Cook County v. United States ex rel. Chandler, 123 S. Ct. 1239 (2003)

Hughes Aircraft Company v. U.S. ex rel. William Schumer

The following is a summary of the Supreme Court's opinion in Chandler. The transcript of the oral argument is available on the Supreme Court website at http://www.supremecourtus.gov/oral_arguments/argument_transcripts/01-1572.pdf.
The full text of the opinion is available at http://www.supremecourtus.gov/opinions/02pdf/01-1572.pdf.

Background of the Case

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 and clarifying that FCA treble damages have compensatory as well as punitive traits and cannot be equated with classic punitive damages. Dr. Janet Chandler brought this qui tam action in 1997 against the Hektoen Institute for Medical Research (Hektoen), Cook County, and Cook County Hospital (CCH). CCH had obtained a grant from the National Institute of Drug Abuse to study the treatment of drug-dependent pregnant women. The grant was later transferred to Hektoen, which is a CCH affiliate. The terms of the grant required the grantee to comply with federal regulations for research on human subjects. Chandler's lawsuit alleged that the defendants forged data pertaining to nonexistent "ghost" research subjects and submitted false progress reports to the Government. She also alleged that they failed to comply with the human subject research regulations, failed to obtain informed consent or thorough medical histories from participants, and failed to keep accurate records or provide proper care. Finally, she alleged that CCH unlawfully retaliated against her by firing her for speaking out about these abuses.

Cook County moved to dismiss, arguing that it is not a "person" subject to liability under the Act. The district court initially denied the county's motion, ruling that the term "person" in the Act's liability provision includes municipalities. Furthermore, the court ruled that the Act's treble damages provision is not punitive, so the traditional immunity of municipalities from punitive damages was not implicated. See United States ex rel. Chandler v. Hektoen Institute for Medical Research, 35 F. Supp. 2d 1078 (N.D. Ill. 1999), 16 TAF QR 3 (Apr. 1999). Subsequently, 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, per Justice Scalia, ruled that states are not "persons" for purposes of FCA qui tam suits, and stated that the Act's treble damages provision is "essentially punitive in nature." In light of Stevens, Cook County moved for reconsideration of the district court's decision.

On reconsideration, the district court found nothing in Stevens to alter its conclusion that the county is a "person" for purposes of FCA liability. See United States ex rel. Chandler v. Hektoen Institute for Medical Research, 118 F. Supp. 2d 902 (N.D. Ill. 2000), 21 TAF QR 2 (Jan. 2001). However, in view of Stevens, the court abandoned the position that FCA damages are not punitive. Holding that the county was immune from the imposition of punitive damages, the court dismissed the case against it. On appeal, the Seventh Circuit reversed and remanded, ordering the district court to reinstate Cook County as a defendant. See United States ex rel. Chandler v. Cook County, 277 F.3d 969 (7th Cir. 2002), 26 TAF QR 1 (Apr. 2002). The court of appeals ruled that municipalities have been "persons" subject to FCA liability since the Act was first adopted in 1863, and that nothing in the 1986 amendments exempted municipalities from liability.

The Seventh Circuit's ruling on this point created a conflict with the Fifth Circuit's decision in 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). The Garibaldi court ruled that municipalities are not "persons" subject to qui tam liability. A week after the Seventh Circuit's ruling in Chandler, the Third Circuit issued a decision that followed the approach of Garibaldi and made no mention of Chandler. See United States ex rel. Dunleavy v. County of Delaware, 279 F.3d 219 (3d Cir. 2002), 26 TAF QR 4 (Apr. 2002). To resolve this split among the courts of appeals, the Supreme Court granted certiorari. See 536 U.S. 956 (2002), 27 TAF QR 1 (July 2002).

The Court's Decision

In an opinion written by Justice Souter, the Supreme Court unanimously affirmed the judgment of the Seventh Circuit. The Court noted that it had recognized as early as 1826, the Court had expressly recognized the presumption that the statutory term "person" extends to cover corporations, including public corporations such as municipalities. The Court noted that both case law and legal commentary in the nineteenth century reflected the widespread understanding that municipal corporations, like private corporations, are included in the term "person." Indeed, municipalities were the archetypal corporations of the eighteenth century, and it was not until the nineteenth century that private corporations became widespread.

The Court rejected the defendant's argument that municipal liability was inconsistent with the criminal penalties and the historical context of the 1863 Act. Although the Act's criminal penalty of imprisonment clearly could not apply to municipalities, that was no reason to exempt them from remedies that sensibly apply. Moreover, although it is true that local governments were not recipients of massive amounts of federal funding in 1863, Congress drafted the FCA expansively in order to reach all types of fraud that might result in financial loss to the Government. Thus, neither the Act'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 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.

First of all, the Court observed, some liability beyond the amount of the fraud is unquestionably necessary to compensate the Government completely for ancillary costs, such as the costs of detection and investigation, as well as the delays and inconveniences occasioned by fraudulent claims. Moreover, the qui tam feature, which diverts as much as thirty percent of the recovery to a private relator, is the "most obvious indication that the treble damages ceiling has a remedial place under this statute." Once the relator's share is subtracted, the Government's recovery is roughly double damages, which the Court had already recognized as remedial in prior decisions. Moreover, the FCA has no separate provision for prejudgment interest, which is usually thought essential to compensation. Finally, the Act does not expressly provide for consequential damages, which are typically available in actions for fraud at common law. In fact, the Court observed, the Act's legislative history suggests that Congress adopted the treble damages provision as a substitute for consequential damages.

Thus, the Court concluded, the FCA's treble damages provision "certainly does not equate with classic punitive damages." Classic punitive damages leave the jury with open-ended discretion, raising concerns that municipal defendants, because of their taxing power, may be unfairly targeted by unduly generous juries, resulting in the imposition of liability on blameless or unknowing taxpayers. These concerns are much less acute under the FCA. If the jury finds liability in an FCA case, it is instructed to return a verdict for actual damages: the court then determines any multiplier, and sets any separate penalty. Moreover, the FCA imposes liability only on local taxpayers who have already enjoyed the indirect benefit of the fraud, to the extent that the ill-gotten federal money has already been passed along in the form of lower taxes or expanded services. The courts, by exercising their discretion, and the Government, by deploying its power to intervene and dismiss or settle, can determine whether the local taxpayer should make up for an undeserved benefit, or the federal taxpayer should be permanently out of pocket. Thus, the presumption against "punitive" damages has only limited vigor in this context.

At the same time, working against the weakened presumption regarding "punitive" damages was a different presumption, this one at full strength: the cardinal rule that repeals by implication are disfavored. As the Court observed: "Inferring repeal from legislative silence is hazardous at best, and error seems overwhelmingly likely in the notion that the 1986 amendments wordlessly redefined 'person' to exclude municipalities." 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. The purpose of the amendments was to strengthen the FCA: Thus Congress abolished the government knowledge defense, increased the measure of recovery, and enhanced the incentives for relators to bring suit. There is also evidence in the legislative history that Congress affirmatively endorsed municipal liability. Thus, the Court ruled, "[i]t is simply not plausible that Congress intended to repeal municipal liability sub silentio by the very Act it passed to strengthen the Government's hand in fighting false claims." Because the term "person" in the FCA included local governments in 1863, and nothing in the 1986 amendments redefined the term, the Court affirmed the judgment of the Seventh Circuit.

TAF's Amicus Curiae Brief

Taxpayers Against Fraud, The False Claims Act Legal Center, filed a friend-of-the-court brief in support of the relator Janet Chandler. TAF's brief was the only one to challenge the statement in Stevens that FCA treble damages are "essentially punitive in nature." The central holding of Stevens is that states are not "persons" under the FCA because of the "long-standing interpretive presumption that the word "person" does not include the sovereign." In TAF's view, the Stevens Court's statement about punitive damages, which seems to have been added almost as an afterthought, was not necessary to support this holding.

TAF observed that the Supreme Court has repeatedly held that the pre-1986 double damages regime was remedial rather than punitive. Moreover, the legislative history of the 1986 amendments clearly indicates that FCA as amended would be remedial, not punitive. This history suggests that the increase from double to treble damages was effected in order to ensure that the Government would be fully compensated for its losses, both direct and consequential.

As noted above, the holding in Stevens was based on the interpretive presumption that states, which are sovereigns, are not "persons" subject to suit. However, TAF pointed out that no such presumption applies to municipal corporations because they are not sovereign. In fact, as the Stevens court noted, the "presumption with regard to corporations is just the opposite" of the presumption with regard to states: "they are presumptively covered by the term person." Therefore, TAF argued that local governments and governmental agencies are persons subject to FCA qui tam liability. Copies of the brief are available from TAF upon request.

In its opinion in Chandler, the Supreme Court accepted many of TAF's arguments. The Court ruled, just as TAF had argued, that treble damages are in many cases purely compensatory, because they are needed to provide an adequate incentive for the relator, as well as to compensate the Government for the costs of investigation and prosecution, prejudgment interest, and consequential damages. The Supreme Court's decision in Chandler will have an enormous impact on the Federal Government's fraud-fighting efforts, because billions of federal dollars flow to municipalities each year, creating enormous opportunity-and enormous temptation-for fraud. The Court's ruling represents a significant victory in the effort to combat fraud against the Government.

The following is a brief summary of the Supreme Court's opinion in Stevens. To see the opinion, log on to http://supct.law.cornell.edu/supct/pdf/98-1828P.ZO. The following article discusses the future of qui tam suits against public entities after Stevens: stevens.pdf.

The following letter brief addresses how the holding in Stevens impacts the question of whether the qui tam provisions violate the "take Care" clause of Article II of the Constitution: riley.pdf . The brief was filed in the United States Court of Appeals for the 5th Circuit on August 31, 2000 in the case of U.S. ex rel. Joyce Riley v. St. Luke's Episcopal Hospital et al.

Summary of Court's holding
Reversing the judgment of the Second Circuit, the Supreme Court ruled that states and state entities are not "persons" subject to qui tam liability under § 3729 of the Federal False Claims Act, 31 U.S.C. § 3729 et seq.

Section 3729(a) subjects to liability:

[a]ny person who," inter alia, "knowingly presents or causes to be presented, to an officer or employee of the United States Government ... a false or fraudulent claim for payment or approval." [emphasis added]

In reaching its holding, the Court applied its longstanding presumption that the term "person" does not include the sovereign absent an affirmative contrary showing by Congress. According to the Court, neither the original 1863 False Claims Act nor subsequent amendments to the statute manifested such congressional intent. In reaching its holding via the statutory construction issue, the Court never reached the issue of whether an action in federal court by a qui tam relator against a state would violate the Eleventh Amendment.

In addition to its ruling on the meaning of "person" as it is used in § 3729 of the False Claims Act, the Court also ruled that private individuals have standing under Article III of the Constitution to maintain qui tam suits where the Government has declined to intervene. The Court held that relators have Article III standing as partial assignees of the Government's damages claim to remedy the injury suffered by the United States. Justice Scalia wrote the opinion.

TAF as amicus curiae
Taxpayers Against Fraud, The False Claims Act Legal Center, submitted briefs as amicus curiae supporting Jonathan Stevens, the respondent, on both the state liability and Article III issues. Copies of the briefs are available from TAF upon request.

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Hughes Aircraft Company v. U.S. ex rel. William Schumer U.S.
Supreme Court No. 95-1340
Oral Argument - February 25, 1997
Decided - June 16, 1997

(View the Argument Transcript Online.) The Supreme Court decided only the narrow threshold issue of retroactivity and left all other issues unaddressed. Reversing the 9th Circuit, the Court unanimously held that the 1986 FCA amendment permitting qui tam suits based on information in the Government's possession does not apply retroactively to qui tam suits regarding pre-1986 conduct. Therefore, the case at hand should have been dismissed, as required by the pre-1986 version of the Act. Because of this retroactivity holding, the Court expressed no opinion on the "public disclosure" and "harm to the public fisc" issues that also were presented. The Court vacated the judgment below and remanded for further proceedings consistent with its opinion. Justice Thomas wrote the decision.

Hughes Aircraft Company and seven amici filed briefs supporting reversal of the 9th Circuit's decision in U.S. ex rel. William Schumer v. Hughes Aircraft Company, 63 F.3d 1512 (9th Cir. 1995). The relator William Schumer and four amici, including Taxpayers Against Fraud, The False Claims Act Legal Center, filed briefs urging affirmance of the circuit court decision. The Solicitor General of the U.S. Department of Justice also filed an amicus brief supporting affirmance.

Amici supporting respondent

• National Employment Lawyers Association (NELA)
• Taxpayers Against Fraud, The False Claims Act Legal Center (TAF)
• National Health Law Program, Inc. (NHeLP)
• Project on Government Oversight (POGO)

A short summary of some of the arguments in TAF's brief appears below. Copies of the complete brief may be obtained by contacting TAF.

Additional summaries of arguments made in briefs filed by the Petitioner, Respondent, Solicitor General, and amici on both sides may be found in TAF's January 1997 issue of the False Claims Act and Qui Tam Quarterly Review.

Hughes Aircraft v. U.S. ex rel William Schumer: Summary of the Brief of Taxpayers Against Fraud, The False Claims Act Legal Center

"Public disclosure" issue
According to TAF's brief, the legislative history of the 1986 FCA Amendments shows that the qui tam provisions of the Act were amended in response to pervasive fraud against the Government and several weaknesses in the Government's fraud-fighting efforts. TAF argues that Congress envisioned that qui tam relators could substantially contribute to anti-fraud efforts by exposing and bringing forward evidence of fraud, activating and advancing cases to prosecution, and providing financial and human resources. In short, the brief concludes, Congress' primary aim in amending the Act was to bolster anti-fraud efforts by encouraging more private enforcement suits.

The brief analyzes the plain meaning of "public disclosure" under [back to top] 3730(e)(4) in the context of the statute as a whole and its purposes. It argues that a "public disclosure" requires an affirmative act of exposure to the people as a whole. The determination of whether a "public disclosure" has occurred, according to TAF, involves an objective analysis of both the means of disclosure and the audience that has received the disclosure. The first part of the inquiry examines whether the means by which a disclosure was made rendered it likely that it would reach the people as a whole. The second part of the inquiry examines whether the actual audience to which the disclosure was made constitutes the general public. Since the audits in question were never disseminated in a manner designed to reach the people as a whole, the brief concludes that the 9th Circuit's holding should be affirmed.

Injury to the public fisc issue
TAF's brief also argues that the text of the statute, legislative history, and prior Supreme Court decisions make clear that proof of damage to the public fisc is not an element of an FCA violation. Further, the brief contends that submission of claims for payment while knowingly violating an explicit cost accounting disclosure requirement can form the basis for FCA liability.

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