Wednesday, June 22, 2011

FCA Catch 22

New Image The Supreme Court may have constructed a kind of black hole for some law suits with last month’s Schindler Elevator Corp v. U.S. Ex Rel Kirk. Put together with FRCP Rule 11Schindler may result in an attorney's act of exploring the viability of a potential claim (which Rule 11 would seem to require) simultaneously destroying that claim.   

In brief, the False Claims Act allows employees (among others) to bring suit as "relators" against firms that submit false claims to the government. In Schindler itself, the employer’s contract with the US required it to file reports about its employment of veterans.  Kirk, a former employee, brought an FCA suit alleging that Schindler's claims for payment were false because it had not filed those reports or its filings misrepresented its employment of veterans. But prior to bringing suit, Kirk had his wife request information from the Department of Labor under the Freedom of Information Act.  The responses revealed noncompliance and were one of the bases of Kirk's claim.

This is where an FCA exception enters the picture: A false claims suit can't be based on certain publicly-disclosed information. The relevant language bars suit "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." The question before the Court, then, was whether a suit based on an FOIA response would be based on a "administrative . . . report."  And a majority of the Court held yes.  Stressing a broad reading consistent with ordinary meaning of “reports” and no textual basis for a narrower interpretation, the majority held that an FOIA response qualifies; thus, a transaction disclosed in a record attached to an FOIA response is disclosed “in” that response and therefore is disclosed “in” a report for purposes of the public disclosure bar. 

So what’s an attorney to do when considering whether to file an FCA case? Schindler says don’t submit an FOIA request. But Rule 11 would seem to necessitate one where the employee doesn’t have sufficient information to file a complaint. Look at (a)(3), which requires an attorney to certify that “the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery….” Is a pre-suit investigation “reasonable” if easily available information was not requested because it would destroy the case?   

It is difficult to imagine another situation where diligent investigation simultaneously extinguishes that claim.  Perhaps the singularity of this outcome suggests the majority got its interpretation of the FCA wrong. Or maybe Rule 11 should be read not to view an (otherwise reasonable) investigation as reasonable when doing so would negate the claim.   

Or maybe the word “based” provides an out.  To the extent that Kirk’s FOIA request merely confirmed his previous suspicions, maybe his FCA suit was not so much “based on” the responses as confirmed by them. In other words, when a realtor has his own information without an FOIA request but invokes the statute to further investigate, we could treat his case as not “based upon” his FOIA request and so bypass Schindler

However, attempts to define when a claim is or is not “based upon” a request are hazardous at best and the applicable standard troublingly unclear.  Reasonable suspicion?  Probable cause? Of course, a plaintiff may satisfy Rule 11’s reasonable investigation standard by virtue of his knowledge as an employee or by virtue of investigations outside FOIA requests.  Yet, if he couldn’t bring suit without the information revealed by an FOIA request, wouldn’t it be fair to describe his suit as “based upon” the FOIA response? 

Sure, if Schindler came out the other way, cases based on nothing more than FOIA requests could be a viable FCA claims, and, yes, the purpose of the FCA public disclosure bar – stressed in Schindler – is to discourage entrepreneurial litigation.  But one wonders whether this particular game is worth the candle since Schindler seems destined to result either in more ill-founded suits or more litigation over what a particular suit is based on. Or maybe a third possibility – fewer suits to vindicate the public’s interest in deterring false claims.


Thanks to Kate Stone for helping me on this.

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Charles - A good point, and well illustrated. But my main response is gratitude at seeing an actually accurate invocation of the term "Catch 22," which most of the judiciary (including the Supreme Court) cannot seem to get right.

Posted by: Alek | Jun 23, 2011 5:29:51 PM

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