Imbedded within the recently passed health care reform law (the Patient Protection and Affordable Care Act, or the Health Reform Law) (H.R. 3590) are revisions to an important defense in the False Claims Act (FCA) that will have significant implications for individuals and companies investigated for or charged with violations of the FCA. The FCA's “public disclosure bar” — a well-established threshold jurisdictional defense — has been considerably weakened. Paving the way for increased whistleblower litigation, the Health Reform Law opens the courtroom doors to more “parasitic” suits by qui tam relators. The new amendment (Amendment) weakens the public disclosure bar by: (1) restricting the scope of information considered “publicly disclosed”; (2) expanding the definition of an “original source”; and (3) apparently eliminating the jurisdictional characteristic of the bar.
It is important to note that just one week after passage of the Health Reform Law, the Supreme Court issued its opinion in Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. ___, No. 08-304 (March 30, 2010), a case that construed the pre-Amendment version of the FCA. In the first footnote in Graham County, the Supreme Court addressed the question of the retroactivity of the Amendment and indicated that it was not retroactive and would not apply to already pending cases (full opinion is available at http://www.supremecourt.gov/opinions/09pdf/08-304.pdf).
The FCA Amendment in the Health Reform Law
The purpose of the FCA's public disclosure bar is to weed out parasitic suits — lawsuits by relators who try to capitalize on information about fraud already made public. Prior to the Health Reform Law, the FCA did this by stripping courts of jurisdiction over suits based on allegations or transactions that have been publicly disclosed, unless the relator can prove he or she was the original source of the information.
While maintaining the concept that parasitic suits are improper, the Amendment in the Health Reform Law substantially alters this bar and narrows the defense, particularly by removing disclosures made in state litigation (as well as audits or investigations) from the reach of the FCA. Striking the former paragraph contained in 31 U.S.C. § 3730(e)(4), the Amendment provides as follows:
(4)(A) The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed—
(i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party;
(ii) in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or
(iii) 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.
(B) For purposes of this paragraph, ‘original source' means an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.
H.R. 3590 § 10104(j)(2), 111th Cong. (2009) (emphasis added).
The Amendment Narrows the Scope of Information Considered “Publicly Disclosed”
Under the pre-Health Reform Law version of the FCA, information was publicly disclosed if it was derived from (1) “allegations or transactions in a criminal, civil, or administrative hearing,” (2) “a congressional, administrative, or Government Accounting Officer report, hearing, audit, or investigation,” or (3) “from the news media.” Although the Amendment leaves the “news media” basis in place, it severely restricts the other possible sources of information that will trigger this defense.
Specifically, information is now considered publicly disclosed, only if it is disclosed in a federal criminal, civil, or administrative hearing, or a federal report, hearing, audit, or investigation. The addition of the “federal” modifier by the Amendment presumptively excludes information that is disclosed in state and local forums.
Ironically, the question of whether the pre-Health Reform Law public disclosure bar encompassed information disclosed in these forums was settled seven days after enactment by the Supreme Court in Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. ___, No. 08-304 (March 30, 2010). By a vote of 7 – 2, the Court held that the pre-Health Reform Law public disclosure bar was triggered by disclosures made in state and local settings as well as in federal settings.
The Amendment essentially undercuts the main impact of the Court's ruling, limiting it to cases pending on March 23, 2010 (i.e., the date on which the president signed the Health Reform Law into law). See infra (discussing the non-retroactive nature of the Amendment). For cases filed after that date, information derived from state and local sources will not be considered “publicly disclosed.” Moreover, even information derived from federal sources will not be considered publicly disclosed if that information is from “Federal criminal, civil, or administrative hearings” in which “the Government or its agent” was not a party. In other words, in the usual federal litigation where the government is not a party, disclosure of the facts subject to the FCA action will not fit the new definition of a public disclosure under the Health Reform Law.
The narrowing of the public disclosure bar will likely have a significant impact. Relators who do not have independent knowledge of any fraud can now bring FCA suits based solely on publicly available information from state, local, and (in limited circumstances) even federal forums. Under the Amendment, a relator has every incentive to troll the state court dockets for allegations of potential fraud against the government. Searching, for example, the dockets of wrongful termination suits and other state employment actions containing possible “insider” information, a parasitic relator may uncover allegations of potential fraud that could now be used as the basis for a valid and sustainable FCA suit. The public disclosure bar would no longer preclude such suits because the information obtained would not be considered publicly disclosed. This would militate further in favor of companies in employment contracts requiring litigated disputes to be resolved through arbitrations to keep such disputes out of state courts.
The Amendment Expands the Definition of an Original Source
The Health Reform Law's second major change to the public disclosure bar is the expansion of the definition of an original source, thereby permitting more relators to sustain their claims past a motion to dismiss. Under the pre-Health Reform Law language, a relator was considered an original source only if she could establish she had “direct and independent knowledge of the information on which the allegations” in the FCA case were based. The Amendment eliminates the direct knowledge requirement, and now provides that a relator will be considered an original source if she (1) “has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) . . . has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions” on which the FCA case is based.
For example, an employee who learned of allegations involving her employer only because they were publicly disclosed (e.g., contained in a news report) could still bring an FCA suit based on those allegations if she is able to claim that she has “independent” knowledge that will “materially add” to the suit. The Amendment does not specify what constitutes knowledge that materially adds to an FCA suit. It is easy to imagine, however, relators pushing the limits of this exception, arguing that any non-public information — such as names of co-workers who may be potential material witnesses or internal policies and procedures — should be considered knowledge that materially adds to an FCA suit. Even if such arguments are ultimately unsuccessful, it is certain that the new exception will be the source of significant litigation.
The Amendment Appears to Eliminate the Jurisdictional Bar
A final change is that the Amendment appears to eliminate the jurisdictional aspect of the bar. The pre-Health Reform Law version of the FCA explicitly provided that “[n]o court shall have jurisdiction over an action” that violated the public disclosure bar (emphasis added). The Amendment changes the phrasing of this provision and now provides that the “court shall dismiss an action or claim under this section, unless opposed by the Government” if that action or claim violates the public disclosure bar (emphases added). Depending on how the courts interpret this language, this change in emphasis and terminology would appear to have two important implications.
First, by replacing the explicit reference to “jurisdiction” with the phrase “shall dismiss,” the Amendment appears to provide that courts have jurisdiction over FCA cases that violate the public disclosure bar. While a violation of the public disclosure bar remains a basis for dismissal, it is now unclear whether this is a basis that can be waived (including inadvertently). Unlike many other defenses, lack of subject matter jurisdiction is a non-waivable defense, meaning that it can be advanced by a party at any stage of litigation. Most courts construing the former language of § 3730(e)(4) held that public disclosure issues were issues of subject matter jurisdiction. See, e.g., United States ex rel. Minnesota Ass'n of Nurse Anesthetists v. Allina Health Sys. Corp., 276 F.3d 1032, 1040 (8th Cir. 2002). The elimination of the “jurisdiction” language could therefore have significant implications.
Second, the Amendment now provides that dismissal for violation of the public disclosure bar is not available to a defendant when “opposed by the Government.” In the past, if a court found a violation of the public disclosure bar, the case was automatically dismissed, regardless of whether the government opposed dismissal. The court simply did not have jurisdiction, and, therefore, could not hear the case if it wanted to do so. Under the Amendment, the government's will is apparently deemed superior. In light of the fact that the government rarely employs its statutory right to seek dismissal of meritless FCA cases, it remains to be seen whether the government will simply “oppose” any dismissal through the public disclosure bar, and if it does so, what standard the courts would use to determine whether such government action was proper. In fact, early attempts by the government to exercise this power could conceivably be subject to a constitutional challenge on the grounds that — by effectively providing the government a “veto” over a court's decision to dismiss a case — it violates the doctrine of separation of powers. In light of the government's unique status as the real party in interest in FCA cases, however, it is unlikely that such challenges would ultimately be successful.
Retroactivity of the Amendment
Given these significant changes, the natural question for those parties currently involved in FCA litigation is whether the amendment applies retroactively. The amendment itself is silent on the issue, and the Supreme Court in the first footnote in Graham County appears to have interpreted that silence as meaning that the law was not intended to be applied retroactive. Referencing the Amendment, the Court stated:
On March 23, 2010, the President signed into law the Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119. Section 10104(j)(2) of this legislation replaces the prior version of 31 U. S. C. §3730(e)(4) with new language. The legislation makes no mention of retroactivity, which would be necessary for its application to pending cases given that it eliminates petitioners' claimed defense to a qui tam suit. See Hughes Aircraft Co. v. United States ex rel. Schumer, 520 U.S. 939, 948 (1997).
559 U.S. at n.1 (emphasis added).
Thus, although the Amendment likely will have serious consequences for future FCA litigation, it should not affect litigation that commenced prior to its enactment.