In an August 12 decision, the First Circuit Court of Appeals rejected an argument advanced by the defendants and by the United States appearing as amicus, and the rule adopted by four other circuit courts, to hold that the False Claims Act (FCA) permits relators to “blow the whistle” after an allegation of fraud is publicly disclosed, so long as they have personal knowledge of the publicized fraud and provide their information to prosecutors before filing (even just before filing). The case, United States ex rel. Mark Eugene Duxbury, et al. v. Ortho Biotech Products, LP, No. 08-1409, slip op. (1st Cir. Aug. 12, 2009), is noteworthy for several reasons: first, because the court highlighted its disagreement with the interpretation of the “original source” requirements adopted in other circuits; and second, because of the manner with which the court dispatched the government’s arguments and adopted instead the textual argument advanced, in this case, by relators and the relators’ bar. 

Courts, relators, and the government have long disagreed over the requirements that a relator must satisfy to qualify as an “original source” and sustain a qui tam action based on publicly disclosed allegations. In Duxbury, the First Circuit provided an extensive analysis of the “original source” exception to the public disclosure bar of the FCA. Here, the Court held that the plain language of the statute controls, and that a relator qualifies as an “original source” if he (1) has “direct and independent knowledge of the information on which the allegations are based” and (2) provides that information to the government before filing a complaint, regardless of whether the relator provides the information to the government before the public disclosure.

The case commenced shortly after consolidation of the Average Wholesale Price (AWP) multidistrict litigation in 2002. Mark Duxbury, a former Ortho Biotech Products (OBP) salesman, filed a qui tam suit alleging that OBP fraudulently inflated the AWP of its drugs and engaged in a kickback scheme that induced health care providers to file false claims. Kurt Blair, a second salesman, commenced a separate action alleging that OBP engaged in a widespread off-label promotion scheme that likewise caused the filing of false claims. The government declined to intervene in either matter and both were unsealed. Blair dropped his suit; Duxbury filed an amended complaint that included off-label promotion allegations and a second relator, Dean McClellan. OBP successfully moved to dismiss the amended complaint under Federal Rules of Civil Procedure 12(b)(1) and 9(b), for lack of subject matter jurisdiction and failure to plead with particularity. Relators appealed, but did not contest the district court’s holding that their claims were based on publicly disclosed allegations.

On appeal, the threshold question for the Court was whether a relator who satisfies the “direct and independent knowledge” provision of § 3730(e)(4)(B) qualifies as an “original source” by providing his information to the government before filing a complaint. The Court held that he does.

Judge Torruella, writing for the Court, cited the plain language of the statute, which provides that “’original source’ means an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the government before filing an action.” § 3730(e)(4)(B). The Court found this definition to be unambiguous and clear, and held that the statute imposed no further requirements for the “original source” exception to the bar on publicly-disclosed suits. Adopting the approach of the Fourth Circuit, it “conclude[d] that the plain terms of § 3730(e)(4)(B) begin and end the matter.”

The Court rejected the proposition advanced by OBP and the United States, appearing as an amicus, that § 3730(e)(4)(B) “requires a relator to provide” the government information “before the public disclosure itself, not just before the filing of the relator’s suit.” OBP and the United States argued that (1) the plain meaning of the term “original source” contradicts the Fourth Circuit’s statutory interpretation; (2) strict reliance on the plain terms of § 3730(e)(4)(B) would provide an incentive to relators to file parasitic suits based on publicly disclosed allegations; and (3) the rationale for encouraging qui tam actions ceased to apply once the government became aware of fraudulent activity through public disclosures. The court found these arguments unpersuasive. It found that the “language, structure, and history” of § 3730(e)(4) supported its interpretation.

First, it declined to rely on a dictionary meaning of “original source” because the statute expressly defines the term at § 3730(e)(4)(B).

Second, it stated that the structure of the FCA sufficiently mitigated the danger that its reading might encourage parasitic suits. The Court acknowledged that while the Fourth Circuit agreed with its interpretation, others differed: the D.C. and Sixth Circuits require a relator to provide his information to the government before the public disclosure to qualify as an “original source,” while the Second and Ninth Circuits require him to be the source of the disclosure itself.

The First Circuit challenged and then rejected the rationale of these requirements. It noted that the FCA’s “first-to-file” bar under § 3730(b)(5) already “provides potential relators significant incentive not to sit on the sidelines,” for “it is unclear why a relator would wait for a public disclosure and risk another relator bringing suit.”

The Court further challenged the notion that the government’s awareness of publicly disclosed fraud diminished its need to encourage relators to come forward with their own information. It posited that in some circumstances, the specific information prompting a public disclosure may prove less reliable (if, for example, based on rumor) or accessible (if, for example, from a reporter’s confidential source) than that provided by a relator, even after the disclosure of the fraud in question.

Third, it asserted that the history of the public disclosure bar “does not require the Court to deviate from the plain meaning of § 3730(e)(4)(B).” Congress’s 1986 amendments to the FCA abolished the statute’s jurisdictional bar on qui tam actions based on information already within government’s possession. That bar provided no exception for cases in which a relator had been the source of the information. The Court stated that the amendments reflected Congress’s intent to shift away from a “restrictive” regime based on “government knowledge” to one that resulted in less “underenforcement” of the FCA. In turn, Congress focused on the “public disclosure” of the information provided to the government, and instated the “original source” exemption to encourage more private enforcement acts.

While other circuits highlight the threat of parasitic suits, the Court said, they place insufficient emphasis on the lesson behind the Congressional action in the 1986 amendments to the statute which abolished the “government knowledge” provision which barred suits based on information already in the possession of the government. A rule that fails to value a relator’s information because the government has already become aware of fraud through public disclosure might bar productive suits based on better information. The Court was unwilling to create such a bar without explicit textual support.

Having committed to the plain meaning of § 3730(e)(4)(B), the Court strictly applied it to the case at hand. It affirmed the district court’s holding that McClellan failed to qualify as an original source. As the amended complaint acknowledged that he did not bring any new claims against OBP, he was required to provide information to the government prior to the original complaint. He did not.

By contrast, the Court reversed the dismissal of Duxbury’s kickback claims. It determined that he (1) qualified as an original source because he provided the government information before filing his complaint and (2) plead with sufficient particularity to satisfy Rule 9(b). On the latter, the Court asserted that he provided ample factual and statistical support for his allegations that OBP induced certain specific health providers to file false claims. Notably, on this point, the language of the opinion could hold a silver lining for defendants—the Court’s 9(b) analysis can be read as limiting the complaint to claims resulting from kickbacks allegedly paid to those specific named providers.

Finally, the Court also affirmed the dismissal of Relators’ off-label promotion claims. It held that the original complaint failed to provide essential facts regarding OBP’s off-label promotion scheme and that, following Blair’s more detailed complaint, Relators’ later claims were barred by the first-to-file rule of §3730(b)(5).

The case’s principle holding, that the plain meaning of § 3730(e)(4)(B) governs the FCA’s “original source” exemption, represents the latest entry in the evolving jurisprudence on the public disclosure bar, and is a clear departure from the approach taken in other circuit courts. With the Supreme Court accepting petitions for certiorari in FCA qui tam cases with greater frequency during the last three terms, Duxbury could be poised for review in the high court.