CIVIL FALSE CLAIMS ACT: Eighth Circuit Rejects ... - Fried Frank

FraudMail Alert ®
CIVIL FALSE CLAIMS ACT: Eighth Circuit
Rejects Justice Department Efforts to Avoid
Paying Relators’ Share on Settlement
“Unrelated” to Relators’ Qui Tam Claims
The Justice Department (“DOJ”) received an unpleasant surprise last week. After releasing Hewlett-
Packard Company (“HP”) from a range of False Claims Act liability in return for a $55 million settlement
payment, a divided panel of the Eighth Circuit Court of Appeals ruled that DOJ would have to pay a
substantial portion of that settlement amount to Relators—far beyond the limited “share” payment DOJ
expected to make. United States ex rel. Roberts v. Accenture, LLP, No. 11-2054, 2013 WL 764734 (8th
Cir. Mar. 1, 2013). The appellate decision rejected the government’s myriad arguments—including an
unusual claim (for DOJ anyway) that Relators were not entitled to any recovery on certain qui tam
complaint allegations because they lacked the particulars necessary to comply with Rule 9(b). The end
result is that DOJ now has to pay Relators $8.8 million, as opposed to the $1.9 million it anticipated
paying, leaving a $7 million deficit in the government’s net recovery in the case.
While the Eighth Circuit ruling primarily addressed the fight between DOJ and Relators, with HP as
bystander, the decision exposes the risk defendants face if they do not wrap up their attorneys’ fees
liability at the time of settlement in cases where the relator’s share is still in dispute. A subsequent ruling
that a relator is entitled to a share of the government’s recovery on “other” claims could lead to additional
attorneys’ fees liability for the defendant under the FCA’s fee-shifting provision. 31 U.S.C. § 3730(d)(1) (a
qui tam plaintiff “shall also receive an amount for reasonable expenses which the court finds to be have
been necessarily incurred, plus reasonable attorneys’ fees and costs. All such expenses, fees and costs
shall be awarded against the defendant”).
Background
In their qui tam complaint, filed in 2004, Relators alleged HP defrauded the government through certain
kickback and defective pricing schemes. DOJ intervened in the action in 2006, after receiving what the
Eighth Circuit described as extraordinary assistance from Relators, who not only funded substantial
portions of the investigation but actually drafted the Inspector General subpoenas for the government
attorneys. Two years after the intervention decision, HP disclosed the results of an internal audit,
revealing compliance problems with respect to a price reduction clause under a specific GSA contract
(“Contract 35F”). The qui tam complaint made no specific mention of Contract 35F. Ultimately, HP
settled the claims with the United States for $55 million, of which $9 million expressly was allocated to the
Fried Frank FraudMail Alert No. 13-03-08 03/08/2013
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“kickback” allegations in the qui tam complaint and $46 million was allocated to the Contract 35F
defective pricing claim. With respect to the Relators’ share payment, DOJ took the position that Relators
were only entitled to a percentage of the $9 million payment for the kickback allegations, and that
Relators would not be awarded any share of the $46 million recovery for the Contract 35F claim. Relators
were not happy with this distribution and demanded their statutory share of the $46 million payment as
well. The government’s refusal to share any portion of the Contract 35F recovery was litigated, resulting
in the Eighth Circuit decision issued last week.
The Role of the Government’s Intervention
FCA Section 3730(d)(1) governs relator awards when the government intervenes in the qui tam action. It
provides:
If the Government proceeds with an action brought by a [relator], such person shall . . .
receive at least 15 percent but not more than 25 percent of the proceeds of the action or
settlement of the claim, depending upon the extent to which the person substantially
contributed to the prosecution of the action.
Relators argued that, in addition to their share of the $9 million settlement proceeds resulting from the
kickback claim, they also should receive, under § 3730(d)(1), a 15 percent minimum share of the
$46 million Contract 35F recovery as a “finder’s fee” for bringing the action in which the government
intervened. DOJ had a different view of the situation. The government responded that “the proceeds of .
. . [a] settlement of the claim” under § 3730(d)(1)—an action in which the government has intervened—
are limited to the actual claims raised by the Relators, and do not include a claim (such as the Contract
35F claim) that was not alleged in the Relators’ complaint and was not related to claims alleged in that
complaint. Gov’t Reply Br. at 5-6. DOJ argued that its interpretation of this provision is consistent with
the overall statutory scheme, which requires a claim-by-claim analysis to determine the relator’s right to
share in the government’s recovery on a claim pursued through an alternate remedy and the relator’s
right to recover as an “original source” of publicly disclosed allegations under the public disclosure bar.
Gov’t Reply Br. at 7-11. See 31 U.S.C. § 3730(c)(5) (alternate remedy provision); 31 U.S.C. § 3730(e)(4)
(public disclosure provision); Rockwell Int’l Corp. v. United States, 549 U.S. 457 (2007) (holding that
relator was not an “original source” entitled to a share of government’s recovery under 31 U.S.C. §
3730(e)(4) because relator’s allegations described an entirely different cause of the defective product
fraud than that ultimately uncovered and settled by the government). And, as discussed below, DOJ
argued that one of the ways that it could establish that the Contract 35F claim was unrelated to
allegations in Relators’ complaint was that the “defective pricing” allegations in that complaint would not
have satisfied the pleading requirements of Rule 9(b) and therefore were legally insufficient to state an
FCA claim (which is a prerequisite to recovery by a relator).
The Eighth Circuit applied a more limited interpretation of § 3730(d)(1), ruling that the 15 percent
minimum share is a “minimum finder’s fee in situations where the government elects to proceed with a
relator’s action and obtains a judgment or settlement” (subject to three statutory exceptions that did not
apply in this case). 2013 WL 764734, at *5. On this rationale, the court upheld what it characterized as
the district court’s “factual finding” that the settled Contract 35F claim was related to Relators’ action.
Claim-by-Claim Analysis
In its decision, the Eighth Circuit did not reject the concept that one way to ascertain whether claims are
related for purposes of § 3730(d)(1) is to determine whether there is a factual overlap between them.
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Instead, it held that the government had failed to identify any clear error in the district court’s
determination that the Contract 35F claim was related to the qui tam claims. The court also focused on
the timing of the Contract 35F claim, noting that since it was based on an HP disclosure made as part of
an internal investigation that began shortly after a partial unsealing of the qui tam complaint, it was
disingenuous for the government to claim it was an unrelated claim that stemmed from a purely voluntary
disclosure by HP.
This rationale drew criticism from the dissenting judge in Roberts, who pointed out that the key factual
determination to be made is not when the government’s Contract 35F claim was made, but
whether there is sufficient factual overlap between the defective pricing claim settled by
the government and the claim brought by the relators, such that proceeds of the
settlement of the defective pricing claim should fairly be characterized as “proceeds of
the . . . settlement of the claim” brought by the relators.
The dissent also criticized the majority for not undertaking its own review of the record in the case,
suggesting strongly that such a review would have demonstrated that the claims were not related:
although the court asserts in the end that the district court found that the relators brought
the same claim that the government settled, the court never reviews whether such a
finding is supported by the record. The court affirms the district court's award based on a
different theory—that is, that the relators' action played a role in uncovering the defective
pricing scheme that was the subject of the government's settlement. Ante, at 10. But as
discussed, the court's theory is legally flawed, because the statute does not give relators
the right to a share of recovery based on additional claims that the government brings or
settles after it intervenes in an action to pursue a claim or claims brought by relators.
The dissent is persuasive. Related precedent and the actual language of § 3730(d)(1) support the view
that an issue discovered and disclosed after certain allegations are made is not necessarily sufficiently
factually related to those original allegations by the relator to trigger the statutory “finder’s fee.” The
majority decision’s focus on timing, on the other hand, would seem to allow this fee for all claims that
would not have been asserted by the government but for the Relators’ original complaint, no matter how
factually attenuated. See 2013 WL 764734, at *7 (“The FCA’s purpose was advanced in this case. The
relators’ complaint and assistance in prosecuting the action resulted in HP investigating its pricing
practices. The government then chose to intervene in the relators’ action, initiated its own investigation
into HP’s defective pricing, and ultimately reached a settlement favorable to the government. Thus, the
relators’ action served its intended purpose, and the relators should be rewarded accordingly.”).
Rule 9(b) Analysis
In somewhat of a role reversal for DOJ, the government sought to bolster its argument that the Contract
35F claim was not related to the qui tam complaint allegations by applying a Rule 9(b) analysis. The
government argued strenuously that (a) Rule 9(b) applies to FCA claims, (b) the allegations in the qui tam
complaint should be evaluated under a 9(b) standard to determine if they are sufficiently pleaded, and
(c) the complaint allegations are devoid of the details and particulars that are essential to pleading an
FCA cause of action. DOJ’s acknowledgement of the importance of Rule 9(b) in weeding out FCA
allegations that are based on conclusory assertions and speculation certainly is welcome and refreshing,
particularly given its express recognition in its appellate brief of the type of pleading that is mandatory to
meet the Rule 9(b) standard:
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The Rule requires any fraud claim to specify “the time, place, and content of the
defendant’s false representations, as well as the details of the defendant’s fraudulent
acts, including when the acts occurred, who engaged in them, and what was obtained as
a result.”
[ . . . . ]
But as this Court [has] . . . made clear, while the requirements of Rule 9(b) must be read
in harmony with the principles of notice pleading, a fraud claim still “must identify who,
what, where, when, and how.”
[ . . . . ]
A qui tam complaint that fails to meet Rule 9(b)’s specificity requirements is a “legally
invalid complaint” that “cannot form the basis for recovery” under the FCA.
Gov’t Reply Br. at 17-19.
The Eighth Circuit panel reaffirmed the importance of Rule 9(b) and its role as a safeguard that protects
defendants from frivolous accusations and provides notice of the claims against them. But the court
rejected the government’s theory that Rule 9(b), which is “meant to test the sufficiency of a complaint at
its outset,” has any bearing on a relator’s share determination under § 3730(d)(1) at the end of the case
when there is no longer any opportunity to cure a deficiency. 1
The Court therefore affirmed the district court’s determination that Relators were entitled to both a 21
percent recovery on the $9 million kickback claim (which was not in dispute on appeal) and also a 15
percent recovery on the $46 million recovery on the Contract 35F defective pricing claim. The end result
is that DOJ had to pay out to the Relators $7 million more than it anticipated when it settled the matter
with HP.
Also, as a practical matter, the Eighth Circuit’s ruling underscores the importance of resolving relator’s
share and attorneys’ fee issues at settlement in intervened cases. In particular, if attorneys’ fees liability
is not resolved at settlement, particularly where there is an unresolved dispute between the relator and
the government over the relator’s share payment, the defendant may end up being responsible for
additional attorneys’ fees liability. It should be noted that attorneys’ fees liability also can be created in
other settings where a qui tam action has been filed, including cases where the government has resolved
the matter through an alternate remedy or contract modifications. See, e.g., United States ex rel. Barajas
v. Northrop Corp., 258 F.3d 1004 (9th Cir. 2001) (ruling that, under the circumstances of the case,
suspension and debarment proceeding was an alternate remedy); United States ex rel. Alderson v.
1
The court also examined cases cited by the government and found that they did nothing to advance the
government’s argument. 2013 WL 764734, at *9-10. Specifically, the court distinguished the Sixth Circuit’s
decision in United States ex rel. Bledsoe v. Community Health Systems, 501 F.3d 493 (6th Cir. 2007) (“Bledsoe
II”) as an “alternate remedy” case in which the government began its investigation before the relator filed the qui
tam suit, it did not intervene in the qui tam action, and the relator failed to establish a connection between his
action and the government’s existing settlement. Also, the court determined that the Supreme Court’s decision
in Rockwell International Corp. v. United States, 549 U.S. 457 (2007) did not apply because relator’s action in
that case was challenged as based on publicly disclosed allegations and the Supreme Court ruled that the relator
was not an “original source,” but the government in Roberts did not challenge Relators’ claim under the “direct
and independent” standard of the original source provision.
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Quorum Health Group, Inc., 171 F. Supp. 2d 1323, 1339-40 (M.D. Fla. 2001) (“Any exclusion of the $5
million should have been manifested in the language of the settlement agreement”).
* * *
This memorandum is not intended to provide legal advice, and no legal or business decision should be
based on its content. If you have any questions about the contents of this memorandum, please call your
regular Fried Frank contact or one of the attorneys listed below:
Author:
Douglas W. Baruch
Contacts:
Douglas W. Baruch
Partner
+1.202.639.7052
John T. Boese
Of Counsel
+1.202.639.7220
Fried Frank FraudMail Alert ® No. 13-03-08 03/08/2013
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