Today, the Supreme Court held, 7-2, that the term “administrative” in the False Claims Act’s public disclosure provision in Section 3730(e)(4)(A) includes allegations or transactions disclosed in state and local administrative reports. In Graham County Soil & Water Conservation District v. United States ex rel. Wilson, No. 08-304 (Mar. 30, 2010) (“Graham County II”), the Court reversed the Fourth Circuit’s decision that limited the scope of Section 3730(e)(4)(A) to public disclosures in administrative reports that were exclusively federal, and found that nonfederal reports such as those that disclosed the alleged fraud in Graham County II qualified as public disclosures under Section 3730(e)(4)(A). Today’s decisions can be found at http://www.supremecourt.gov/opinions/09pdf/08-304.pdf.

Today’s decision interprets the public disclosure provision put in place in the FCA in 1986 in order to bar parasitic qui tam suits. Importantly, although the Court specifically noted that the public disclosure bar signed into law in the Patient Protection and Affordable Care Act (“PPACA”) on March 23, 2010 would replace the version that is the subject of today’s decision, the majority stated that the new law made no mention of retroactivity, “which would be necessary for its application to pending cases.” Thus, the recent amendments to the public disclosure provision have no retroactive effect. See Pub. L. 111-148, 124 Stat. 119, § 10104(j)(2) (2010) (amending 31 U.S.C. § 3730(e)(4)). See also FraudMail Alert No. 10-03-24. Today’s decision is therefore the law of the land on public disclosure in FCA suits that are based on conduct occurring prior to March 23, 2010, and the new amendments should apply only to conduct occurring after March 23, 2010.

Writing for the majority, Justice Stevens divided the opinion into three basic parts: an examination of the text of the public disclosure provision, its legislative history, and the policies underlying it. The Court concluded that the text and underlying policies of Section 3730(e)(4)(A) did not support the federal limitation in the Fourth Circuit’s decision, and it found that the legislative history of the 1986 provision did not resolve the question before the Court. Instead, the Court held that the balance struck between encouraging qui tam suits and discouraging parasitic suits under the 1986 public disclosure bar did not limit the term “administrative” to federal sources, and the Court left for the lower courts to decide whether the relator was an original source of the allegations in Graham County II. Justice Scalia concurred in the judgment and concurred in part in the majority decision. Justice Sotomayor, joined by Justice Breyer, dissented.

The reader should note that the authors filed an amicus brief in the Supreme Court on behalf of the Washington Legal Foundation and the Allied Educational Found in support of the petitioners/defendants in this case.

Factual Background and Decisions Below.

Prior to the recent amendment in the PPACA, the FCA’s public disclosure bar in Section 3730(e)(4)(A) provided:

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.

In addition, an “original source” was defined in Section 3730(e)(4)(B) as one who has direct and independent knowledge of the information on which the allegations are based. These two provisions were included in the statute in a 1986 amendment that sought to avoid the results in two prior cases: United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), which allowed a parasitic qui tam suit copied from a criminal indictment, and United States ex rel. Wisconsin v. Dean, 729 F.2d 1100 (7th Cir. 1984), which dismissed a true “original source” under the “government knowledge” bar enacted in 1943 to overturn the Marcus decision.  

The relator in Graham County II alleged that, by failing to use competitive bidding for certain work they performed, two North Carolina counties made improper payments from funds received under the federal Emergency Watershed Protection program. The allegations in the declined suit closely followed the conclusions of an independent auditor hired by the counties to review these program expenditures, as required under federal regulations. The counties moved to dismiss the suit under Section 3730(e)(4)(A), arguing that, because the auditor’s reports were transmitted to local and state administrative agencies prior to the complaint, the allegations had been “publicly disclosed” in an “administrative” report and the relator was not an “original source” of the information underlying the allegations. The district court ruled that the auditor’s reports were “administrative” reports under Section 3730(e)(4)(A), found that the relator was not an “original source,” and thus dismissed the suit under the public disclosure bar. The Fourth Circuit reversed, ruling that the term “administrative” in the public disclosure bar was strictly limited to federal sources and therefore that the allegations were not “publicly disclosed” in the audit reports filed with the state.  

The Supreme Court’s Textual Analysis  

The Court noted at the outset of its analysis of the statutory language that there was nothing inherently federal about the word “administrative” and that Congress had not defined the term in the FCA. The Court was unpersuaded by the Fourth Circuit’s application of what the Court referred to as “the Sandwich Theory.” Under this theory, the Fourth Circuit deemed the reports referred to in category 2 of the public disclosure provision to be exclusively federal because the term “administrative” was sandwiched between the terms “congressional” and “GAO” in reference to these reports. In rejecting the Fourth Circuit’s Sandwich Theory, the majority decision found that these adjectives were “too few and too disparate” to qualify as a “string of statutory terms” or “items in a list,” as those phrases were used in other precedents. Rather, the Court found that the entire text of the public disclosure bar and all of the sources listed in Section 3730(e)(4)(A) needed to be considered, and doing so considerably weakened the case for limiting the term “administrative” to federal sources:

In sum, although the term “administrative” may be sandwiched in Category 2 between terms that are federal in nature, those terms are themselves sandwiched between phrases that have been generally understood to include nonfederal sources; and one of those phrases, in Category 1, contains the exact term that is the subject of our inquiry. These textual clues negate the force of the noscitur a sociis canon, as it was applied by the Court of Appeals. We are not persuaded that the associates with which “administrative” keeps company in §3730(e)(4)(A) endow it with an exclusively federal character.

Slip op. at 11-12.

Legislative History

Next, the Court considered the arguments based on the legislative history of the 1986 amendments. It found that the legislative history of the public disclosure bar adopted in 1986--when the term “administrative” was written into the law--shed no light on the meaning of that term. See Slip op. at 14 n. 15 (citing John T. Boese, Civil False Claims and Qui Tam Actions § 4.02[A] (Aspen Law & Business) (3d ed. 2006 & Supp. 2010-1)). The critical language was adopted in a conference committee after the Senate and House reports on the amendments were completed. This lack of legislative history caused Justice Scalia, in a concurring opinion, to highlight the folly of even considering the legislative history of the public disclosure bar.

Nevertheless, the majority found that what legislative history of the public disclosure provision did exist demonstrated Congress’s efforts to avoid the results in Marcus v. Hess and Wisconsin v. Dean, showing that Congress sought to “strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits.” The way Section 3730 (e)(4)(A) achieved this was “a matter of considerable uncertainty,” and the Court found that there was no evident legislative purpose to guide the resolution of the precise scope of the suits deemed unmeritorious or harmful under the public disclosure bar.

The majority also specifically rejected relator’s arguments based upon a letter from Sen. Grassley and Rep. Berman in 1999:

Needless to say, this letter does not qualify as legislative “history,” given that it was written 13 years after the amendments were enacted. It is consequently of scant or no value for our purposes.

Slip op. at 17.

Underlying Purposes and Public Policy

Finally, the Court addressed a number of policy arguments advanced by both sides and held that these also favored the defense view. The Court rejected as “sheer conjecture” the proposition advanced by the Solicitor General and the relator that many state and local reports never come to the attention of federal authorities:

Numerous federal investigations may be occurring at any given time, and DOJ attorneys may not reliably learn about their findings. DOJ attorneys may learn about quite a few state and local inquiries, especially when the inquiries are conducted pursuant to a joint federal-state program financed in part by federal dollars, such as the program at issue in this case. Just how accessible to the Attorney General a typical state or local source will be, as compared to a federal source, is an open question. And it is not even the right question.

Slip op. at 18. The right question, the Court explained, is whether the allegations of fraud were “publicly disclosed,” not “whether they have landed on the desk of a DOJ lawyer.” Indeed, public disclosure is the “statutory touchstone,” the Court concluded, and the broad sweep of public disclosures--through the “hearings” in category 1 and “news media” in category 3--demonstrate that the focus of the provision is not confined to federal sources.

The Court also pointed out that it was “flat wrong” to suggest that its holding would be a return to the unduly restrictive government knowledge standard that prevailed before 1986:

Today’s ruling merely confirms that disclosures made in one type of context—a state or local report, audit, or investigation—may trigger the public disclosure bar. It has no bearing on disclosures made in other contexts, and it leaves intact the ability of original sources to prosecute qui tam actions irrespective of the state of Government knowledge.

Slip op. at 20. The original source question thus remains open on remand.