ROCKWELL: LINKING THE RELATOR’S RECOVERY TO HIS KNOWLEDGE
By Robert L. Vogel - November 2007
For the first time since Congress overhauled the False Claims Act (“the Act”) in 1986, the Supreme Court has issued an opinion addressing the eligibility of a private citizen to file a lawsuit under the Act’s “qui tam” provisions. In Rockwell International Corp., et al. v. United States, et al., __ U. S. __, 127 S. Ct. 1397, 167 L. Ed. 2d 190 (March 27, 2007), the Supreme Court interpreted the Act’s “public disclosure” and “original source” provisions. The Court’s decision to take the Rockwell case, rather than other cases involving these provisions, seemed unusual because the case involved only a few of the many interpretive questions arising from the provisions at issue. However, while directly addressing a few specific issues, the Court’s opinion may contain a broader message concerning the proper use of qui tam suits. The Court’s message may be that, when deciding whether a qui tam relator should be rewarded for initiating a lawsuit, a court should focus primarily on (a) what the relator knew at the outset of the case, and (b) the value of that knowledge in leading to any recovery. The mere fact that the relator initiated the chain of events that ultimately led to the government’s recovery – i.e., that the relator was the one who first “got the ball rolling” -- does not, in the Court’s view, deserve a reward if, at the end of the day, the government recovered only on the basis of misconduct that was not known to the relator when he came forward. In short, the relator’s knowledge of wrongdoing, rather than mere chance, should be the basis of the relator’s recovery.
I. The False Claims Act and its “Qui Tam” Provisions.
The False Claims Act, a civil statute codified at 31 U.S.C. §§ 3729-3733, is said to be the government’s primary tool for recovering monies lost as the result of fraud against the government. See S. Rep. No. 345, 99th Cong., 2d Sess. At 2 (1986), reprinted in 1986 U.S.C.C.A.N. 5266. The Act provides, among other things, that persons who knowingly submit or cause the submission of false claims for payment by the United States government, or who knowingly use false statements to get such claims paid or approved, are liable for treble damages plus civil penalties of between $5,500 and $11,000 per false claim. 31 U.S.C. § 3729.1
Since it was initially enacted in 1863, the Act has always contained “qui tam” provisions enabling a private citizen, known as the “relator,” to enforce the Act’s provisions by filing a lawsuit as a private attorney general. See United States ex rel. Williams v. NEC Corp., 931 F.2d 1493, 1496-98 (11th Cir. 1991). If, through judgment or settlement, the government recovers any proceeds in a qui tam case, the relator is generally entitled to a percentage of the government’s recovery.
In 1986, Congress modernized the FCA and its qui tam provisions. See Pub. L. No. 99-562, 100 Stat. 3153 (1986). Under the post-1986 version of the Act, the relator may “bring a civil action for a violation of [the FCA] for the person and for the United States Government. The action shall be brought in the name of the Government.” 31 U.S.C. § 3730(b)(1).
To commence a qui tam suit, the relator must file a complaint under seal -- i.e., secretly -- in federal court and must not serve a copy of the complaint on the defendant until the court so orders. Instead, the relator delivers a copy of the complaint and a written disclosure of “substantially all material evidence and information the person possesses” to the United States Department of Justice (“DOJ”). The government then has the opportunity to investigate the relator’s allegations and decide whether or not to intervene in the lawsuit. Id. at § 3730(b)(2). The government has at least 60 days in which to conduct this investigation, but upon a motion by the government showing “good cause,” the court may extend this time period. Id. at § 3730(b)(3). In virtually any case that appears to have any merit, the government will file several motions for extensions of its time to investigate the relator’s allegations while the case remains under seal. It is common for this time period to be extended for several years.
When DOJ formally decides whether or not to intervene, the court is supposed to unseal the action. If the government intervenes, it assumes “the primary responsibility for prosecuting the action,” and the relator has “the right to continue as a party to the action.” Id. at § 3730(c)(1). If the government declines to intervene, the relator may conduct the action without DOJ’s participation. Id. at § 3730(c)(3). Even after declining to intervene, however, the Government may change its mind and intervene at a later date upon a showing of “good cause.” Id.
If the qui tam suit results in a recovery, the recovery belongs to the government, and the relator is generally entitled to receive a percentage of the proceeds. In cases where the government has intervened, the relator generally may receive between 15 and 25 percent of the case proceeds, plus an award of reasonable attorneys’ fees and costs from the defendant. Id. at § 3730(d)(1). In cases where the government declined but the relator successfully pursued the case to conclusion, the relator generally may receive between 25 and 30 percent of the case proceeds, plus an award of reasonable attorneys’ fees and costs from the defendant. Id. at § 3730(d)(2).
The statute defines certain circumstances in which a relator either is ineligible to pursue a qui tam suit, or the relator is eligible to proceed but may be entitled only to a reduced recovery. The most commonly invoked bars against a relator pursuing a qui tam suit are the “public disclosure” bar and the “first to file” rule. As discussed in more detail below, the “public disclosure” bar precludes a relator from pursuing a qui tam suit based upon certain public disclosures of allegations or transactions, unless the relator was an “original source” of the information upon which the lawsuit was based. Id. at § 3730(d)(4)(A). An “original source” is defined as “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.” Id. at § 3730(d)(4)(B). Under the FCA’s “first to file” rule, “[w]hen a person brings [a qui tam action], no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” Id. at § 3730(b)(5). The FCA also precludes a relator from proceeding with a qui tam claim if the relator “is convicted of criminal conduct arising from his or her role in the violation of [the FCA].” Id. at § 3730(d)(3).2
The FCA also defines certain circumstances under which a relator may be eligible to proceed with a qui tam suit, but the court may reduce the relator’s award below the ordinary range specified in the Act. Most importantly, a court may reduce the relator’s share if it finds that the relator “planned and initiated the violation of [the FCA] upon which the action was brought, ... taking into account the role of that person in advancing the case to litigation and any relevant circumstances pertaining to the violation.” Id.
II. Qui Tam Cases In Practice.
The life of a qui tam case usually starts when a potential “whistleblower” who has observed what he believes is wrongdoing contacts an attorney who knows about the False Claims Act. The whistleblower and attorney then work together to determine the strength and size of the case, which enables them to estimate the potential benefit of starting the action; in addition, they try to assess the risks such an action would entail. The decision to file a qui tam suit is frequently a career-threatening, or even career-ending, move. Except in rare cases, the target of the case, along with others in the industry, will eventually learn who has filed the lawsuit; if the relator is still employed with the defendant, the relationship will likely be untenable. Moreover, other potential employers may be unwilling to hire someone who has already sued an employer. Consequently, before filing suit, a relator will typically have to believe that the prospects of a lucrative recovery will outweigh the likelihood of a very significant career setback.
The relator usually has to make the critical decision of whether to file suit in the absence of all the information necessary to conclude that a suit will ultimately be successful. The typical relator knows that the defendant has been engaging in conduct that appears unlawful or improper on its face; usually, however, the relator can only infer that, as a result of this misconduct, the defendant has knowingly been submitting, or causing the submission of false claims for the payment of government funds. For example, a relator who works for a Medicare provider may be aware that physicians are knowingly performing unnecessary procedures on Medicare patients, but may not be aware of all the billing details. In such a case, the best the relator can do is to infer that the physicians’ misconduct is resulting in the filing of false claims. Or, if the relator is alleging that a military contractor is supplying the government with a product that has a hidden defect, the relator may not know whether the contractor has disclosed the problem to government officials, and whether they have decided to accept the product nonetheless; the best the relator may be able to do is to infer that, if government officials had known about the defect, they would not have accepted the problem.
Several provisions of the Act can make it hazardous for a relator to do an extensive investigation prior to filing suit, even where the relator’s knowledge is incomplete. Because of the “first-to-file” rule, a relator’s attorney could jeopardize his client’s right to recover by interviewing other witnesses prior to filing suit; one of the witnesses might recognize the potential for a lucrative lawsuit, contact another attorney, and file the case first. Moreover, by doing anything that could alert the defendant to the possibility of a future qui tam suit, the relator could undercut the Government’s ability to conduct an undercover investigation – which is perhaps the primary benefit the Government derives from the fact that the qui tam case is to be filed under seal.
Once the relator files a sealed qui tam suit, DOJ must decide whether it is in the Government’s interest to intervene in the suit. For DOJ, the decision to intervene has traditionally amounted to a decision to adopt the case as the Government’s own. For that reason, DOJ is likely to spend a significant amount of time and investigative resources prior to deciding to intervene in any case.3
DOJ usually interviews the relator shortly after the case was filed. The main purpose of the interview is to get a complete picture of the information that the relator has about the allegations, clarifying or supplementing whatever information the relator has already provided to the Government in the complaint and written disclosure statement. In some cases, where the relator has troves of information about the defendant’s operations or expertise about a complex subject matter, there may be ongoing contact between the Government’s investigative agent and the relator, continuing long after the initial interview.
For every False Claims Act case, there is at least one Government agency that is the payor of the allegedly false claims, and therefore, the “victim” of the alleged fraud. Typically, DOJ will want to find out any information it can from this Government agency about the claims that were submitted in connection with the alleged fraud, and about the agency’s views about the alleged misconduct. For example, if the relator has alleged a fraud against the Medicare program, DOJ will want to know the view of the Centers for Medicare and Medicaid Programs on the following questions: Was the defendant’s alleged conduct improper? If the defendant’s actual conduct had been known to the agency, would that have affected the agency’s decision to pay the defendant’s claims?
In addition to finding out the agency’s views on the allegations, DOJ will often want to use one of the Government’s subpoena powers to obtain documents, or even testimony, from the defendant or third parties. In cases involving large amount of documents, or defendants who resist compliance with subpoenas, this process can take many months or even a few years.
During or after this process of investigation and analysis, DOJ will often try to explore the possibility of negotiating a settlement with the defendant. Alternatively, DOJ may simply want to understand the defendant’s perspective on the allegations, and to know whether the defendant can offer any plausible defenses to the charges. To this end, DOJ may ask the court to partially lift the seal on the case, granting DOJ permission to disclose the relator’s allegations, or even the complaint itself, to the defendant so that the parties can productively exchange information.
After this process, if DOJ still remains confident in the allegations and cannot reach a settlement with the defendant, DOJ will be ready to intervene. At this point in time – having gathered a substantial amount of information from other Government agencies, the defendant, and third parties – DOJ’s “case” against the defendant is likely to consist of much more detailed underlying evidence than the case initially presented to DOJ by the relator.
III. The Rockwell Case.
In Rockwell, supra, the Supreme Court answered some of the many questions arising from the Act’s public dislosure bar and original source provisions. These provisions, codified at 31 U.S.C. § 3730(e)(4), state:
(A) No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.
(B) For purposes of this paragraph, "original source" means an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under the section which is based on the information.
A. The Facts of Rockwell.
As summarized by the Supreme Court, the facts of Rockwell were as follows. Until March 1986, James Stone worked as an engineer at Rocky Flats, a nuclear facility managed by Rockwell International Corporation under a contract with the United States government. 127 S. Ct. at 1401. In the early 1980s, Rockwell considered a plan to store hazardous waste materials by mixing toxic sludge with concrete to form blocks of “pondcrete.” Id. In a written Engineering Order in 1982, however, Stone informed Rockwell management that he did not think that would work. Stone later testified that he believed the pipe system would not properly remove the sludge. Id. at 1401-02. Rockwell nonetheless proceeded with the plan and, for a period of time, successfully produced “concrete hard” pondcrete. Id. at 1402. In October 1986, after Stone had left Rocky Flats, Rockwell discovered that some of the pondcrete blocks were insolid. Id.
In June 1987, Stone approached the FBI and alleged that Rockwell had committed numerous violations of environmental laws. Id. In June 1989, based in part on the information Stone had provided, the FBI sought and obtained a warrant to search the Rocky Flats facility. Id. The FBI affidavit stated, in part, that pondcrete blocks were insolid “due to an inadequate waste-concrete mixture.” Id. The allegations set forth in the affidavit were then reported in various newspapers. Id. at 1403.
In July 1989, Stone filed a qui tam suit. Id. In his disclosure statement to the Government, Stone alleged 26 violations, one of which pertained to the pondcrete. Id. Stone explained in his statement that he had reviewed the design for the pondcrete system and had foreseen that the piping mechanisms would not properly remove the sludge, which in turn would lead to an inadequate mixture of sludge and cement. Id.
After initially declining to intervene, the Government intervened in the case in November 1996 and, with the relator, filed a joint amended complaint. Id. at 1404. The amended complaint included an allegation that Rockwell was storing insolid pondcrete blocks, but it did not indicate that defective piping was a cause of the problem. Id.
The pondcrete block issue was subsequently addressed in a more specific Statement of Claims, which the district court later adopted in its final pre-trial order. Id. The final pre-trial order, by its own terms, superceded all prior pleadings in the case.
According to the Statement of Claims, plaintiffs alleged that Rockwell had replaced its pondcrete foreman in the winter of 1986 – after Stone no longer worked there. In order to speed up production, the new foreman lowered the ratio of cement to sludge in the pondcrete; this alteration of the ratio of cement to sludge, in turn, resulted in the production of insolid pondcrete blocks. Id. The Statement of Claims did not include an allegation that there had been any problem with the pipe system, or that such a problem had contributed to the instability of the pondcrete blocks. Id.
When the case ultimately came to trial, no one introduced any evidence concerning any problem with the pipe system. Id. On the contrary, to the extent the evidence and arguments suggested that there had been a problem with the pondcrete, it all suggested that the problem had been caused by the reduction of the amount of cement used in the mixture. Id. The jury found in favor of the plaintiffs with respect to claims covering time periods between April 1, 1987 and September 30, 1988, and found in favor of Rockwell with respect to claims covering other time periods. Id.
B. The Court’s Holdings in Rockwell.
To resolve the case, the Supreme Court addressed several questions and made several holdings. The first question addressed by the Court was whether the public disclosure bar was “jurisdictional.” The Court held that it was. Id. at 1405. The Court held that when Congress explicitly states that the federal courts do not have jurisdiction over a defined category of cases, the courts do not have jurisdiction over those cases. Id. at 1405-06. Here, the category for which Congress withdrew jurisdiction were “False Claims Act qui tam cases based on publicly disclosed allegations as to which the relator was not an original source of the information.” Id. at 1406. The chief significance of the Court’s holding was that, because the relator’s status as an “original source” arose in the context of an inquiry into whether the district court could exercise subject-matter jurisdiction, the defendant could not waive the issue by “conceding” or failing to contest the issue at any stage in the litigation. Id. at 1406-07.
The Court next addressed whether the relator’s complaint was “based upon the public disclosure of allegations or transactions” in a government hearing or through the news media. Curiously, although the Court refused to accept any “concession” by Rockwell that the relator was an “original source” -- because this question was jurisdictional -- the Court was willing to accept, without further discussion, the concession by the parties that the claims on which the relator prevailed were “based upon publicly disclosed allegations” within the meaning of § 3730(e)(4)(A) -- although that question too was jurisdictional. Id. at 1407.
The Court then addressed the question: What is the “information” of which the relator has to have “direct and independent knowledge” in order to be an “original source”? Id. Specifically, is it the information on which the allegations in the qui tam action are based? Or, is it the information on which the public disclosure of allegations or transactions is based? Id. The Court held that, to be an “original source,” the relator must have “direct and independent knowledge” of the information underlying the allega-tions in the lawsuit, rather than the information underlying the public disclosure. Id.
The Court recognized that, although the allegations in the lawsuit might be the same as those that were publicly disclosed, the “information” underlying the relator’s allegations might be different from that underlying the public disclosure. Id. For example, if an allegation was publicly disclosed in a newspaper, the reporter might have relied on a confidential source other than the relator. Id. at 1407-08. In that situation, a court could not possibly determine what the “information” underlying the public disclosure was – let alone whether the relator knew that information. Id. at 1408. On the other hand, it was reasonable to expect a court to determine the information that was the basis for the allegations in the qui tam lawsuit. It was this information of which the relator must have direct and independent knowledge.4
The Court next addressed whether the requirement that the relator have “direct and independent knowledge” referred solely to the information that was the basis of the allegations made at the commencement of the case -- i.e., the allegations in the relator’s original complaint -- or also to the information that was the basis of allegations that the relator made sometime later in the lawsuit, either in an amended complaint or in the pretrial order. Id. The Court held that if new allegations were made at any stage in the proceeding -- for instance, after the plaintiffs filed an amended complaint incorporating new allegations – and these allegations had been publicly disclosed, then the relator had to have direct and independent knowledge of the information underlying the newly-made allegations. Id. The Court cautioned that if it were to limit the jurisdictional inquiry only to allegations made in the original complaint, the relator would be “free to plead a trivial theory of fraud for which he had some direct and independent knowledge and later amend the complaint to include theories copied from the public domain or from materials in the Government’s possession.” Id. The Court concluded, “we look to the allegations as amended – here, the statement of claims in the final pre-trial order – to determine original-source status.” Id. at 1409.
The Court then proceeded to analyze the allegation that was the basis for the plaintiffs’ recovery in Rockwell, and it found that Stone did not have direct and independent “knowledge” of the information on which this allegation was based. Id. Within the relevant time period covered by the jury’s finding of liability, the only pertinent problem was insolid pondcrete. Id. at 1409-10. The Court found: “Because Stone was no longer employed by Rockwell at the time, he did not know that the pondcrete was insolid; he did not know that the pondcrete storage was even subject to RCRA; he did not know that Rockwell would fail to remedy the defect; he did not know that the insolid pondcrete leaked while being stored onsite; and, of course, he did not know that Rockwell made false statements to the Government regarding pondcrete storage.” Id. at 1410.
The Court continued: “Stone’s prediction that the pondcrete would be insolid because of a flaw in the piping system does not qualify as ‘direct and independent knowledge’ of the pondcrete defect. Of course a qui tam relator’s misunderstanding of why a concealed defect occurred would normally be immaterial as long as he knew the defect actually existed. But here Stone did not know that the pondcrete failed; he predicted it. Even if a prediction can qualify as direct and independent knowledge in some cases (a point we need not address), it assuredly does not do so when its premise of cause and effect is wrong. Stone’s prediction was a failed prediction, disproved by Stone’s own allegations.” Id.
The Court next turned to the issue of whether Stone’s joinder of the pondcrete claim with a second claim for which he was an original source – although there was no recovery on the second claim -- cured any defect in jurisdiction. Id. The Court held that the relator’s direct and independent knowledge of one claim, which did not result in any recovery, did not give the district court jurisdiction over other, distinct claims that were joined in the same action. Id. The Court concluded that the plaintiff’s decision to join several claims in a single lawsuit should not rescue claims that would have been doomed if they had been asserted separately; likewise, however, the joinder of claims should not result in the dismissal of claims that would have otherwise survived. Id.
Finally, the Court addressed the plaintiffs’ contention that the Government’s intervention in the qui tam suit “cured” any jurisdictional defect with respect to the relator’s participation. Id. at 1410-11. The Court held that it did not. Id. at 1411. The Court held, however, that even though the lower court lacked jurisdiction over the relator’s claim, it retained jurisdiction over the Government’s action against Rockwell after the Government had intervened in the case. Id. The Court reasoned that, upon the dismissal of the relator, the lower court should treat the intervened action as though the Attorney General had brought the action, and the Government would be entitled to keep whatever recovery is achieved through the lawsuit. Id.
IV. The Consequences of Rockwell.
In several respects, the Rockwell case has increased the risk a relator faces when pursuing a qui tam case. First, the case establishes that the Court’s jurisdiction over the relator’s claims cannot be put to rest until the very end of the case. If, between the commencement of the case and its resolution, the plaintiffs pursue different “allegations” from those contained in the initial Complaint, and those allegations were publicly disclosed before they were first included in an amended complaint or superceding pleading (such as a pre-trial order), the relator may have to demonstrate that he was an “original source” of the new allegations – even though there were no public disclosures prior to the relator’s initiation of the lawsuit.
Second, in the trial of any case involving prior public disclosures, the relator will have to make sure to present evidence sufficient to establish that the relator was an “original source” of the allegations being tried. If the Government attempts to resist the presentation of such evidence – for example, by arguing that such evidence would not be in the Government’s best strategic interests – the relator must make a proffer of the evidence and argue to the Court that it should admit the evidence in order to establish its subject-matter jurisdiction.
Third, whenever a case involves a prior public disclosure and. therefore, the question of whether the relator was an “original source,” one can expect the defendants to argue that the relator did not actually “know” of the defendant’s misconduct, but rather, simply “predicted” that such misconduct would occur. If there is evidence to establish that misconduct did in fact occur, the relator can respond that, based on the other facts known to the relator, it was reasonable for the relator to infer that the misconduct took place. The relator could argue that a “reasonable inference” which turned out to be correct is distinguishable from Rockwell, where the relator made a “failed prediction” that turned out to be incorrect.
While the Rockwell case may impose additional burdens on some relators, it may also benefit some relators – particularly, those who are the second to file a case against a particular defendant. If the first-to-file relator has asserted an allegation that is flawed, and a second relator has asserted a different allegation that changes the direction of the Government’s investigation and would support a recovery, the first relator cannot simply argue that the first case got the Government started in its investigation and, therefore, deserves the entire reward. The first relator may have to argue that the second allegation was not substantially “different” from the first allegation or, in the alternative, demonstrate that he was an “original source” of the information on which the second allegation was based.
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1 The False Claims Amendments Act of 1986 provided that the range of civil penalties was between $5,000 and $10,000 per false claim. However, this range was raised to between $5,500 and $11,000 per false claim for conduct which occurred on or after September 29, 1999. See 64 FR 47099, 47104 (8/30/99).
2 The FCA also precludes qui tam suits (1) by members of the armed forces against other members of the armed forces arising from the person’s service, (2) against certain government officials if the action is based on evidence or information known to the government when the action was brought, and (3) based on allegations or transactions which are the subject of a civil suit or an administrative civil money proceeding in which the government is already a party. 31 U.S.C. § 3730(e)(1)-(3).
3 On the other hand, it is sometimes easy for DOJ to determine that it should not intervene in a qui tam suit. For example, upon receiving and reviewing a qui tam complaint, DOJ may realize that the complaint simply fails to state a claim upon which relief may be granted, or that the amount of the alleged fraud is trivial and not worth the expenditure of significant government resources.
4 In holding that the relator need only have direct and independent knowledge of the “information” that is the basis for his lawsuit, rather than the “information” that was the basis for the prior public disclosure, the Rockwell Court undercut the rationale of U.S. ex rel. Dick v. Long Island Lighting Co., 912 F.2d 13 (2d Cir. 1990). See also Chen-Chen Wang ex rel. U.S. v. FMC Corp., 975 F.2d 1412 (9th Cir. 1992) (following Long Island Lighting Co.). In Long Island Lighting Co., the Second Circuit found that the term “information,” when referring to the information of which a relator had to be an “original source,” had to be the same “information” that was the basis for the allegations or transactions that had been publicly disclosed. The Second Circuit then reasoned that, to be an original source, the relator must have played a role in the public dislosure by providing his information, directly or indirectly, to the person or entity that later made the disclosure. In light of the Rockwell decision, it is doubtful that the Long Island Lighting Co. case or its progeny can still be considered good law.