Proposed Changes to the False Claims Act Could Energize the Plaintiffs' Bar
Submitted by Jeffrey C. Torres, McGuireWoods LLP (Chicago)

Under the Federal Civil False Claims Act, persons or entities who deceive the federal government to improperly obtain from (or improperly be relieved from paying to) the government can be liable for up to three times actual damages suffered plus mandatory civil penalties. 31 U.S.C. §§ 3729-3733. Included in the Act are qui tam provisions that allow private whistle-blowers, or “relators,” to bring these lawsuits on behalf of the federal government and to share in up to 30% of the recovery. 31 U.S.C. § 3730(b).

Energy Industry as Corporate-Defendants

Industries involved in the production and sale of energy are not strangers to qui tam actions brought under the Act and significant legal resources are directed toward defeating claims made by whistle-blowers hoping to share in the sums awarded to the government. In a recent example, the Tenth Circuit reversed and remanded a lower court decision dismissing a qui tam plaintiff’s lawsuit seeking a portion of millions of dollars of oil & gas royalties that were allegedly not collected by the Department of Interior’s Minerals Management Service (MMS). At issue were MMS field practices that omitted oil and gas royalties language from leases. The relator was a senior auditor for MMS who brought a qui tam suit against the federal oil-and-gas lessee alleging underreporting of sales proceeds and underpayment of royalties on more than 50 offshore oil leases. Although the trial court overturned the jury verdict award of approximately $7.5 million on the grounds that the government auditor’s information was subject to the "public disclosure bar" discussed below, the Tenth Circuit reversed and remanded the case for further consideration as it determined the relevant information was not subject to the bar. U.S., ex rel. Maxwell v. Kerr-McGee Oil & Gas Corp., 540 F.3d 1180 (10th Cir. 2008). Although ultimately coming to the conclusion that the qui tam plaintiff's case should proceed, the appellate court noted the public policy problem presented by granting a government auditor relator status because information gained during employment was used for personal gain.

Checklist For Defeating Parasitic Lawsuits

Although the Act was originally enacted to battle fraud in Civil War defense contracts, jurisprudence over the years has seen an ebb and flow of "parasitic suits," or lawsuits brought by private parties based on information known to the general public. In 1986, during a previous low tide period for parasitic lawsuits, Congress made broad changes to the Act that have served to encourage more private enforcement suits. In response, corporate defendants have developed a three-step checklist to follow upon being served with a qui tam action: (1) apply the relevant statute of limitations; (2) determine whether the "public disclosure bar" is applicable; and (3) assert all relevant merits-based defenses.

The first step in defending against a qui tam suit is to determine whether the statute of limitations has run. The statute of limitations is the later of: (1) six years from the date of a violation of the Act, i.e., a false claim made to the federal government; or (2) three years after the date when the relevant federal official knew or should have known of the violation, but in no event more than ten years after the date on which the violation is committed. 31 U.S.C. § 3731(b)(2). Over time, most courts have held that the six-year limitations period applies where the federal government declines to intervene.

The second step is to assert the "public disclosure" bar. If the public disclosure bar applies, the court lacks subject matter jurisdiction and must dismiss the suit. 31 U.S.C. § 3730(e)(4)(A); Kennard v. Comstock Resources, Inc., 363 F.3d 1039, 1042 (10th Cir. 2004). A defendant can assert the public disclosure bar if it makes a three-part showing that: (1) the allegations or transactions at issue were "publicly disclosed" to someone who is a stranger to the fraud; this requires an affirmative act of disclosure, not merely the potential for a disclosure; (2) the public disclosure occurred 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; and (3) the relator's claims are "based upon" the public disclosure. A majority of courts hold that a substantial similarity must exist between the relator’s claims and the publicly disclosed transactions or allegations while a minority of circuits hold that the relator must have actually relied on the public disclosure in formulating his or her claims. However, even if the public disclosure bar would bar a qui tam suit, the court can still retain jurisdiction if the relator demonstrates that he or she is an "original source" of the information (in the vernacular of the courts, one who has "direct and independent knowledge" of the information on which the allegations are based) and "voluntarily" provided that information to the government before filing the action.

The final step should be to assess and assert all merits-based defenses to claims under the Act, which defenses the courts have commonly recognized as res judicata, mistake/negligence, and unclean hands/estoppel.

Proposed Changes to the False Claims Act

Last month, Senator Charles Grassley introduced S. 458, entitled the "False Claims Act Clarification Act of 2009," which has bi-partisan support and is similar to the version introduced in the last Congress. If passed, this legislation will significantly alter the landscape of qui tam litigation, exposing companies to increased liability and stripping them of some of their most useful defenses. According to the Judiciary Committee's Press Office, S. 458 is not yet listed for mark up, but the proposed bill includes sweeping changes including the following:

• Private individuals will be allowed to bring qui tam lawsuits under the Act as long as they timely follow certain specific requirements;
• The public disclosure bar will be removed as a defense;
• Pleading requirements will be eased;
• The statute of limitations will be lengthened from six to ten years;
• Subcontractors will be able to bring lawsuits under the Act; and
• The basis of funds subject to the Act's requirements would extend beyond fraud on the federal government.

Senator Grassley is on record as stating that his bill attempts to clarify a split in the Federal Circuit Courts of Appeal regarding whether a government employee may file a lawsuit under the Act: "[t]he proposed bill allows government employees to sue as qui tam plaintiffs after they take certain steps of disclosure within the government." However, the pending bill's impact extends well beyond expanding upon the ability of government employees to bring qui tam lawsuits. If the legislation passes in its current or substantially similar form, companies in the energy industry will face the potential for increased liability without the handy defenses they have grown accustomed to employing. At a minimum, a new checklist will need to be developed.

The author would like express his appreciation for the contributions that Daniel Bubar and Jonathan Chester (McGuireWoods, Chicago) made toward publication of this article.