U.S. Supreme Ct. Vets False Claims Act. QUI TAM HURDLES

Marcia Coyle The National Law Journal

 A 17-year-old whistleblower suit by a now 81-year-old former engineer at the Rocky Flats nuclear weapons plant has triggered U.S. Supreme Court review of a crucial issue under the fastest growing area of federal civil litigation today, the False Claims Act.

In Rockwell International Corp. v. U.S. and ex rel. Stone, No. 05-1272, the justices on Dec. 5 will examine a critical restriction on who can bring so-called qui tam lawsuits under the act.

Was Principal Engineer James S. Stone “an original source of the information” that served as the basis for a jury’s finding that Rockwell, starting in 1987, violated the act by hiding from the government environmental, safety and health problems related to its processing of nuclear waste?

The high court’s interpretation of a statute that Justice Samuel A. Alito Jr. as a lower court judge criticized as unclear will affect not only who qualifies as a qui tam “relator” but also the ability of defendants, often large corporations, to dismiss early these complex and expensive suits.

The False Claims Act is becoming the principal tool by which the federal government combats fraud, said FCA practitioner Peter B. Hutt II, a partner at Miller & Chevalier, who filed an amicus brief supporting Rockwell on behalf of the Washington Legal Foundation.

The FCA provides for treble damages and penalties and a lesser burden of proof than criminal statutes that require proof beyond a reasonable doubt and do not necessarily allow the government to recover as much money, he explained.

“Anyone who does business with the federal government and takes federal money in any way is a potential target of an FCA lawsuit either by the federal government directly or by a qui tam plaintiff,” said Hutt. “There has been a constant, slow increase in the number of cases, constantly changing theories of liability and new classes of industries as defendants.”

And where there is alleged fraud by large companies, such as by the most recent target — pharmaceutical companies — Hutt said, “The dollars get very large, very quickly.”

From fiscal years 1987 through 2005, settlements and judgments for the federal government in FCA cases have exceeded $15 billion, of which $9.6 billion, or 64 percent, was for cases filed by whistleblowers under the FCA’s qui tam provisions, according to a report last January by the U.S. Government Accountability Office. The whistleblowers’ share of the qui tam settlements and judgments was more than $1.6 billion during this period.

QUI TAM HURDLES

The FCA provides that any person who knowingly submits, or causes the submission of, false claims for government funds or property is liable for damages and penalties.

Under the FCA, the government can prosecute an action on its own, or a private person may bring a qui tam action. The FCA calls a qui tam plaintiff a “relator,” also known popularly as a whistleblower.

The government has the right to intervene in the relator’s lawsuit. If the government declines intervention, the relator has the right to go forward alone.

To prevent so-called parasitic lawsuits by relators who try to capitalize on information about fraud already made public, the FCA prohibits qui tam suits “based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or [Government Accountability Office] report, hearing, audit, or investigation, or from the news media.”

This “public disclosure” bar has one exception. A qui tam suit that triggers the public-disclosure bar may proceed only if the relator is “an original source of the information.” An original source must have “direct and independent knowledge of the information on which the allegations are based,” and have “voluntarily provided the information to the Government before filing [a suit] which is based on the information.”

The original-source exception is at the heart of Rockwell’s case in the Supreme Court. It has argued unsuccessfully before a district court and an appeals court that Stone was not an original source because he had no first-hand knowledge of the fraud at issue.

“The public-disclosure bar with its original-source exception is the single most litigated issue in the entire False Claims Act jurisprudence,” said John T. Boese, partner in the Washington office of New York’s Fried, Frank, Harris, Shriver & Jacobson and author of the leading FCA treatise, Civil False Claims and Qui Tam Actions.

The government, he said, intervenes in about 20 percent of all qui tam cases. In the 80 percent proceeding without the government, the original-source issue arises in much more than half, he said, adding, “It also can arise, as in Rockwell, where the government intervenes, and that is more and more true because of the legal fees issue.”

If a relator can be dismissed on the original-source issue, the defendant doesn’t have to pay legal fees and costs if it loses, explained Boese.

“You can imagine the amount in a case litigated as actively and vigorously as the Rockwell case,” he said, estimating legal fees at up to four times the $4.2 million jury award. “And the government doesn’t have to pay the relator a share of what it recovers.”

Over the years, the courts have expanded what is a public disclosure, and therefore the original-source exception has become more important, said James Moorman, president of Taxpayers Against Fraud Education Fund, which operates a False Claims Act Legal Center and will file an amicus brief supporting Stone.

“None other than then Judge Alito ruled in a FCA case that when the government gave a document to a relator who had filed a [Freedom of Information Act] request, it had, in effect, issued a public report triggering the public-disclosure bar,” Moorman said. “This astounded everybody, but there it is.

“So the original-source rule, which protects you from being bumped out by the public-disclosure bar, is crucial.”

ORIGINAL SOURCE?

Rockwell operated the Rocky Flats nuclear weapons facility in Colorado under a contract with the U.S. Department of Energy from 1975 through 1989. Stone worked as principal engineer there from November 1980 until March 1986.

After Stone was laid off, he informed an FBI agent that environmental crimes had allegedly been committed at Rocky Flats during his period of employment. The FBI agent prepared an affidavit, obtained a search warrant and conducted a search. About a month after the search, Stone filed his qui tam action alleging that in an effort to maximize its receipt of award fees and other payments under its government contract, Rockwell had violated the FCA by falsely representing to DOE that it had complied with applicable environmental, safety and health requirements in its operation of the facility.

In the meantime, the government conducted a criminal investigation into Rockwell’s management of Rocky Flats. In March 1992, Rockwell pleaded guilty to 10 environmental violations.

In 1995, the government intervened in Stone’s qui tam action and both filed an amended complaint restating Stone’s initial allegations and asserting additional claims.

At trial, the primary issue was whether Rockwell had concealed from DOE environmental, safety and health problems related to the processing and storage of saltcrete and pondcrete, two forms of processed toxic waste.

Rockwell’s counsel, veteran high court litigator Maureen Mahoney, head of the appellate practice at Latham & Watkins from the firm’s Washington office, argues that Stone had no direct and independent knowledge that the pondcrete leaked toxic waste or that Rockwell had represented otherwise to DOE because he left Rocky Flats before either the pondcrete or the toxic waste statements were made.

The 10th U.S. Circuit Court of Appeals, Mahoney contends, incorrectly interpreted the statute’s requirement of “direct and independent knowledge” of the later fraud to require only limited knowledge “underlying or supporting” the fraud allegation.

“The 10th Circuit expanded that narrow exception so broadly that it effectively swallows the jurisdictional bar,” she wrote in court papers regarding the original-source exception.

Noting that the federal circuits have adopted varying standards, Mahoney argues, “The best reading is that the relator must have direct and independent knowledge of information sufficient to permit the trier of fact to conclude that a false statement was made to the Government in support of a fraudulent claim for payment.”

NO PARASITE

In its opposition to Supreme Court review and in lower court proceedings, the government argued that Rockwell had understated substantially the significance of Stone’s knowledge. He had been instructed in his job not to divulge environmental and other problems to DOE, and he had uncovered through his own efforts design problems for the pondcrete blocks that would result in toxic-waste releases.

“Stone’s role in this case was therefore very different from that of the ‘parasitic’ relators at whom the ‘public disclosure’ bar is directed,” the government argued in its opposition brief.

Stone’s high court counsel, Maria T. Vullo, a partner in New York’s Paul, Weiss, Rifkind, Wharton & Garrison, said there is no confusion in the circuits on how to interpret the original-source exception.

“I think the way the circuits have approached the issue is really a function of how they describe particular facts of the case,” she said.

“The plain language of the statute is what it is and to the extent Rockwell has a gripe, that’s a gripe for the Congress to add some standard that’s not existing in the statutory language right now. We will argue that we meet all of Rockwell’s new tests.”

Fried Frank’s Boese noted that defendants and the government can question whether someone is an original source at any stage of the litigation because it is a jurisdictional issue.

“What Rockwell is arguing very effectively is that Stone’s theory of liability was abandoned both by Stone and the government and never presented to the jury,” he said. “What was presented was a whole new theory that the government developed in course of its criminal investigation. They argue he was not the original source of the theory of fraud that was eventually successful.”

But Rockwell is “throwing all kinds of smoke” in front of the Supreme Court, countered Moorman of Taxpayers Against Fraud. The case, he said, is part of a continuing campaign by business and industry “to hobble and undermine” whistleblower lawsuits.

“They struck out on their constitutional attacks on the statute and now they’re trying to get an interpretation that would do the same thing,” said Moorman.

 

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