IN THE SUPREME COURT OF THE STATE OF CALIFORNIA
___________________________________________
JOEY WELLS, by and through his guardian
ad litem MICHAEL WELLS, et al.
S123951
Plaintiffs and Appellants,
v.
ONE2ONE LEARNING FOUNDATION, et al.,
Defendants and Respondents,
and
STATE OF CALIFORNIA,
Real Party in Interest and Respondent
___________________________________________
Third Appellate District, No. C042504
Sierra County Superior Court No. S46CV5844
The Honorable William W. Pangman, Judge
APPLICATION FOR PERMISSION TO FILE BRIEF
AMICUS CURIAE AND BRIEF OF AMICUS CURIAE
TAXPAYERS AGAINST FRAUD
IN SUPPORT OF PLAINTIFFS/ APPELLANTS
James
Moorman Paul D.
Scott
Amy
Wilken State Bar #
145975
Joseph
E.B. White Law Offices of Paul D. Scott
Taxpayers
Against Fraud 201 Filbert Street, Suite
401
1220
19th Street, Ste 501 San Francisco, CA 94133
Washington,
DC 20036 (415)
981-1212
Attorneys
for Amicus Curiae Taxpayers Against Fraud
IN THE SUPREME COURT OF THE STATE OF CALIFORNIA
___________________________________________
JOEY WELLS, by and through his guardian
ad litem MICHAEL WELLS, et al.
S123951
Plaintiffs and Appellants,
v.
ONE2ONE LEARNING FOUNDATION, et al.,
Defendants and Respondents,
and
STATE OF CALIFORNIA,
Real Party in Interest and Respondent
___________________________________________
Third Appellate District, No. C042504
Sierra County Superior Court No. S46CV5844
The Honorable William W. Pangman, Judge
APPLICATION FOR PERMISSION
TO FILE BRIEF AMICUS CURIAE
Taxpayers Against Fraud Education Fund (TAF), a
nonprofit public interest organization located in Washington, D.C., submits
this application to file the enclosed brief as amicus curiae. TAF is dedicated to educating the legal
community, the public, legislators, and others about the Federal False Claims
Act and its qui tam provisions and the state false claims acts,
including the California False Claims Act (CFCA), with the goal of preserving
effective anti-fraud legislation at the federal and state level. The organization has published educational
materials about the state and federal statutes and has participated in
litigation as a qui tam relator and as an amicus curiae. Its sister organization, the nonprofit False
Claims Act Legal Center, has lobbied to prevent legislative amendments to the
federal and state False Claims Acts that would reduce their effectiveness as
fraud-fighting tools.
TAF has a profound interest in ensuring that the CFCA
is appropriately interpreted and utilized so that the CFCA can be used as a
tool for remedying fraud. The issue in this case is the applicability of the
CFCA to local government entities (here, local school districts), and
corporations which affiliate with local government entities (here, charter
schools), accused of defrauding the state treasury.
Immunizing local public entities and charter schools
from liability under the CFCA would have far-reaching consequences. Local public entities receive billions of
dollars in state funding for a multitude of different state programs and are no
less able than private corporations or individuals to engage in fraudulent
schemes to exploit the exercise of the state spending power and rob the state
treasury of needed funds. So too, local
public entities routinely contract and affiliate with individuals and
corporations in a similar position to reap unlawful profits from state monies
allocated to serve public needs for services such as education, hospital and
emergency health services, and utilities.
Granting local public entities immunity from suit under the CFCA would
impair enforcement efforts by the Attorney General, the chief state officer charged
with enforcement of the CFCA, to remedy local corruption and would remove the
deterrent effect of potential liability under the CFCA from those who spend the
billions of dollars in state funding allocated to the local government level
each year.
TAF has had a longstanding interest in the issue of
liability of local governmental entities under the Federal False Claims
Act. TAF previously has filed amicus curiae briefs on that issue in Cook
County v. United States ex rel. Chandler (2002) 538 U.S. 119 and United
States ex rel. Dunleavy v. County of Delaware (3d Cir. 2002) 279 F.3d 219.
As such, TAF can offer a unique perspective on the issue facing this
Court. TAF has extensive and unique
experience working with both the federal statute and all thirteen of the state
statutes, including the California False Claims Act, modeled on the federal
statute. Moreover, TAF has ample
familiarity with the range of cases in which frauds have been perpetrated by
local public entities, including school districts, water districts,
transportation authorities, county hospitals and the corporations that
affiliate with those local public entities, such as the charter schools in this
case. As such, TAF is able to provide a
perspective on the questions before this Court from the citizens and taxpayers
who provided the impetus for enactment of the CFCA and similar statutes.
For the foregoing reasons, Taxpayers Against Fraud
should be granted permission to file the enclosed brief as amicus curiae
Dated: March 9, 2005. Respectfully submitted,
____________________
Paul D. Scott
Law Offices of Paul D. Scott
James Moorman
Amy Wilken
Joseph E.B. White
Taxpayers Against Fraud
Attorneys for Amicus Curiae
Taxpayers Against Fraud
TABLE
OF CONTENTS
PAGE
INTEREST
OF AMICUS CURIAE ..... 1
INTRODUCTION............... 2
ARGUMENT..................... 4
I. The Plain Language of the CFCA
Establishes
That
School Districts and Charter Schools
Are
Proper Defendants... 4
II. The United States Supreme Court Has Held
That Local Public Entities Are Persons Under
the Federal False Claims Act............. 11
III. Public Policy Considerations Counsel In Favor
of Recognizing Local Public Entities as Proper
Defendants Under the CFCA........ 13
22.
CONCLUSION.... 28
TABLE OF
AUTHORITIES
CASES PAGE
City
of Hawthorne v. H&C Disposal Co.,
109 Cal.App.4th 1668 (2003) 4
City
of Newport v. Facts Concerts,
453 U.S. 247 (1981)......... 8
Clemes
v. Del Norte County Unified School Dist.,
1996 WL 331096 (N.D. Ca. 1996)........ 24
Cook
County v. United States ex rel. Chandler,
538 U.S. 119 (2002) 2,
8, 11-13, 15
First
Interstate Bank of California v. State of California,
197 Cal.App.3d 627 (1987) 25
Gonzales
v. State of California,
29 Cal.App.3d 585 (1972) 25
Hamilton
v. County of San Diego,
108 Cal. 273 (1895)......... 6
Hudson
v. United States,
522 U.S. 93 (1997)...... 17
Kirschmann
v. Lake Elsinore Unified School District,
83 Cal.App.4th 1098 (2000)...... 24-25, 27
Levine
v. Weis,
68 Cal.App.4th 758 (1998) 7, 23
Levine
v. Weis,
90 Cal.App.4th 201 (2001) 5, 16, 17, 23
Marcus
v. Hess,
317 U.S. 537 (1943)...... 22
TABLE OF AUTHORITIES, cont.
CASES PAGE
Monell
v. New York City Dep’t of Soc. Servs.,
436 U.S. 658 (1978)......... 8
Owen
v. City of Independence,
445 U.S. 622 (1980)......... 8
Pacificare
Health Systems, Inc. v. Book,
538 U.S. 401 (2003)...... 15
Pennzoil
v. Texaco, Inc.,
481 U.S. 1 (1987).................. 22
People
ex rel. Stone v. Jefferds,
126 Cal. 296 (1899)...... 24
People
ex rel. Younger v. Superior Court,
16 Cal.3d 30 (1976) 16,
17
Regents
of the University of California v. Superior Court,
17 Cal.3d 533 (1976)...... 24
Rojas
v. Superior Court,
33 Cal.App.4th 407 (2004). 9
Rothschild
v. Tyco Intnl.,
83 Cal.App.4th 488 (2000). 4
Southern
Cal. Rapid Transit Dist. v. Superior Court,
30 Cal.App.4th 713 (1994)............ 23, 27
State
of California ex rel. City and County of San Francisco
v.
Old Republic Title Co.,
S.F. Superior Court Case No. 993507 8
Union
Trust Co v. State of California,
154 Cal. 716 (1908)...... 25
TABLE OF
AUTHORITIES, cont.
CASES PAGE
United
States v. Beatrice Foods Co.,
330 F. Supp. 577 (D. Utah 1971) 19
United
States v. Blue Cross and Blue Shield of Alabama, Inc.,
156 F.3d 1098 (11th Cir. 1998)........ 19
United
States v. Bornstein,
423 U.S. 303 (1976)...... 16
United
States v. Carpentieri,
23 F. Supp. 2d 433 (S.D.N.Y. 1998)........ 19
United
States v. Daniel Mann, Johnson & Mendenhall,
355 F.3d 1140 (9th Cir. 2004) 26
United
States v. Foster Wheeler Corp.,
447 F.2d 100 (2d Cir. 1971) 19
United
States v. General Dynamics Corp.,
19 F.3d 770 (2d Cir. 1994)........ 19
United
States v. Halper,
490 U.S. 435 (1989)...... 16
United
States ex rel. Ericson v. City College of San Francisco,
1999 WL 221057 (N.D. Ca. 1999)........ 24
United
States ex rel. Fallon v. Accudyne Corp.,
880 F. Supp. 636 (W.D. Wisc. 1995)........ 19
United
States ex rel. Fine v. Chevron, U.S.A., Inc.,
39 F.3d 957 (9th Cir. 1994)........ 24
United
States ex rel. Giles v. Sardie,
191 F. Supp. 2d 1117 (C.D. Ca. 2000)........ 23
TABLE OF
AUTHORITIES, cont.
CASES PAGE
United
States ex rel. Hagood v. Sonoma County Water Agency,
929 F.2d 1416 (9th Cir. 1991) 24
United
States ex rel. Hopper v. Anton,
91 F.3d 1261 (9th Cir. 1996)........ 24
United
States ex rel. Rosales v. San Francisco Housing Authority,
173 F. Supp. 2d 987 (N.D. Ca. 2001)........ 23
United
States ex rel. Sequoia Orange Co. v. Oxnard Lemon Co.,
1992 WL 795477 (E.D. Ca. 1992)........ 19
United
States ex rel. Sutton v. Double Day Office Services, Inc.,
121 F.3d 531 (9th Cir. 1997) 19
United
States ex rel. Totten v. Bombardier Corp.,
286 F.3d 542 (D.C. Cir. 2002)........ 19
Vermont
Agency v. United States ex rel. Stevens,
529 U.S. 765 (2000)......... 7
Wells
v. One2One Learning Foundation,
10 Cal. Rptr. 3d 456 (2004)......... 7
STATUTES:
California False Claims Act Gov’t Code §12650 et
seq.... 5, 22
Gov’t Code
§12651(a)(1) - (8)...... 4,
22
§12652(c)(3) 4
§12652(c)(8)(D)(iii)......... 5
§12652(D)(1) 9
§12652(e)(2)(a)................. 20
§12652(f)..... 5
§12652(g).. 17
§12653(g)(3).................. 17
TABLE OF
AUTHORITIES, cont.
STATUTES PAGE
Gov’t Code
§12655(a) 18
§12655(c).... 6
OTHER AUTHORITIES:
Education Code 47604(c).. 28
IN THE SUPREME COURT OF THE STATE OF CALIFORNIA
___________________________________________
JOEY WELLS, by and through his guardian
ad litem MICHAEL WELLS, et al.
S123951
Plaintiffs and Appellants,
v.
ONE2ONE LEARNING FOUNDATION, et al.,
Defendants and Respondents,
and
STATE OF CALIFORNIA,
Real Party in Interest and Respondent
__________________________________________
Third Appellate District, No. C042504
Sierra County Superior Court No. S46CV5844
The Honorable William W. Pangman, Judge
BRIEF OF AMICUS CURIAE TAXPAYERS AGAINST FRAUD
IN SUPPORT OF PLAINTIFFS/ APPELLANTS
James Moorman Paul
D. Scott
Amy Wilken State
Bar # 145975
Joseph E.B. White Law Offices of Paul D. Scott
Taxpayers Against Fraud 201 Filbert Street, Suite 401
1220 19th Street, Ste 501 San
Francisco, CA 94133
Washington, DC 20036 (415) 981-1212
Attorneys for Amicus Curiae Taxpayers Against Fraud
INTEREST OF AMICUS CURIAE
Taxpayers Against Fraud Education Fund (TAF) is a
nonprofit public interest organization located in Washington, D.C. dedicated to
educating the legal community, the public, legislators, and others about the
Federal False Claims Act and its qui tam provisions and the state false
claims acts, with the goal of preserving effective anti-fraud legislation at
the federal and state level. The organization has published educational
materials about the state and federal statutes and has participated in
litigation as a qui tam relator and as an amicus curiae. Its sister organization, the nonprofit False
Claims Act Legal Center, has lobbied to prevent legislative amendments to the
federal False Claims Act which would reduce its effectiveness as a
fraud-fighting tool and has presented testimony on state false claims
acts. TAF’s interest in this case is to
support vigorous enforcement of the California False Claims Act (CFCA) by
contributing its understanding of the proper interpretation and application of
the CFCA. In addition, TAF is able to
provide insight into cases involving the federal Act where courts have rejected
similar arguments to those made by defendants in this case. TAF is submitting this brief together with a
Motion for Leave to File in compliance with California Rules of Court 29.1(f).
INTRODUCTION
This case presents the critically important question
of whether local public entities are “persons” within the meaning of the CFCA
and may be subject to liability for defrauding the state. Cities, counties and
local government agencies, including local school districts, receive billions
of dollars in state funding each year.
Well-established principles of statutory construction and sound public
policy considerations counsel affirming the court of appeals’ holding that the
school districts and charter school defendants in this case are proper
defendants under the CFCA.
As the United States Supreme Court recognized in
Cook County v. United States ex rel. Chandler (2002) 538 U.S. 119, it has
been well-established for over one hundred and fifty years that municipal
corporations are “persons” and liable for their wrongs. The definition of “person”under the CFCA
readily encompasses local public entities including school districts and the
private corporations, here the charter schools, that execute local
governmental, or quasi-governmental, functions. A contrary holding would immunize a whole set of potential
wrongdoers – from school districts to airport authorities and water districts –
from liability under the CFCA even if egregious frauds are committed
For these reasons, defendants’ argument that local
school districts are not local public entities but, instead, “arms of the
state” is without merit. As discussed
below, even though local school districts receive state funding and may be
treated as state agencies for some purposes, these attributes do not make
school districts (essentially local educational agencies) “arms of the state”
and immune from suit under the CFCA. In
any event, even if this Court determines that it is appropriate to remand this
case to determine whether the state would be liable for indemnifying any
judgment in this action against the school district defendants, it should
affirm the court of appeals’ holding that charter schools, privately-held corporations, are “persons”
within the meaning of the CFCA.
Moreover, in the event of a remand on the status of local school
districts, this Court should exercise its supervisory authority and make clear
that, in general, local public entities are considered “persons” within the
meaning of the CFCA.
ARGUMENT
I. The Plain Language of the CFCA Establishes That School
Districts and Charter Schools Are Proper Defendants.
In 1987, the California legislature enacted the False
Claims Act, patterned on a similar federal statutory scheme set forth at 31
U.S.C. § 3729 et seq,. to supplement governmental efforts to identify
and prosecute fraudulent claims made against state governmental entities by
authorizing private parties (referred to as qui tam plaintiffs or
relators) to bring suit on behalf of the government. See City of Hawthorne v. H&C Disposal Co.
(2003) 109 Cal. App. 4th 1668, 1677-78; see also Rothschild v.
Tyco Intnl. (2000) 83 Cal. App. 4th 488, 495 (citing
legislative history materials). The
CFCA permits the recovery of civil penalties and treble damages from any
“person” who “knowingly presents or causes to be presented [to the state] ... a
false claim for payment or approval.”
Cal. Govt. Code §
12651(a)(1).
Under the CFCA, a qui tam relator files a
complaint under seal and serves it, along with a written disclosure statement
of the material evidence and information in support of the claim, on the
Attorney General. See Cal. Govt.
Code § 12652(c)(3). If the Attorney
General elects to proceed with the action, the Attorney General has the primary
responsibility for prosecuting the action.
Id. § 12652(c)(8)(D)(iii) & (f). So as to give the widest possible coverage and effect to its
prohibitions and remedies, the CFCA must be liberally construed. Id. §12655(c); see also LeVine
v. Weis (2001) 90 Cal. App. 4th 201, 210 (Levine II).
1. The
question presented in this case is whether three school districts, and three
different California charter schools affiliated with those school districts,
are “persons” within the meaning of the CFCA.
The core allegation in this case is that defendant charter schools and
school districts defrauded the State of California by collecting more than $20
million annually in state educational funds to run three charter schools
without providing instruction and educational materials to enrolled students
and while overcharging for services.
Thus, the fraudulent transaction alleged in the complaint involves a
diversion of money allocated by the state for the education of children by
local school districts to charter schools that did not provide educational
services, a classic “false claim” within the meaning of the Act.
Critical to the disposition of this case is the
definition of person under the CFCA.
Under Government Code section 12650(e),“person” has a very broad
definition and “includes any natural person, corporation, firm,
association, organization, partnership, business or trust.” (emphasis added).
As the court of appeals correctly held, local school
districts and charter schools easily fall within the definition of “person”
under the CFCA. The definition of
“person” in the CFCA is an inclusive one.
Local school districts fall within the definition of “person” as either
an “association,” “organization,” or
“corporation. Under California law, a
school district is a corporation organized for educational purposes. See Brief of California Attorney
General at 6 (citing Hamilton v. County of San Diego (1895) 108 Cal.
273, 280). Charter schools are operated
by private, non-profit corporations and, therefore, fall within the definition
of “person” as corporations. .
The CFCA directs that its terms are to be liberally
construed so as to effectuate the remedial purpose of the statute. Govt.
Code§12655(c). Given the context and
purpose of the CFCA, the court of appeals correctly held that there is no
reason to conclude that the California legislature intended that the protection
afforded to the public treasury by the CFCA “be denied merely because the
entity raiding the treasury is a government entity.” Wells v. One2One Learning Foundation (2004) 10 Cal. Rptr.
3d 456, 471-72 (citations omitted); see also Levine v. Weis (1998) 68
Cal. App.4th 758 (LeVine I). Moreover, nothing in the legislative history
of the CFCA demonstrates that the California legislature intended to immunize local
public entities from liability under the CFCA.[1]
Construing the definition of “person” in the CFCA to
encompass local public entities is consistent with well-established common law
principles that local public entities are “persons” subject to all forms of
liability, and are not entitled to the privileges or immunities akin to a
sovereign state. See Vermont
Agency v. United States ex rel. Stevens (2000) 529 U.S. 765 (“Any natural
person, partnership, corporation, association or other legal entity is
presumptively covered by the term “person”).
For this reason, the United States Supreme Court has held multiple
times, in various contexts, that the usual meaning of the word “person” extends
to local public entities including cities and counties. See Cook County, Illinois v.
United States ex rel. Chandler (2003) 538 U.S.119 (federal False Claims
Act); Owen v. City of Independence (1980)
445 U.S. 622, 639 & n.19 (“local governmental units are subject to suit as
“persons”); City of Newport v. Fact Concerts (1981) 453 U.S. 247, 259
(“a municipality, like a private corporation, was to be treated as a natural
person subject to suit for a wide range of tortious activity”); Monell v.
New York City Dep’t of Soc. Servs. (1978) 436 U.S. 658. Numerous California appellate decisions have
similarly recognized that statutes referring to “persons” apply to school
districts and municipal entities. See
Brief of California Attorney General at 6 (citing cases).
2. Several
other references in the CFCA support the conclusions that defendants are
“persons.” First, the definition of
“person” also defines those who may bring a civil action for the violation of
the CFCA as a “qui tam plaintiff.” Such
actions have been brought by cities and counties serving both as qui tam plaintiff,
and as the defrauded party. See,
e.g. State of California ex rel.City and County of San Francisco v. Old
Republic Title Co. San Francisco, Super. Ct., SF City and County, No.
993507 (Judgment entered Nov. 21, 2001).
If the definition of “person” was limited to exclude local public
entities such actions would be barred, a result inimical to the purpose of the
CFCA to promote deterrence and prosecution of frauds that deplete the public
treasury.
Second, the
CFCA contains express limitations on who may not be sued as “persons” and
excludes members of the State Senate or Assembly, members of the state
judiciary, elected officers in the executive branch of the state, and members
of the governing body of any political subdivision. Govt. Code § 12652(D)(1).
It is a well-established principle of statutory construction that express
exclusions from a general definition are to be treated as exclusive. See Rojas v. Superior Court,
(2004) 33 Cal. App. 4th 407, 424 (expressio unius est exclusio
alterius maxim). Therefore, because
local public entities are not expressly excluded from the definition of
“person” under the CFCA, it is reasonable to assume that local public entities
are “persons” unlike certain identified public officials.
Finally, the legislative history of the 1987
amendments to the CFCA, if anything, confirms that the Legislature intended to
reach local public entities as potential defendants. In 1987, the legislature redefined “person”to omit “company,
district, county, city and county, the state, and any of the agencies and
political subdivisions of these entities” from the previous version of the
law. As the California Attorney
General’s Brief at 10-11 explains, the amendments to the definition of person
make sense if viewed in the context of the substantial revisions to the
CFCA. Under the 1987 amendments,
political subdivisions were afforded a new cause of action for prosecuting
allegations of false claims or fraud under the Act. Since the definition of “person” reaches both those who can file
suit and those who are proper defendants, it is not at all surprising that the
legislature enacted a simpler, inclusive definition of “person.” So too, it is reasonable to assume that the
Legislature may have concluded that the express inclusion of local public entities
in the definition of “person” was unnecessary as it was redundant of the new
role for political subdivisions expressly set forth in the amendments to the
statute. Nothing in the legislative
history of the Act supports defendants’ argument that the Legislature intended
to take the more dramatic step of granting blanket immunity to local public
agencies which receive billions of dollars in state funding each year.
In any event, whether or not one reviews the
legislative history of the Act, the plain meaning of “person” in the text of
the CFCA easily reaches local public entities.
Nothing in the text of the CFCA or the legislative history compels the
conclusion that the Legislature intended to immunize local public entities from
prosecution for fraud under the Act.
II. The United States Supreme Court Has Held That Local Public
Entities are Persons Under the Federal False Claims Act
In Chandler, the United States Supreme Court
held that local public entities are “persons” within the meaning of the federal
False Claims Act after rejecting arguments very similar to those made by
defendants in this case. In Chandler,
a former director of a research program brought suit against Cook County
Hospital and the Hektoen Institute for Medical Research, a non-profit research
organization affiliated with the hospital.
The allegations in the case were that defendant hospital and non-profit
organization had violated the express terms of a $5 million grant from the
National Institute of Drug Abuse to study a treatment regimen for pregnant drug
addicts. Initially, the district court
denied a motion to dismiss the case holding that “person” under the federal FCA
reached state and local governments. After
the Supreme Court issued its opinion in Vermont Agency of Natural Resources v.
United States ex rel. Stevens that states may not be sued under the federal
FCA, the district court dismissed the action in Chandler holding that it
was impermissible under Stevens to impose treble damages on a county
entity because such damages would be “essentially punitive.” See Chandler, 538 U.S. at
124. The Court of Appeals reversed this
holding and the United States Supreme Court accepted review.
After an extensive review of the historical usage of
the term “person” at the time of enactment of the original FCA in 1863, the
United States Supreme Court unanimously held that local public entities, there
a county hospital, are, without doubt, “persons” within the meaning of the
federal FCA. 538 U.S. at 124-29. Noting that Congress had written
expansively, meaning “to reach all kinds of frauds, without qualification, that
might result in financial loss to the government,” id. at 129 (citations
omitted), the Court held that nothing in the text or the history of the federal
Act points to exclusion of local governmental entities. Id.
This conclusion was bolstered by the Court’s recognition that “local
governments are commonly at the receiving end of all sorts of federal funding
schemes and thus no less able than individuals or private corporations to
impose on the federal fisc and exploit the exercise of the federal spending
power.” Id.
As the California Attorney General notes in his brief
at 12-13, the CFCA is closely modeled after the federal Act. Accordingly, the analysis of text and
history performed by the United States Supreme Court to determine whether local
public entities are “persons” in Chandler is also instructive here. Local public entities and corporations like
the charter schools are “persons” under both the federal Act and the CFCA.
III. Public Policy Considerations Counsel In Favor of Recognizing
Local Public Entities as Proper Defendants Under the CFCA
The State of California disburses billions of tax
dollars to local public entities each year.
With that money, many local government agencies – school districts,
water and port authorities, hospitals – contract with individuals and
corporations that serve governmental, or quasi-governmental interests. That level of funding creates enormous
opportunity for fraud by local public entities and the companies with which they
contract or otherwise affiliate. The
CFCA is the tool the California legislature created to combat that fraud. Nothing in the text or history of the Act
suggests that the Legislature envisioned that such a large number of recipients
of state funds would be immune from suit under the CFCA.
Defendants make a series of arguments why liability
here would be too great an imposition on defendants and should not be
available. Many of these arguments were
made against liability for cities and counties under the federal Act in Chandler
and all of them were squarely rejected by the United States Supreme Court. In light of the clear legislative judgment
to reach all “persons” who submit false or fraudulent claims to the State,
defendants’ arguments against liability here are wholly without merit.
First,
defendants argue that because there is a presumption against imposing punitive
damages on local government entities, that the CFCA cannot apply to these
defendants because of the treble damages remedy in the CFCA. Specifically, defendants cite California
Government Code § 818 which prohibits imposing damages on a public entity
“primarily for the sake of example and by way of punishing the defendant.” See Opening Brief of Sierra Plumas
Joint Unified School District and Sierra Summit Academy at 34. In support of the argument that treble
damages are necessarily “punitive,” and thus prohibited by § 818, defendants
cite the United States Supreme Court’s decision in Vermont Agency of Natural
Resources v. United States ex rel. Stevens.
In Chandler, the Supreme Court rejected a
similar argument under the federal FCA and held that the treble damages
available under the federal FCA are compensatory and remedial, not
punitive. 538 U.S. at 130 (“treble
damages have a compensatory side, serving remedial purposes in addition to
punitive objectives.”) Decided subsequent to Vermont Agency, the Supreme
Court in Chandler held that treble damages are not “simply” or “solely”
punitive. The Court explained that
“[t]reble damages certainly do not equate with classic punitive damages” and
that “it is important to realize that treble damages have compensatory traits
along with the punitive.” Chandler,
supra, at 130. The Court further
explained:
The most obvious indication that the treble damages
ceiling has a remedial place under this statute is its qui tam feature
with its possibility of diverting as much as 30 percent of the Government’s
recovery to a private [qui tam plaintiff] who began the action. In qui tam cases the rough difference
between double and treble damages may well serve not to punish, but to quicken
the self-interest of some private plaintiff who can spot violations and start
litigating to compensate the Government, while benefitting himself as
well. The treble damages feature thus
leaves the remaining double damages to provide elements of the make-whole
recovery beyond mere recoupment of the fraud.
Id. at 131; see also Pacificare Health Systems,
Inc. v. Book (2003) 538 U.S. 401, 406 (noting that Chandler
recognized that “treble damages have a compensatory side”); United States v.
Bornstein (1976) 423 U.S. 303, 315 (pre-1986 amendment FCA’s double damages
provision necessary “to compensate the Government completely for the costs,
delays, and inconveniences occasioned by fraudulent claims”).
For similar reasons, the California court of appeals
in LeVine II rejected the argument that the damages remedy under the
CFCA is simply or solely punitive. The
county defendant in LeVine II claimed that the double damages provision
was punitive, relying like defendants here on section 818 and Vermont Agency. The LeVine II court concluded that
double damages are not punitive and observed that
“Damages which are punitive in nature, but not ‘simply’
or solely punitive in that they fulfill ‘legitimate and fully justified
compensatory functions,’ have been held not to be punitive damages within the
meaning of section 818 ....”
LeVine II,
90 Cal. App.4th at 209 (quoting People ex rel. Younger v. Superior Court (1976)
16 Cal.3d 30, 35). The treble damages
remedy fulfills the Legislature’s goal to afford the government a complete
remedy for not only the fraud itself but also for the ancillary costs of
detection and investigation. See
United States v. Halper (1989) 490 U.S. 435, 445-46, overruled on
other grounds by Hudson v. United States (1997) 522 U.S. 93. Treble damages also make up for the costs
of suit and pre-judgment interest, and for consequential damages flowing from
the fraud on the public fisc.
Moreover, both
in Chandler and Levine II, the courts recognized that the
additional damages award serves to “more fully compensate” the relator “for the
incalculable risk he takes when he threatens to disclose or discloses” the
false claim.” Thus, particularly under
California law where the maximum award for a relator is 50%, see §
12653(g)(3), a large portion of the treble damages simply provides the
necessary incentive to compensate the whistleblower for the risk in coming
forward. See also LeVine II, 90
Cal. App.4th at 209 (double damages for retaliation is compensatory, to pay
employee for the “risk” taken when employee “discloses his employer’s false
claim”). The CFCA also allocates a
portion of the recovery to the prosecution of future CFCA cases. See Govt Code § 12652(g).
Accordingly,
the CFCA’s treble damage remedy is not “simply” or “solely” punitive,
but has “legitimate and fully justified compensatory functions.” Younger, 16 Cal.3d at 35; LeVine
II, 90 Cal. App.4th at 209. It is
not imposed “by way of punishing the defendant,” as section 818 prohibits, but
to permit enough of a recovery to compensate the government for its losses and
provide an incentive for the qui tam plaintiff. The CFCA’s treble damage remedy does not
violate section 818 and does not provide a basis for immunizing defendants in
this case from liability under the CFCA.
Second, some defendants argue that a CFCA claim is
precluded here because there is a complex administrative scheme for the
Superintendent of Public Instruction and the Director of Finance to audit local
school districts, including charter schools and, therefore, that scheme cannot
be bypassed in favor of filing a CFCA action.
This argument is without merit.
The CFCA clearly states that its remedies supplement other remedies and
are not precluded by the existence of other administrative remedies or
statutory causes of action. See
Govt Code § 12655(a) (“The provisions of this article are not exclusive, and
the remedies provided for in this
article shall be in addition to any other remedies provided for in any other
law or available under common law.”) Moreover, nothing in the system for
audits of local educational agencies cited by defendant under Education Code §
41341, see Opening Brief on the Merits of The Camptonville Academy at
29-31, precludes, preempts, or impliedly repeals the Attorney General’s
authority to prosecute and remedy frauds under the CFCA. For similar reasons, the federal courts
have repeatedly held that the federal FCA is not impliedly repealed by other
statutory schemes. See, e.g.,
United States ex rel. Sequoia Orange Co. v. Oxnard Lemon Co. (E.D.
Cal. 1992) 1992 WL 795477(Agricultural Marketing Agreement Act); United
States ex rel. Totten v. Bombardier Corp. (D.C. Cir. 2002) 286 F.3d
542(Amtrak Reform and Accountability Act); United States v. General
Dynamics Corp. (2d Cir. 1994) 19 F.3d 770(Anti-Kickback Act); United
States v. Beatrice Food Co.
(D. Utah 1971) 330 F. Supp. 577, 580 (federal antitrust laws); United
States ex rel. Fallon v. Accudyne Corp. (W.D. Wis. 1995) 880 F.
Supp. 636, 639(federal environmental laws); United States v. Carpentieri
(S.D.N.Y. 1998) 23 F. Supp. 2d 433, 436-37(Federal Employees Compensation Act);
United States ex rel. Sutton v. Double Day Office Services, Inc.(9th
Cir. 1997) 121 F.3d 531, 534(Service Contract Act); United States v. Blue
Cross and Blue Shield of Alabama, Inc.(11th Cir. 1998) 156 F.3d
1098(Social Security Act); United States v. Foster Wheeler Corp. (2d Cir. 1971) 447 F.2d 100, 101(Truth in
Negotiations Act). The availability of
other administrative remedies for these plaintiffs to petition for oversight of
the school districts and charter schools defendants does not impliedly preclude
the filing of this qui tam action by these relators or the Attorney
General’s determination whether to intervene in this action to prosecute the
alleged fraud.[2]
Third,
contrary to defendants’ argument, there is no evidence that the net effect on
the State of imposing liability on local entities will be negative or that
affirming the court of appeals here will open the floodgates of litigation
against local public entities. The
sheer number of cases brought against local government entities is likely not to
change dramatically as the status quo in the California courts under Levine
I has been that local public entities are subject to suit. Moreover, as noted by the California
Attorney General, substantial safeguards are in place under the CFCA to protect
against vexatious lawsuits and the Attorney General may seek dismissal of any
action for good cause. Govt Code § 12652(e)(2)(a). Imposing blanket immunity from suit for local public entities,
however, would undermine the ability of the Attorney General and citizens to
prosecute frauds that diminish the state coffers.
In any event, the decision of the Legislature to
include local public entities as potential defendants more than justifies any
additional costs of suit. The
Legislature has made the determination that the opportunity to recoup state
funds unlawfully obtained by local public entities, and the deterrent effect of
the CFCA, outweigh any additional costs.
The briefs of defendants and amici display great distaste for qui
tam lawsuits. But regardless what FCA
defendants may think, the Legislature has made the determination that the cost
of giving relators incentives to come forward and report frauds that might
otherwise go undetected outweigh the cost of the incentive. For the same reasons that Congress enacted
the federal False Claims Act, the qui tam provision in the CFCA “was
passed upon the theory, based upon experience as old as modern civilization,
that one of the least expensive and most effective means of preventing fraud on
the treasury is to make the perpetrators of them liable to actions by private
persons acting ... under the strong stimulus of personal ill will or the hope
of gain. Prosecutions conducted by such
means compare with the ordinary methods as the enterprising privateer does to
the slow-going public vessel.” Marcus
v. Hess (1943) 317 U.S.537, 541 n.5.
A FCA judgment against a local public entity could be
substantial – but only if the defendant’s fraud on the state treasury was
substantial. And, in that event, the
damages visited upon defendant would be proportionate to the totality of the
injury inflicted on the treasury by the defendant’s fraud. A defendant’s complaint about the potential
size of an adverse judgment is entitled to no weight where the magnitude of the
consequences would be the product of the “immensity” of the underlying
wrongdoing. See Pennzoil v.
Texaco, Inc. (1987) 481 U.S. 1, 34.
Defendants and its amici voice concerns that local governments
might have to cut back on services if qui tam suits are allowed. These complaints simply underscore the
importance of policing fraud in state programs that spend money allocated to
the local level. Liability under the
CFCA is not for the unwary but only for acts that are knowing, intentional and
willful. Govt Code § 12650(b)(2);
12651(a)(1)-(8). It was the province of
the Legislature to determine, as it has done, that local public entities shall
bear the costs of remedying frauds proportionate to the full cost of the injury
imposed on the state treasury.
Disagreements with this judgment must be brought to the Legislature.
Fourth,
defendants’ argument that a CFCA action cannot lie because it would violate the
California Constitution and Education Code § 14040 to allow any money collected to be returned to the
state treasury rather than the State School Fund, is more than a bit
disingenuous. See Reply Brief of Camptonville Academy at 13-14. Assuming plaintiffs’ allegations of fraud
are true, the purpose of the law will be fulfilled by recoupment of the funds
to the state treasury rather than allowing defendants simply to abscond with
their ill-gotten gains. Whether the
funds will need to be reallocated to school funding after recoupment is an
issue for the State to decide once the recoupment from defendants is successful.