During the last quarter, there have been a number of notable developments related to qui tam suits, reflecting mixed results for the sector.

  1. Fifth Circuit Rules That Federal Employees, Including Auditors and Investigators, Can File False Claims Act Suits.

On July 31, 2012, the United States Court of Appeals for the Fifth Circuit, which had previously closely scrutinized FCA complaints, greatly expanded the types of individuals who can file an FCA complaint. In Little v. Shell Exploration & Production Co., 690 F.3d 282 (5th Cir. 2012), the court held that "even one whose job is to investigate fraud" has standing to bring an FCA case. Under that standard, DOE auditors, program reviewers, and investigators, who are often privy to information that has not been publicly disclosed, arguably could bring FCA cases on that information. The court tempered its ruling somewhat by holding that if a relator was specifically employed to disclose fraud, any disclosures would be nonvoluntary--meaning that the federal employee could potentially lack standing under the original source rule. However, with Congress's recent changes to the public disclosure bar, which drastically limit what constitutes a public disclosure, this ruling substantially increases the number of individuals who could have standing to bring an FCA suit.

  1. AIU and the University of Phoenix Receive Contradictory Decisions Based on the First-to-File Rule.

Two recent decisions involving motions to dismiss qui tam actions filed against for-profit schools resulted in seemingly inconsistent outcomes. Both cases focused on the meaning of the term "pending" as it is used in the first-to-file rule in the FCA, which generally prohibits duplicative lawsuits against entities that contract with the government. 31 U.S.C. § 3730(b)(5).

In United States ex rel. Hoggett v. Univ. of Phoenix, Case No. 2:10-cv-02478, 2012 WL 2681817 (E.D. Cal. July 6, 2012), the University of Phoenix ("UOP") filed a motion to dismiss a qui tam complaint filed against it on various grounds, including the FCA's first-to-file and public disclosure rules. UOP had argued that the case was barred by the first-to-file rule because it involved allegations of wrongdoing that were at issue in a previously dismissed action, meaning this action was duplicative and barred. The relator in the case argued that his action was not barred because the prior case was no longer pending at the time he filed his case. The United States District Court for the Eastern District of California agreed with the relator, holding that "[u]sing the first-to-file rule to bar whistleblower suits that allege new fraud perpetrated by a wrongdoer after completion of a previous suit would thwart the statute's purpose to encourage whistleblowers to come forward." Id. at *4. On that basis, the court found the first-to-file rule inapplicable. UOP's motion to dismiss was ultimately denied on all grounds.

In contrast, the United States District Court for the Northern District of Georgia reached the opposite conclusion in United States ex rel. Powell v. American Intercontinental University, Inc., Case No. 1:08-cv-02277, 2012 WL 2885356 (N.D. Ga. July 12, 2012). American Intercontinental University ("AIU"), like UOP, argued that a case was barred by the first-to-file rule by previously-filed cases that had subsequently been dismissed. The court in the AIU case found that although an earlier case must be "pending" at the time a later case is filed for the first-to-file bar to apply, the earlier case should be considered to be "pending" even after it was dismissed. The court noted that the term "pending" as used in the FCA merely referred back to the first-filed action. Id. at *4. Moreover, the court stated that interpreting the term "pending" to mean only those cases that were active at the time of a later case's filing "would create a bizarre result because if the second set of relators filed their complaint sooner--and while the first suit was still active--they would be barred . . . . But if the second set waited the likely years it would take for a dismissal in the first . . . action[], they would be rewarded." Id. at *5. Additionally, the court noted that defining "pending" as active "does not comport with who the actual plaintiff [is] in a qui tam suit--the government." Id. Since the actual plaintiff would have already sued the defendant, the policies behind the FCA would not support successive suits based on the same subject matter. Id.

It is likely that these courts will not be the last to address this issue. However, the Powell court's reasoned analysis could serve as a guidepost for defendants seeking to apply the first-to-file rule based on cases that had been dismissed.

  1. Qui Tam Suit Against EDMC Is Recommend to Be Dismissed in Part.*[1]

In United States ex rel. Sobek v. Education Management, LLC, Case No. 2:10-cv-00131 (W.D. Pa), EDMC is alleged to have violated the FCA under the false certification theory. Specifically, the complaint alleges that EDMC violated the FCA by misrepresenting the accreditation of certain programs, job placement rates, cost of its programs, compliance with student progress tracking requirements, and compliance with the incentive compensation regulations, and by failing to return federal funding for students who were dropped from programs. EDMC moved to dismiss on various grounds, including that the incentive compensation claims were barred by the FCA's "first-to-file" rule. On October 22, 2012, the magistrate judge recommended dismissal of the incentive compensation claims based on the "first-to-file" rule, which relator conceded. Additionally, the magistrate judge recommended dismissal of the claims based on purported misrepresentations of the cost of its programs and the purported failure to return federal funds for failure to plead facts sufficient to support the claims. The magistrate judge, however, recommended that the remaining claims should be allowed to proceed on to discovery. These recommendations can be appealed to the district court judge.