WASHINGTON — The Supreme Court heard arguments Monday testing when whistle-blowers who discover fraud in federal programs may sue in the name of the United States and collect some of the settlement.

Congress adopted the False Claims Act during the Civil War to solicit the help of ordinary citizens in fighting contracting fraud. The law encourages whistle-blowers to sue on behalf of the U.S. government by ensuring that a portion of any damages or civil penalties won will be shared with the person who initiated the lawsuit.

Since Congress strengthened the law in 1986, the Justice Department has recovered about $20 billion, of which more than $2 billion has gone to citizens, Justice figures show. In recent decades, such suits have especially targeted Defense Department and health services fraud.

Monday’s case tests when some citizen lawsuits might be kept out of court under a provision aimed at opportunistic lawsuits based simply on information publicly available. It is being closely followed by the National League of Cities, a majority of the states and the Washington-based Taxpayers Against Fraud Education Fund, which encourages citizen lawsuits and strong government enforcement of the False Claims Act.

The act prohibits citizen lawsuits arising from public disclosures “in a congressional, administrative or (Government Accountability Office) report, hearing, audit or investigation.” The question Monday was whether that exemption relates only to federal reports — as the Department of Justice argues — or blocks a whistle-blower from bringing a claim based on information publicly available in a state or local report.

That question, which has divided lower court judges, arose in a North Carolina case before the high court. An employee of the Graham County Soil and Water Conservation District alleged fraud tied to the county’s participation in a federal disaster relief program after a storm in 1995.

A federal trial judge rejected the lawsuit brought by Karen Wilson, saying a Graham County audit of the controversy had documented some of the problems she cited, including the county’s failure to seek competitive bids. The U.S. Court of Appeals for the 4th Circuit reversed, saying only federal administrative reports, audits or investigations would have precluded her suit under the False Claims Act.

Douglas Hallward-Driemeier, an assistant U.S. solicitor general, told the justices that Congress wanted the disclosure exemption limited to federal reports and that reading it to encompass state and local administrative reports would undermine the anti-fraud law.

He said federal reports arising from investigations underway by the U.S. government are different from local audits not readily known to federal officials. “The government has to drill down many levels before it necessarily is going to know about that fraud,” he said.

Christopher Browning, representing Graham County officials, countered that if the court followed the federal government’s reasoning, “there will be a proliferation of opportunistic … actions brought under this statute. (That) would have a devastating effect upon states (and) local governments.”

Thirty states have joined the side of the Graham County Soil and Water Conservation District, urging the court to rule that the case initiated by Wilson and joined by the U.S. government should be thrown out. The Taxpayers Against Fraud Education Fund is on the other side, asserting that if the exemption is extended to state administrative proceedings, “the federal government stands to lose valuable information about fraud.”

Mark Hurt, representing Wilson, said Congress tied the exemption to federal investigations. Hurt said the drafting history from the House and Senate deliberations shows that lawmakers were focused in 1986 on federal reports that would be “more likely to put the government on notice” about fraud.

The justices showed by their questions that they thought the law was ambivalent and there was no easy interpretation.

“Why wouldn’t a state report be as much of a public disclosure as a federal report?” Justice Ruth Bader Ginsburg asked. Hurt said state reports are likely to be “sitting in file cabinets all around the country,” escaping federal view.

Justice Anthony Kennedy asked about the practical rationale for the federal-state distinction. Hurt said the government needed to rely more on citizens to sift through local reports.

Chief Justice John Roberts asked Browning for his best argument if the court believed the merits from each side were about equal and might have a tendency to rule for the U.S. government, which has a large stake in such cases. Browning said the counterargument would be the flood of potential lawsuits.

Hallward-Driemeier said several proposals are pending in Congress related to the anti-fraud law, but none addresses the disclosure rules.

A ruling is likely by July.

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