as "state agencies" are subject to liability in such suits. Prior to the Supreme Court's ruling in Chandler, lower federal courts were sharply divided on this question. At the appellate level, the Third and Fifth Circuits held that local governments and their agencies are not "persons" subject to qui tam liability under the FCA. See United States ex rel. Garibaldi v. Orleans Parish School Board, 244 F.3d 486 (5th Cir. 2001), 22 TAF QR 1 (Apr. 2001), cert. denied, 122 S. Ct. 808 (2002); United States ex rel. Dunleavy v. County of Delaware, 279 F.3d 219 (3d Cir. 2002), 26 TAF QR 4 (April 2002). However, the Seventh Circuit reached the opposite conclusion, holding that local governments are "persons" subject to qui tam liability. See United States ex rel. Chandler v. Cook County, 277 F.3d 969 (7th Cir. 2002), 26 TAF QR 1 (April 2002).

The Seventh Circuit's decision created a split of authority among the federal courts of appeals. Accordingly the Supreme Court granted certiorari, and unanimously affirmed the judgment of the Seventh Circuit. The Court observed that the statutory term "person" has long been presumed to cover corporations, including public corporations such as municipalities. Moreover, neither the FCA's text nor its history supports the exclusion of municipalities from liability.

The Court also rejected the defendant's attempt to rely on the Stevens Court's statement that the current FCA treble damages are "essentially punitive in nature" to argue that even if the 1863 Act provided for municipal liability, the 1986 amendments, which increased available damages from double to treble, eliminated such liability. Clarifying its statement in Stevens, the Court observed that "treble damages have a compensatory side, serving remedial purposes in addition to punitive objectives." Although "the tipping point between pay-back and punishment defies general formulation," several features of the FCA suggest a remedial function, and thus the FCA's treble damages provision "certainly does not equate with classic punitive damages." In fact, in light of the objectives of the 1986 amendments, the Court concluded, it is impossible to believe that Congress intended silently to repeal municipal liability.

Shortly after its decision in Chandler, the Court vacated the Third Circuit's judgment in Dunleavy and remanded for further proceedings. See 155 L. Ed. 2d 208 (2003), 30 TAF QR 4 (Apr. 2003). The Fifth and Sixth Circuits likewise reversed and remanded in two cases where district courts had held that municipalities were not subject to qui tam liability. See United States ex rel. Campbell v. Montgomery County Hospital District, 2003 U.S. App. LEXIS 14994 (5th Cir. July 29, 2003), 32 TAF QR 1 (Oct. 2003); United States v. Hickman County, 2003 U.S. App. LEXIS 5397 (6th Cir. Mar. 18, 2003), 30 TAF QR 3 (Apr. 2003) [Note-LEXIS erroneously indicates the date of the Hickman opinion as Feb. 18 rather than Mar. 18.]. In Garibaldi, the district court granted the relator's motion pursuant to Fed. R. Civ. P. 60(b)(6) for relief from judgment, and reinstated its prior judgment against the school board that had been reversed by the Fifth Circuit. See 2003 U.S. Dist. LEXIS 16547 (E.D. La. Sept. 17, 2003), 32 TAF QR 1 (Oct. 2003).

For a more detailed discussion of the background of the Chandler case, the Supreme Court's decision, and TAF's amicus brief, see our Supreme Court Update. For an examination of Chandler's implications for FCA cases involving double jeopardy, excessive fines, vicarious liability, or survivability challenges, see Shelly R. Slade's article "Collateral Consequences of Halper, Stevens, and Chandler" in the October 2003 issue [PDF] of the TAFEF False Claims Act and Qui Tam Quarterly Review.

Alternate Remedy Provision,
Section 3730(c)(5)

In United States ex rel. Bledsoe v. Community Health Systems, Inc., 342 F.3d 634 (6th Cir. Sept. 10, 2003), the Sixth Circuit reversed a district court judgment dismissing with prejudice the relator's claims in a qui tam action. The court of appeals ruled that the relator's complaint failed to satisfy Rule 9(b), but the district court abused its discretion in dismissing with prejudice. More importantly, the Sixth Circuit held that the district court erred in denying the relator's motion to recognize a settlement between the defendant and the Government, of which the relator argued he was entitled to a share under the FCA's alternate remedy provision. The court of appeals rejected the Government's argument that the alternate remedy provision applies only in cases where the Government has intervened. Although the settlement agreement by its terms purported to exclude the relator's claims, the court held that (assuming he could amend the complaint to satisfy Rule 9(b)) the relator was entitled to an evidentiary hearing at which he could present evidence supporting his assertion that the claims in his complaint and in the settlement agreement overlapped.

Challenge Based on Eighth Amendment Excessive Fines Clause

In United States v. Mackby, 339 F.3d 1013 (9th Cir. Aug. 12, 2003), the Ninth Circuit issued a significant opinion regarding the application of the Excessive Fines Clause of the Eighth Amendment in FCA cases. In 1998, the Government brought an FCA action against Peter Mackby, alleging that he instructed his physical therapy clinic's billing service to submit false claims by substituting the physician identification number of his physician father for that of the treating physician on Medicare claim forms. Following a bench trial, the district court entered a judgment of $729,454.92 for the Government, based on a $5,000 penalty for each of 111 claims submitted and treble damages in the amount of $174,454.92. Mackby appealed, challenging both his liability and the money judgment pursuant to the Excessive Fines Clause of the Eighth Amendment to the Constitution. The court of appeals affirmed the district court's finding of liability, but ruled that the award of damages and civil penalties was subject to review under the Excessive Fines Clause, and remanded to the district court to determine whether the judgment was grossly disproportionate to the gravity of the offense. See 261 F.3d 821 (9th Cir. 2001), 24 TAF QR 26 (Oct. 2001). On remand, the district court ruled that judgment was not constitutionally excessive, noting that it was far less than the maximum recovery of nearly $86 million that could have been sought, and that a sizable deterrent was appropriate, especially since the defendant had refused to accept responsibility for his wrongdoing. See 221 F. Supp. 1106 (N.D. Cal. 2002), 28 TAF QR 32 (Oct. 2002). Mackby appealed. In its August 12, 2003 decision affirming the district court's ruling that the judgment was not constitutionally excessive, the Ninth Circuit, like the district court, stressed that the judgment actually imposed was far less than the potential civil and criminal penalties that could have been imposed. The court also observed that at least some part of the judgment against Mackby was purely remedial. For a detailed discussion of the applicability of the Excessive Fines Clause to FCA cases, see Suzanne E. Durrell's article "The Excessive Fines Clause of the Eighth Amendment and the Civil False Claims Act: To United States v. Bajakajian and Beyond" in the July 2002 issue [PDF] of the TAFEF False Claims Act and Qui Tam Quarterly Review.