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”).
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 “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.
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.
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:
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. 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”).