Litigation and Trial - Max Kennerly : Philadelphia Trial Lawyer Max Kennerly : Business and Commercial Litigation : Civil Attorney : The Beasley Firm : Philadelphia Pennsylvania

The False Claim Act envisions a broad definition under 31 U.S.C. § 3729(b) for when a defendant "knowingly" makes a false or fraudulent claim to the federal government:

(b) Knowing and Knowingly Defined.— For purposes of this section, the terms “knowing” and “knowingly” mean that a person, with respect to information—

(1) has actual knowledge of the information;
(2) acts in deliberate ignorance of the truth or falsity of the information; or
(3) acts in reckless disregard of the truth or falsity of the information,

and no proof of specific intent to defraud is required.

The burden of persuasion for proving it is, like under most federal statutes, only preponderance of evidence:

Unlike a large number, and perhaps the majority, of the States, Congress has chosen the preponderance standard when it has created substantive causes of action for fraud. See, e. g., 31 U. S. C. § 3731(c) (False Claims Act); 12 U. S. C. § 1833a(e) (1988 ed., Supp. I) (civil penalties for fraud involving financial institutions); 42 CFR § 1003.114(a) (1989) (Medicare and Medicaid fraud under 42 U. S. C. § 1320a-7a); Herman & MacLean v. Huddleston, 459 U. S., at 388-390 (civil enforcement of the antifraud provisions of the securities laws); Steadman v. SEC, 450 U. S. 91, 96 (1981) (administrative proceedings concerning violation of antifraud provisions of the securities laws); SEC v. C. M. Joiner Leasing Corp., 320 U. S. 344, 355 (1943) (§ 17(a) of the Securities Act of 1933); First National Monetary Corp. v. Weinberger, 819 F. 2d 1334, 1341-1342 (CA6 1987) (civil fraud provisions of the Commodity Exchange Act). Cf. Sedima, S. P. R. L. v. Imrex Co., 473 U. S. 479, 491 (1985) (suggesting that the preponderance standard applies to civil actions under the Racketeer Influenced and Corrupt Organizations Act).

Grogan v. Garner, 498 U.S. 279, 288-289 (1991).

But even though a whistleblower need not show specific intent to defraud, there nonetheless are limits on the claims. The Fourth Circuit recently decided US ex rel. Owens v. First Kuwaiti General Trading, affirming the District Court's grant of summary judgment:

Relator John Owens brought this qui tam suit under the False Claims Act (“FCA”), 31 U.S.C. §§ 3729, et seq., against First Kuwaiti construction firm, his former employer. He alleged that the firm billed falsely for deficient work in connection with construction of the U.S. embassy in Baghdad and that it retaliated against him for actions taken in furtherance of his FCA contentions. The district court granted summary judgment to defendant.

The essence of Relator's claim is that defendant failed to live up to its contractual obligations. He produced no evidence either of knowing misrepresentations on defendant's part or of having been mistreated for any actions taken on behalf of his FCA claims. We therefore affirm the district court's judgment. Congress crafted the FCA to deal with fraud, not ordinary contractual disputes. The FCA plays an important role in safeguarding the integrity of federal contracting, administering strong medicine in situations where strong remedies are needed. Allowing it to be used in run-of-the-mill contract disagreements and employee grievances would burden, not help, the contracting process, thereby driving up costs for the government and, by extension, the American public.

I'm a sucker for Circuit Court opinions that state the law in plain English and cite to other Circuits, which is why I'm posting this one:

The FCA provides that suit may be brought against anyone who “knowingly presents” to the government “a false or fraudulent claim for payment or approval.” 31 U.S.C. § 3729(a)(1). It similarly allows suit against anyone who “knowingly makes ․ a false record or statement material to a false or fraudulent claim.” Id. at § 3729(a)(1)(B). In adopting the FCA, “the objective of Congress was broadly to protect the funds and property of the government.” Rainwater v. United States, 356 U.S. 590, 592 (1958).

The FCA's scienter requirement does not demand “specific intent to defraud” and can be satisfied by proving only “reckless disregard of the truth or falsity of the information.” Id. § 3729(b). Congress, however, has made plain “ ‘its intention that the act not punish honest mistakes or incorrect claims submitted through mere negligence.’ “ United States ex rel. Hochman v. Nackman, 145 F.3d 1069, 1073 (9th Cir.1998) (quoting S.Rep. No. 99-345, at 7 (1986)). This is because “[t]he FCA is a fraud prevention statute.” United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013, 1019 (7th Cir.1999); see also Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 128 S.Ct. 2123, 2130 (2008). It does not allow a qui tam relator to “shoehorn what is, in essence, a breach of contract action into a claim that is cognizable under the False Claims Act.” United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 373 (4th Cir.2008).

The case itself is good example of when faulty government contracting work is not quite bad enough to warrant liability. The defendant there apparently messed up some of the building work, but no worse than other contracts with similar claims did, and — more importantly — no worse than envisioned by the contract itself. The whistleblower thus couldn't muster, at least in the Circuit Court's eyes, enough evidence to show the defendant even "recklessly disregard" the falsity of the claims it submitted.

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At Business Week, it seems Oracle isn't living up to its namesake:

Oracle Corp., the world’s second- biggest software maker, faces a lawsuit brought by a whistleblower and the U.S. Justice Department claiming it overcharged the government by tens of millions of dollars.

As the Complaint summarizes,

This lawsuit is based on a scheme by Defendant Oracle Corporation ("Oracle") to defraud the United States by failing to disclose deep discounts Oracle offered to commercial customers when Oracle sold software products to federal government agencies through a General Services Administration Multiple Award Schedule. Oracle's failure to disclose the discounts it offered to its most favored customers resulted in overcharges to the federal Government totaling tens of millions of dollars.

Failing to give the government most-favored-customer deals in a GSA contract puts you on the fast track to a qui tam suit, since the GSA damages (and the per-claim penalty) add up rapidly with each new fraudulent order placed by the government.

It seems Oracle is quite experienced in the specific fraud at issue here:

In October 2006, Oracle paid $98.5 million to settle a False Claims Act lawsuit over GSA Multiple Award Schedule pricing disclosures at PeopleSoft Inc., a software maker. Oracle bought PeopleSoft in January 2005 for $10.3 billion.

The complaint, filed in 2003 by whistleblower James Hicks, was joined in 2006 by the Justice Department.

PeopleSoft Case

PeopleSoft was accused of understating the discounts it provided to commercial customers, including one that got up to 74 percent off the listed price.

“Because PeopleSoft did not give GSA accurate pricing information, it negotiated higher prices for its products and services than it would have obtained if GSA had known the truth,” Rod Rosenstein, the U.S. Attorney in Maryland, said in a statement at the time. 

How ironic.

One fact worth pointing out: the present case was originally filed more than three years ago yet only recently unsealed and served upon Oracle. Per the False Claims Act, once the Complaint was filed, it then sat silently, under seal, while the U.S. Attorney's office for the Eastern District of Virginia investigated whether or not they would intervene in support of the case. (They did.)

That's not to criticize the fine folks at the USAO there — these cases are massive and require an extraordinary amount of complicated work. The USAO is also quite rightly very selective in deciding whether or not to intervene in a case. Further, the most effective part of a qui tam investigation is typically the initial part done in secret prior to the unsealing of the suit.

Putting all of that together means one thing: a lot of time, money and effort spent on the investigation before the lawsuit itself really gets going. It's hard to tell in these cases how much of the investigation was done by the USAO, and how much was done by the relator's lawyer, but I'll tell you this: if you dump an unprepared case on the USAO's lap or don't pull your weight in the initial investigation, they'll show you the door.

Something to keep in mind next time you read another attempt to deny whistleblowers their due under the False Claims Act.

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Via the WSJ Law Blog, Amy Kolz at The American Lawyer has a new article about the False Claims Act:

"[FCA cases] are a big gamble," says Piacentile's counsel, former Boies, Schiller & Flexner partner David Stone of Stone & Magnanini, who cites cost-benefit analyses and good relationships with prosecutors as essential to his qui tam practice. "That's why you have to know what you're doing. Otherwise you can be in a case for ten years and not get anything."

But there is a darker perspective on Joseph Piacentile. Unlike most qui tam relators, he doesn't blow the whistle as an employee or business partner of the companies he has sued. Instead he relies on secondhand information collected through his own investigations. (Piacentile declined to comment for this article.) Defense counsel call him a professional mudslinger; some qui tam lawyers and former government lawyers say that he's a parasitic bully who files vague or questionable complaints and then pushes his way into settlements based on his qui tam savvy and his willingness to litigate. And Piacentile has a criminal history of his own--a 1991 conviction on fraud and tax charges--which some lawyers say can undercut his credibility as a plaintiff.

It's an interesting argument, worth the read, not least to see how lame most objections to the False Claims Act are these days. Piacentile "pushes his way into settlements based on his qui tam savvy and his willingness to litigate?"

Do billion-dollar companies lack the "willingness" to defend themselves in litigation? Do they hire lawyers who are not "qui tam savvy?"

Do they roll over every time some doctor from New Jersey with a fraud conviction "pushes" them?

That's what the corporate PR departments want you to believe, but even for Piacentile:

Out of 14 unsealed cases in which Piacentile has been a named relator, just four have successfully settled, seven have been dismissed (some without prejudice), and three are ongoing. In two of the three ongoing cases, those filed against Novartis and Sanofi-Aventis, the government has declined to intervene, a negative sign. And Piacentile's share in at least two of the four successful settlements has been relatively small. Two of the three corelators in Medco earned a combined award that was seven times greater than Piacentile's. Of the approximately $52 million in relators' awards in the 2007 Bristol-Myers settlement, Piacentile earned $7.3 million.

"Relatively small" is indeed relative. Though $7.3 million is a good chunk of change in most contexts, that's not necessarily the case in False Claims Act litigation, which typically require the relator prove systematic fraud by highly sophisticated entities that have covered their tracks thoroughly, often with the assistance of counsel. The cases frequently go on for years without trial, requiring thousands of attorney hours on plus extensive efforts by investigators, experts, and an army of support staff. It's not uncommon for relators to provide the U.S. Attorney's office several thousand pages of organized, indexed documents with explanatory memos at the very first meeting.

Qui tam cases are intense. They're expensive. They're prolonged.

Consequently, they're rare. There's ample incentive against filing them.

Maybe, in the big scheme of things, Piacentile is reaping more reward than some people think he should. It's hard to even evaluate; we don't know the details of the sealed cases. It bears mention here that, in all these cases, the U.S. Attorney's office and the Court obviously didn't have a problem with the awards that Piacentile received.

But let's keep our eye on the ball here. The rewards received by relators are but a fraction of the size of the fraud perpetrated by the defendants. The awards are capped by statute at 25% of the overall resolution of the case, 30% if the government doesn't intervene. Typically, courts (and lawyers) start around 15% and then adjust it up or down based on the facts of the case. See the Department of Justice’s Relator’s Share Guidelines (p. 17).

When we weigh the scales of equity, which is really worth of more complaint — that Piacentile has reaped a few million dollars for questionable investigation techniques, or that dozens of companies defraud the government of billions of dollars every year?

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The New Colossus:

Not like the brazen giant of Greek fame,
With conquering limbs astride from land to land;
Here at our sea-washed, sunset gates shall stand
A mighty woman with a torch, whose flame
Is the imprisoned lightning, and her name
Mother of Exiles. From her beacon-hand
Glows world-wide welcome; her mild eyes command
The air-bridged harbor that twin cities frame.
"Keep, ancient lands, your storied pomp!" cries she
With silent lips. "Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tossed to me,
I lift my lamp beside the golden door!"

But what of the tired and poor of our own shores?

WASHINGTON — With a client list that reads like a roster of Fortune 500 firms, a little-known company with an odd name, the Talx Corporation, has come to dominate a thriving industry: helping employers process — and fight — unemployment claims.

Talx, which emerged from obscurity over the last eight years, says it handles more than 30 percent of the nation’s requests for jobless benefits. Pledging to save employers money in part by contesting claims, Talx helps them decide which applications to resist and how to mount effective appeals.

The work has made Talx a boom business in a bust economy, but critics say the company has undermined a crucial safety net. Officials in a number of states have called Talx a chronic source of error and delay. Advocates for the unemployed say the company seeks to keep jobless workers from collecting benefits.

“Talx often files appeals regardless of merits,” said Jonathan P. Baird, a lawyer at New Hampshire Legal Assistance. “It’s sort of a war of attrition. If you appeal a certain percentage of cases, there are going to be those workers who give up.”

Like Gerald Grenier:

Advocates for the unemployed cite cases like that of Gerald Grenier, 47, who spent four years as a night janitor at a New Hampshire Wal-Mart and was fired for pocketing several dollars in coins from a vending machine. Mr. Grenier, who is mentally disabled, told Wal-Mart he forgot to turn in the change. Talx, representing Wal-Mart, accused him of misconduct and fought his unemployment claim.

After Mr. Grenier waited three months for a hearing, Wal-Mart did not appear. A Talx agent joined by phone, then seemingly hung up as Mr. Grenier testified. The hearing officer redialed and left an unanswered message on the agent’s voice mail. The officer called Mr. Grenier “completely credible” and granted him benefits.

Talx appealed, claiming that the officer had denied the agent’s request to let Wal-Mart testify by phone. (A recording of the hearing contains no such request.) Mr. Grenier won the appeal, but by then he had lost his apartment and moved in with his sister.

Mentally-disabled, but still working the night shift to pay his way, just so some morally-disabled companies can fire him and deny him his due.

I can't take these cases. No private lawyer can. The potential client has no way to even pay the costs, much less an attorney's fee.

In a perfect world, the government would intervene to stop major corporations from trampling on the rights of the powerless. 

Sometimes they do, but it depends on the people who represent the government:

[Ohio Attorney General Richard] Cordray is instead focused on using his authority to protect consumers from predatory lending and fraud. He has organized numerous legal challenges of banks and lenders, recently held a summit dedicated to combating consumer fraud that included 300 Ohio consumer advocates, and has been working with other state AGs and the Obama administration to "report trends in fraud and illegal conduct to Treasury to help develop a coordinated and effective national response" and argue in favor of effective financial reform.

A dozen other state AGs are too busy filing lawsuits against health care reform — suits that virtually no one believes will succeed — to care about a couple hundred thousand unemployed citizens being held down in poverty by a former employer too cheap to pay its dues and a frivolous-objection-filing machine.

Even AGs who do care don't have the resources to prosecute every company that systematically cheats its employees, former employees, and consumers. There's simply too much cheating out there.

Same goes for public interest / legal aid firms. They do great work, but even the ones in major cities labor under "shoestring budgets" and the beneficence of big firms with whom they partner, big firms which represent those same companies. 

Who, then, could take up the banner?

Not law school clinics, not anymore:

ANNAPOLIS, Md. — Law school students nationwide are facing growing attacks in the courts and legislatures as legal clinics at the schools increasingly take on powerful interests that few other nonprofit groups have the resources to challenge.

[...]

Law clinics at other universities — from New Jersey to Michigan to Louisiana — are facing similar challenges. And legal experts say the attacks jeopardize the work of the clinics, which not only train students with hands-on courtroom experience at more than 200 law schools but also have taken on more cases against companies and government agencies in recent years.

“We’re seeing a very strong pushback from deep-pocket interests, and that pushback is creating a chilling effect on many clinics,” said Robert R. Kuehn, a law professor at Washington University in St. Louis, citing a recent survey he conducted that found that more than a third of faculty members at legal clinics expressed fears about university or state reaction to their casework and that a sixth said they had turned down unpopular clients because of these concerns.

A bill is pending in Louisiana that would "forbid law students at clinics that receive any public money from suing government agencies, companies or individuals for damages unless exempted by the Legislature." The bill is "a response to a suit brought by the Tulane Law School clinic on behalf of an environmental group against federal and state environmental regulators, seeking greater enforcement of air quality standards in the Baton Rouge area."

That's right: we passed these laws, but we don't want anyone out there actually enforcing them.

Just like the unemployment compensation: it's on the books, but heaven forbid you get any of it.

The government can fix these problems in a blink. Leave the clinics alone. Provide more funding to public interest law firms. Make unemployment compensation objections subject to qui tam laws with treble damages for violations, a per-violation fine, and an award of attorney's fees.

If we're not going to have enough attorneys general to enforce the laws on the books, then we need to make a market for private ones.

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As The Recorder reported,

Four states and dozens of California cities and water districts have joined a qui tam lawsuit, unveiled this week, seeking millions of dollars in damages against a company for allegedly supplying customers with substandard PVC pipe.

The suit, brought against J-M Manufacturing Co. and its former parent company, Formosa Plastics Corp., alleges that J-M sold PVC pipe that had tensile strength below industry standards, and that the company deceived customers by choosing stronger samples for independent certification of its product. The suit also contends that under the company president, Walter Wang, it "implemented a series of 'cost-cutting' measures that undermined the quality of J-M's PVC pipe products," including filling supervisory positions with less experienced managers.

In one corner, we have the Defendants:

"At JM Eagle, we stand 100 percent behind the quality of our products," said spokesman Marcus Galindo. "Any claim that Mr. Wang or anyone at JM Eagle sacrificed the quality of our product for profit is ludicrous. We're a company that cares about more than just the bottom line."

According to the complaint, Hendrix was fired a week after he wrote a memo informing management that the tensile strength of the PVC pipe was below the standard required by independent certification agency Underwriters Laboratories Inc.

Galindo discounted that claim, saying outside agencies make unannounced visits to the company's plants to perform regular audits of its products.

Further, Galindo noted, over the three years that the federal government investigated the claim, it "never stopped purchasing pipe from us. They have decided not to move forward and intervene in this case."

In the other corner, we have Phillips & Cohen LLP's press release:

Nevada, Virginia, Delaware, Tennessee, San Diego, Sacramento, San Jose, the Los Angeles Department of Water and Power and 39 other California municipalities and water districts have joined a whistleblower lawsuit seeking millions of dollars in damages from JM Eagle and its former parent company, Formosa Plastics Corp. (USA), for supplying their water and sewer systems with pipes that JM knew were substandard. ...

"The decisions by so many states, cities and water districts to join this case show just how serious these allegations are," said Mary A. Inman, a San Francisco attorney with Phillips & Cohen LLP, which represents the whistleblower, the Commonwealth of Virginia, the State of Tennessee and 25 California cities and water districts. "With government entities struggling to meet their budgets, it's particularly important for them to recover their losses from any fraud."

As a result of the investigation into the quality of PVC pipe that JM Eagle has provided, the Nevada Department of Public Works, the cities of San Diego and Sparks, Nevada, as well as at least three water districts in Nevada and California (Truckee Meadows Water Authority, North Marin Water District and Alameda County Water District) have removed JM products from their approved-products lists for purchases.

In a case of this size, a government's decision to intervene or not is more political than legal. I don't mean that in a pejorative sense: when a government brings a multi-million-dollar lawsuit against one of its major suppliers, there's a lot more at stake than a settlement or judgment.

It's thus hard to read the tea leaves on the differing federal and state decisions. I'm sure the plaintiff's lawyers are quick to remind that the federal government usually does not intervene, and that the non-intervention is likely a product of limited resources and the federal government's belief that the state intervention (and the experience of the plaintiff's counsel) will ensure the claims are prosecuted in a diligent and thorough manner.

On the flip side, I'm similarly sure the defendants' lawyers consider the state interventions nothing more than cash-strapped states looking for "jackpot justice" from a profitable business.

An interesting one to watch, not least because the plaintiff's claims are predicated entirely upon violation of third-party standards and codes (e.g., Underwriters Laboratories, American Water Works Association, American Society for Testing and Materials, and FM Approvals) that are incorporated into the government contracts.

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Another interesting statutory construction case arising from allegations scientists at Cornell University Medical College and Thomas Jefferson University "misrepresented the findings of their DNA research when they applied for National Institute of Health research grants and did not correct the misrepresentations on subsequent progress reports and renewal applications." Problem is, the grants in question were filed back in the 1990s.

As Judge Savage recounts,

The [False Claims Act] prohibits 'any person from making false or fraudulent claims for payment to the United States.' Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 545 U.S. 409, 411, 125 S. Ct. 2444, 162 L. Ed. 2d 390 (2005); 31 U.S.C. § 3729(a). Any person found liable for violating the FCA is subject to a civil penalty of $ 5,000 to $ 10,000 per violation and treble damages. 31 U.S.C.A. § 3729(a) (West Supp. 2008); Hutchins v. Wilentz, Goldman & Spitzer, 253 F.3d 176, 181 (3d Cir. 2001).

An action under the FCA may be commenced in one of two ways. The attorney general may sue on behalf of the United States government; or, a private individual, known as a relator, can bring a qui tam action. 31 U.S.C.A. § 3730(a), (b)(1); Graham County, 545 U.S. at 411-12 (citing Vermont Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 769-72, 120 S. Ct. 1858, 146 L. Ed. 2d 836 (2000)). Because the relator brings the action on behalf of the government, he must give the government notice of the action. The government has sixty days from the filing of a qui tam complaint to elect to intervene in the action, and, for good cause shown, can petition the court to permit it to intervene at a later date. Graham County, 545 U.S. at 412; § 3730(b)(2) and (c)(3).

A civil action under the FCA must be brought within six years of the violation or within three years of the date when the government learned or should have learned the facts material to the violation, whichever is later. Id. §§ (b)(1), (2). In no event may an action be brought after ten years of a violation. Id. Specifically, the FCA statute of limitations provides:

(b) A civil action under [the False Claims Act] may not be brought -

(1) more than 6 years after the date on which the violation of [the False Claims Act] is committed, or

(2) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed,

whichever occurs last.

31 U.S.C.A. § 3731(b) (2003).

The critical difference between § (b)(1) and (b)(2) is that under § (b)(1), the statute of limitations begins to run when the violation occurs, whereas under § (b)(2), it begins to run when the appropriate person learned or should have learned facts putting him on notice that a violation occurred. A conflict arises from the interplay between the unusual procedure allowing a private party to bring a qui tam action on behalf of the government and the language of the tolling provision, which appears to relate only to the government. It is this conflict that raises the issues confronting us in this case."

United States ex rel. Bauchwitz, No. 04-2892, 2009 U.S. Dist. LEXIS 111919, at *23–25 (E.D. Pa. Dec. 1, 2009).

There's no obvious right answer:

The circuits and district courts that have considered the issue are split as to whether § 3731(b)(2) applies to private relators in actions where the government has not intervened. The Courts of Appeals for the Fourth, Fifth and Tenth Circuits have held that the tolling provision does not apply to qui tam actions where the government has not intervened. United States ex rel. Sanders v. N. Am. Bus Indus., 546 F.3d 288 (4th Cir. 2008), cert. denied, 129 S. Ct. 2793, 174 L. Ed. 2d 291 (2009); United States ex rel. Erskine v. Baker, 213 F.3d 638, 2000 WL 554644 (5th Cir. 2000) (unpublished table opinion); United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 725 (10th Cir. 2006). In contrast, the Ninth Circuit, as well as district courts in Massachusetts, Georgia and Illinois, apply § 3731(b)(2) to private actions even where the government has not intervened. United States ex rel. Hyatt v. Northrup Corp., 91 F.3d 1211, 1214, 1217 (9th Cir. 1996); United States ex rel. Ven-A-Care v. Actavis Mid Atlantic LLC, ___ F. Supp. 2d ___, 2009 U.S. Dist. LEXIS 92945, 2009 WL 3171798 (D. Mass. 2009); United States ex rel. Lewis v. Walker, No. 3:06-CV-16, 2007 U.S. Dist. LEXIS 68208, 2007 WL 2713018 (M.D. Ga. Sept. 14, 2007); United States ex rel. Bidani v. Lewis, No. 97 C 6502, 1999 U.S. Dist. LEXIS 3530, 1999 WL163053 (N.D. Ill. Mar. 12, 1999). The Third Circuit has not decided the issue.

Id. at *51–52.

Although the Third Circuit's precedent leans towards allowing relators in non-intervention cases to rely on statutory provisions arguably meant only for use by the government when it intervenes, the Supreme Court says otherwise:

The Third Circuit's view of the relator's status vis-a-vis the government is no longer viable in light of the Supreme Court's recent holding in United States ex rel. Eisenstein v. City of New York, 129 S. Ct. 2230, 173 L. Ed. 2d 1255 (2009). There, the Supreme Court held that the relator in a non-intervened FCA case cannot invoke the sixty-day deadline applicable to the United States as a party for filing a notice of appeal under Fed. R. App. P. 4(a)(1)(B). Resolving the circuit split, the Supreme Court determined that the government's retaining an interest in an FCA case in which it has not intervened does not make it a 'party.' 129 S. Ct. at 2233. It concluded that this interest does not convert the government's status as a real party in interest to that of a 'party' in the litigation in which it has declined to intervene. Id. at 2235. Consequently, the relator cannot be deemed to have the same status as the government.

Because the Third Circuit's rationale regarding the relator's status in Rodriguez has been rejected, it cannot support a holding that would permit a relator to take advantage of a tolling provision applicable only to the government. 54 It has been replaced by the reasoning of the Supreme Court in Eisenstein. Therefore, following that reasoning, we conclude that the three-year tolling period in § 3731(b)(2) does not apply in cases where the government does not intervene.

Id. at *55–56.

Summary judgment granted, case dismissed. It's not good material for appeal or certiorari, either, as the Eastern District of Pennsylvania also held "Even if the tolling provision applies, as [plaintiff] argues it does, the result would be the same. Because [relator] possessed knowledge of the facts underpinning his allegations regarding all three areas of the defendants' fraudulent statements by 1999 and their probable connection to grants, the claims that are barred by the six-year limitations period would also be barred by the three-year tolling period."

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Oh, Ashcroft v. Iqbal, will we ever stop blogging about you?

The newest online debate pits the class action defense lawyers at Drug & Device Law against University of Pennsylvania Law School Professor Stephen Burbank at PENNumbra, the online supplement to UPenn's Law Review.

Beck and Herrmann open with a defense of Iqbal on several grounds, including:

[C]ourts have no legitimate basis for favoring plaintiffs when interpreting pleading standards. A just system does not pick sides in advance, but instead establishes neutral rules. We reject the normative view that it is somehow “better” to let unmeritorious cases proceed than to risk that meritorious cases will be dismissed. Either way represents error, and neither error is inherently better than the other. Indeed, given the enormous transaction costs that litigation entails, Type II errors (false negatives) are probably preferable to Type I errors (false positives) from a purely economic perspective.

From a "purely economic perspective" it is better if corporations stop wrongfully causing damage in the first place, which they will only do if they have an economic incentive like the threat of legal liability.

But there's a bigger problem with Beck and Herrmann's argument.

It is an "error" when a court dismisses a meritorious case. It is a particularly unjust, unfair, and avoidable "error" when a court dismisses a meritorious case prior to any discovery.

It is not, however, an "error" for a court to refuse to dismiss a case that may be unmeritorious.

Why not? Because the case may be meritorious and, if it is not, the defendant has four more opportunities to resolve the case favorably by testing the merits of plaintiff's claim: judgment on the pleadings, summary judgment, trial, and post-trial relief. That is to say, even after the motion to dismiss, Plaintiff's claims will be assessed, re-assessed, re-re-assessed, then re-re-re-assessed. Then there's an appeal to re-re-re-re-assess each and every element of plaintiff's claims and each and every element of plaintiff's damages.

When a court declines to dismiss an unmeritorious case, there is ample room for error-correction down the road to ensure plaintiff's claims have merit. It's why we have a civil justice system: to provide a thorough airing and evaluation of disputes.

When a court dismisses a meritorious case, however, the only error-correction is a single appeal that will be evaluated under the same unfair anti-plaintiff standard established by Iqbal.

Beck and Herrmann have it exactly backwards: there is "no legitimate basis" for not favoring plaintiffs when interpreting pleading standards. Their "neutral" interpretation of pleading rules is not "neutral" at all, but rather a "normative view" that plaintiffs are not entitled to the same error-correcting procedures to which defendants are entitled.

A "just system" wouldn't pick defendant's side in advance.

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Business Week points us to the major cases.

As Litigation & Trial is a legal, rather than a business, blog, I'm going to take their list of cases but replace their description of each with the actual legal issue at stake, along with links to SCOTUSWiki, which hosts all of the relevant briefs for your reading pleasure:

Bilski v. Kappos: Whether a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (”machine-or-transformation” test), to be eligible for patenting under 35 U.S.C. § 101 and whether the “machine-or-transformation” test for patent eligibility, contradicts Congressional intent that patents protect “method[s] of doing business” in 35 U.S.C. § 273.

Free Enterprise Fund v. Public Company Accounting Oversight Board, et al.: Whether the Sarbanes-Oxley Act is consistent with separation-of-powers principles - as the Public Company Accounting Oversight Board is overseen by the Securities and Exchange Commission, which is in turn overseen by the President - or contrary to the Appointments Clause of the Constitution, as the PCAOB members are appointed by the SEC.

Black et al. v. United States: Whether the “honest services” clause of 18 U.S.C. § 1346 applies in cases where the jury did not find - nor did the district court instruct them that they had to find - that the defendants “reasonably contemplated identifiable economic harm,” and if the defendants’ reversal claim is preserved for review after they objected to the government’s request for a special verdict.

American Needle Inc. v. NFL, et al.: Whether NFLP, the NFL, and the teams functioned as a “single entity” when granting the company an exclusive headwear license and therefore could not violate Section 1 of the Sherman Act, 15 U.S.C. 1, which requires proof of collective action involving “separate entities.”

United Student Aid Funds, Inc. v. Espinosa: Where a debtor declares to discharge a student loan debt in his Chapter 13 bankruptcy plan, has the debtor satisfied the due process requirements of Mullane v. Cent. Hanover Bank & Trust Co, and does the fact that the debtor failed to initiate an adversary proceeding render the enforceability of the discharge order under 11 U.S.C. 1327(a)inapplicable?

Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Company: Can a state legislature properly prohibit the federal courts from using the class action device for state law claims?

Hemi Group, LLC, et al v. City of New York: Whether city government meets the Racketeer Influenced and Corrupt Organizations Act standing requirement that a plaintiff be directly injured in its “business or property” by alleging non commercial injury resulting from non payment of taxes by non litigant third parties.

Graham County Soil and Water Conservation Dist v. ex rel. Wilson: Whether federal courts have jurisdiction over False Claims Act suits based on revelations in administrative reports or audits issued by state or local governments, as opposed to the federal government.

Stay tuned for more discussion of each in upcoming posts.

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At Rolling Stone:

Weigman's auditory skills had always been central to his exploits, the means by which he manipulated the phone system. Now he gave Lynd a first-hand display of his powers. At one point during the visit, Lynd's cellphone rang. "I can't talk to you right now," the agent told the caller. "I'm out doing something." When he hung up, Weigman turned to him from across the room. "Oh," the kid asked, "is that Billy Smith from Verizon?"

Lynd was stunned. William Smith was a fraud investigator with Verizon who had been working with him on the swatting case. Weigman not only knew all about the man and his role in the investigation, but he had identified Smith simply by hearing his Southern-accented voice on the cellphone — a sound which would have been inaudible to anyone else in the room. Weigman then shocked Lynd again, rattling off the names of a host of investigators working for other phone companies. Matt, it turned out, had spent weeks identifying phone-company employees, gaining their trust and obtaining confidential information about the FBI investigation against him. Even the phone account in his house, he revealed to Lynd, had been opened under the name of a telephone-company investigator. Lynd had rarely seen anything like it — even from cyber gangs who tried to hack into systems at the White House and the FBI. "Weigman flabbergasted me," he later testified.

As I wrote before in the context of Marc Dreier, "In the world of computer security, that's known as social engineering. Hackers have recognized for a long time that it is far easier to trick someone into giving up their password than to 'hack' it via wizardry."

Weigman's story is incredible, a blind teenager with nothing more than a phone who managed to dispatch SWAT teams, attack other phone hackers ("phreaks"), relentlessly harass phone company investigators, and complicate the FBI's investigation into him.

A Wired story about his sentencing includes an audiotape of him smooth-talking an AT&T operator (by using a small amount of internal lingo and a chatty demeanor) into disconnecting someone's phone line.

I highlight these stories for several reasons, not least to reiterate the importance of (and presumption of) trust in our interdependent society. It's always easy in retrospect to see "obvious" signs of fraud, to recognize the importance of verifying someone else's statements, and to understand the need to reduce agreements and understandings to writing.

But the truth is, no one can protect themselves all the time, at least not if they have any plans for their life other than perpetual paranoia.

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Via @walterolson, CQ Politics reported yesterday:

The Senate rejected a bid Thursday to impose new limits on whistleblower awards as it moved toward passage of legislation to beef up the government’s ability to combat financial fraud.

By 31-61, the Senate rejected an amendment by Jon Kyl , R-Ariz., that sought to set a $50 million maximum on the amount that a whistleblower could receive through a False Claims Act lawsuit to recoup taxpayer funds lost to fraud. Currently, awards can reach 30 percent of the total recovered for the federal government, if a judge approves that much.

Kyl said whistleblowers who pinpoint fraud by government contractors and other recipients of taxpayer funds “deserve to be compensated when they save the government money.” But he said the current percentage formula can result in some successful litigants being “grossly overcompensated.”

Senate Judiciary Chairman Patrick J. Leahy , D-Vt., sponsor of the antifraud bill, and Sen. Charles E. Grassley , R-Iowa, author of the 1986 False Claims Act provisions that reward citizens for suing on behalf of taxpayers, opposed Kyl’s effort to cap the awards.

The law, Leahy said, “is very well balanced the way it is, with a judge having to make a final decision on the award. ...I don’t want to fix something that’s not broken.”

Grassley said whistleblower suits under the False Claims Act have recovered $22 billion for the government since 1986.

False Claims Act cases, sometimes known as qui tam (an abbreviation of qui tam pro domino rege quam pro se ipso in hac parte sequitur, meaning "[he] who sues in this matter for the king as [well as] for himself"), are unique and complicated beasts dating back to the 13th century in England. 1986 is when the most recent amendments to the Act were passed.

The cases are initially filed in under seal for review by the U.S. Attorney, who then decides if they want to pursue the action themselves. If they decline, then the whistleblower can proceed as a "relator" of the United States, fighting the action on the government's behalf. There's already a huge backlog of these cases waiting for Department of Justice review, unable to proceed.

I don't blame them for the delay. The cases combine the legal complexity of interpreting federal regulations and procurement contracts with the factual difficulty of proving mens rea in a white collar criminal case, making them difficult and time-consuming just to screen, much less pursue.

The reason whistleblowers and law firms take them -- with extraordinary risk to the whistleblower's career and livelihood, and substantial investments in time and money by the law firm, which usually represents the plaintiff on a contingent fee -- is because they can result in tremendous damages if proven at trial. Under 37 U.S.C. § 3729, anyone proven to have knowingly presented a false claim "is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000 [for each false claim], plus 3 times the amount of damages which the Government sustains because of the act of that person," as well as "costs of a civil action brought to recover any such penalty or damages."

The whistleblower -- assuming they can prove entitlement by, among other elements, being the "original source" of the information -- gets a portion of the recovery, which they then split with the lawyers who represented them on the contingent fee.

The question is: why would anyone want to cap these incentive awards at $50 million?

The vast majority of qui tam / False Claims Act cases don't get anywhere near that. Some recent large settlements have been for $325 million against Northrop Grumman, with the plaintiff / relator receiving $48.7 million, and for $128 million against Network Appliance, with the plaintiff / relator receiving $19.2 million. One of the very few cases in which the award broke $50 million was the $1.4 billion Eli Lilly Zyprexa case, in which the four different plaintiff / relators together received $78,870,877, about 5% of the overall recovery. It's unclear if even that would have hit Senator Kyl's proposed cap, since it was divided among the plaintiffs.

The answer becomes clearer when you talk about massive cases, particularly those in which the government declines to intervene.

Assuming a 40% contingent fee agreement, a $50 million cap results in a $20 million cap on the attorney's fees. Sounds like a lot until you consider that litigation and trial over the meaning of a few documents and involving only half a million pages of documents, 124 trial witnesses, and 80 depositions, can cost $60 million for each side. For the In re Visa Check/Mastermoney Antitrust Litigation, 297 F. Supp. 2d 503 (E.D.N.Y., 2003), had plaintiffs' lawyers been billing by the hour, they would have worked in just the litigation the equivalent of $62,545,603 -- trial would have been extra.

But the plaintiffs' firms weren't billing by the hour -- they took on the risk themselves, much as most False Claims Act firms do. Can you imagine what it would take to actually prove at trial, as the DoJ press release says, "Northrop provided and billed the National Reconnaissance Office (NRO) for defective microelectronic parts, known as Heterojunction Bipolar Transistors (HBTs)?"

What about something bigger? What if there are serious problems with more than just the "Heterojunction Bipolar Transistors" in the $337 billion F-35 joint strike fighter? What if private military contractors in Iraq have been overbilling the more than $100 billion they've received? What about the next Zyprexa fraud?

Such cases would be enormously costly, time-consuming and difficult to pursue, undoubtedly many times larger than the $120-million-in-fees Princeton case and at least as large as the more-than-$120 million Visa antitrust case. Most importantly, such would be exceedingly risky, as the plaintiffs would have to prove "knowing" fraud among millions of documents, thousands of transactions, and hundreds of pages of complicated regulations.

What if the Department of Justice wasn't able to commit the resources to do that? The government can't always get David Boies and his team, eager to promote their new firm, for half price, like they did in the antitrust case against Microsoft.

Keep in mind, the core purpose of qui tam is not only to encourage whistleblowers, but to outsource the heavy lifting of carrying a lawsuit through to recovery. As noted by Justice Scalia, "The FCA can reasonably be regarded as effecting a partial assignment of the Government’s damages claim," critical because "the assignee of a claim has standing to assert the injury in fact suffered by the assignor. " Vermont Agency of Natural Resources v. United States ex. rel. Stevens, 529 U.S. 765 (2000).

An upper limit on recovery of $20 million -- or even, say, $40 million, if we doubled the contingent fee to 80% -- isn't enough to justify pursuing a case of that magnitude, which leaves us, the taxpayer, holding the bag for someone else's fraud on the government.

Senator Kyl has never been a fan of open government. Is there a particular case brewing that he has in mind? 

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