Why it matters: This month, we highlight recent cases from the Third, Fifth and Ninth Circuits that caught our eye. The two cases from the Third Circuit are interesting because they are among the first to apply the tests established by the Supreme Court in the 2016 cases of Universal Health Services v. United States ex rel. Escobar (with respect to the test for materiality under the False Claims Act) and United States v. McDonnell (with respect to the test for what constitutes an "official act" in public corruption cases). The Fifth Circuit case dealt with a John Doe contractor who claimed that the government violated his Fifth Amendment due process rights by accusing him of a crime but not naming him as a defendant (and thus not giving him a way to vindicate himself in a public forum) during the course of a 2008 Foreign Corrupt Practices Act criminal proceeding. And the Ninth Circuit case widened the circuit split with respect to whether employees need to disclose information to the SEC in order to qualify for the whistleblower antiretaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Ninth Circuit sided with the Second Circuit and ruled that they do not).
Detailed discussion: Read on for a recap of recent cases from the Third, Fifth and Ninth Circuits that we found to be of interest.
The first case comes from the Ninth Circuit, where the court widened the split among the circuits as to whether employees have to specifically disclose information to the SEC in order to qualify for "whistleblower" status under the antiretaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. On March 12, 2017, the Ninth Circuit in Somers v. Digital Realty Trust Inc. followed the Second Circuit and ruled (with one dissent) that they do not. We last discussed the status of the circuit split on this issue in our October 2015 newsletter under "Do You Have to Whistle to the SEC to Get Protection Under Dodd-Frank? The Second Circuit Says No, Splits With Fifth Circuit." See also the discussion of Somers in Manatt's March 31, 2017, article titled "Ninth Circuit Permits Internal Whistleblower to Sue."
As the Ninth Circuit very succinctly put it in the first line of the Somers opinion, "[t]his appeal presents an issue of securities law that has divided the federal district and circuit courts." The court said that the issue resulted from a "last-minute addition" of the word "whistleblower" to the antiretaliation protections of Dodd-Frank to extend protection to those who make disclosures under the Sarbanes-Oxley Act. This last-minute addition, the court said, created the underlying issue of "whether, in using the term 'whistleblower,' Congress intended to limit protections to those who come within [Dodd-Frank's] formal definition, which would include only those who disclose information to the Securities and Exchange Commission ('SEC')."
To briefly summarize the facts, plaintiff Paul Somers was employed from 2010 to 2014 as a vice president at Digital Realty Trust Inc. In his complaint against Digital Realty filed in the Northern District of California, Somers alleged that, soon after he made several reports to senior management regarding possible securities law violations by Digital Realty, he was fired. Somers claimed that he was not able to report his concerns to the SEC before Digital Realty terminated his employment. The district court denied Digital Realty's motion to dismiss, which was based on the fact that Somers did not disclose to the SEC, and certified the issue for interlocutory appeal to the Ninth Circuit.
The court began its analyses by reviewing the nature of the circuit split, specifically between the Fifth Circuit and the Second Circuit, on this issue. The Fifth Circuit ruled in the 2013 case of Asadi v. G.E. Energy (USA) that making disclosure to the SEC was required in order to qualify for the antiretaliation protections of Dodd-Frank because the statutory language was clear on its face: a "whistleblower" under Dodd-Frank is defined as an employee who discloses information to the SEC. The Second Circuit ruled the opposite in the 2015 case of Berman v. Neo@Ogilvy LLC, finding the statutory language to be ambiguous and holding that Chevron deference must be given to the SEC's regulation issued on the matter (17 C.F.R. § 240.21F-2), which provides that the Dodd-Frank whistleblower provisions "extend protections to all those who make disclosures of suspected violations, whether the disclosures are made internally or to the SEC."
After reviewing in detail the legislative history surrounding the enactment of Dodd-Frank and the interplay between the antiretaliation provisions of Dodd-Frank and Sarbanes-Oxley, and after parsing the relevant statutory language, the court concluded that:
"[the anti-retaliation provisions of Dodd-Frank] should be read to provide protections to those who report internally as well as to those who report to the SEC. We also agree with the Second Circuit that, even if the use of the word 'whistleblower' in the anti-retaliation provision creates uncertainty because of the earlier narrow definition of the term, the agency responsible for enforcing the securities laws has resolved any ambiguity and its regulation is entitled to deference. In 2011, the SEC issued Exchange Act Rule 21F-2 … [which] in our view accurately reflects Congress's intent to provide broad whistleblower protections under [Dodd-Frank]. The Rule says that anyone who does any of the things described in subdivisions (i), (ii), and (iii) of the anti-retaliation provision of [Dodd-Frank] is entitled to protection, including those who make internal disclosures under Sarbanes-Oxley. They are all whistleblowers. The Rule is quite direct. … The regulation accurately reflects congressional intent that [Dodd-Frank] protect employees whether they blow the whistle internally, as in many instances, or they report directly to the SEC."
The dissent in Somers would have followed the Fifth Circuit's approach in Asadi and limited Dodd-Frank's antiretaliation provisions to those employees who disclose to the SEC. It seems like it won't be long before the issue will go before the Supreme Court for a decision.
Moving on to the Third Circuit, we found two recent cases to be of interest because both involved applications of tests established in recent Supreme Court cases. In the first, U.S. ex rel. Petratos v. Genentech, Inc. et al., the Third Circuit on May 1, 2017, affirmed a District of New Jersey court's dismissal of a qui tam case filed pursuant to the False Claims Act, but on different grounds than those relied on by the district court. Whereas the district court had relied on a "reasonable and necessary" analysis in dismissing the lawsuit, the Third Circuit found instead that the relator failed to meet the FCA's materiality requirement pursuant to the test established by the Supreme Court in the 2016 case of Universal Health Services v. United States ex rel. Escobar. We discussed the Escobar decision in our June 2016 newsletter alert titled "False Claims Act: Supreme Court Decides Implied Certification Case."
The Petratos case involved a qui tam lawsuit that was filed by Gerasimos Petratos (relator), the former head of healthcare data analytics at Genentech Inc., in connection with Genentech's multibillion-dollar cancer drug Avastin. In his qui tam lawsuit, the relator claimed that Genentech "suppressed data that caused doctors to certify incorrectly that Avastin was 'reasonable and necessary' for certain at-risk Medicare patients." After an analysis of the "reasonable and necessary" test, the district court dismissed the relator's lawsuit for failure to state a claim.
The Third Circuit affirmed, but on the alternate grounds that the relator failed to establish materiality as required by the FCA. As the court said, "[a]lthough we disagree with the District Court's reasoning, we may affirm its judgment on any ground supported by the record. … Our review of the record leads us to conclude that Petratos cannot establish materiality, which the False Claims Act defines as 'having a natural tendency to influence, or be capable of influencing, the payment or receipt of money.'" The court pointed to Escobar as establishing the "demanding" and "rigorous" test for materiality under the FCA, quoting from the Supreme Court's opinion that "[a] misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable under the False Claims Act."
The court also said that the Supreme Court in Escobar provided "guidance as to how the materiality requirement should be enforced." The court again quoted from Escobar as setting the ground rules for establishing materiality:
"Materiality may be found where 'the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.' … On the other hand, it is 'very strong evidence' that a requirement is not material 'if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated.'… Finally, materiality 'cannot be found where noncompliance is minor or insubstantial.'"
Applying the Escobar test, the court found that the relator's "allegations do not meet this high standard." Noting that there were no facts in the underlying record that showed that the Centers for Medicare & Medicaid Services would not have reimbursed the claims had the alleged reporting deficiencies not been cured—and that the relator did not dispute this—"dooms his case. Simply put, a misrepresentation is not 'material to the Government's payment decision,' when the relator concedes that the Government would have paid the claims with full knowledge of the alleged noncompliance." After considering and rejecting the relator's other arguments, the court concluded that the relator's "allegations may be true and his concerns may be well founded—but a False Claims Act suit is not the appropriate way to address them. He concedes that Genentech followed all pertinent statutes and regulations. If those laws and regulations are inadequate to protect patients, it falls to the other branches of government to reform them."
For an analyses of recent cases in the Ninth Circuit that have addressed the issue of materiality under the FCA post-Escobar, see the article titled "Escobar's Impact: Recent Application of 'Materiality' in Ninth Circuit" by our colleagues John M. LeBlanc, Andrew H. Struve and Katrina Dela Cruz in Manatt's March 2017 Healthcare Litigation newsletter.
In the second Third Circuit case that drew our attention, United States v. Repak, the court on March 28, 2017, affirmed a Western District of Pennsylvania jury verdict against Ronald Repak for public corruption, a decision based in part on the two-step test for what constitutes an "official act" that was established by the Supreme Court in the 2016 case of United States v. McDonnell. See our discussion of the McDonnell decision in our June 2016 newsletter under "'Official Acts'—What They Are … and Are Not."
The facts of Repak show that from late 1977 through early 2013, Repak served as the executive director of the Johnstown Redevelopment Authority, an agency that receives federal and state funding to assist in economic development for the city of Johnstown. While a voluntary board of directors is the ultimate decision-maker, the executive director runs the day-to-day operations and, via recommendations to the board, "plays a vital role in the process of selecting who receives JRA contracts and grants." The opinion goes into great detail on the factual record, but for purposes of this discussion, the relevant facts are that Repak and his assistant (with whom he was having an affair) routinely solicited items from contractors who had been awarded contracts, such as "requests for concert tickets, sporting event tickets, and golf outings." JRA contractors testified that they acquiesced to Repak's solicitations because if they didn't, they understood that they would not be awarded future contracts. Of particular importance on appeal were two solicitations from Repak that had nothing to do with JRA projects and were the subject of the grand jury indictment against him, namely "a new roof on [Repak's] house and excavating services for his son's gym." The jury convicted Repak on these two charged offenses, and Repak was sentenced to restitution and 42 months in jail.
The Third Circuit rejected all of Repak's arguments on appeal. Of relevance here, the court shot down Repak's argument that he did not commit any "official act" under the two-step test established last year by the Supreme Court in McDonnell. The court began by stating McDonnell's two-step test:
"First, the Government must identify a 'question, matter, cause, suit, proceeding or controversy' that 'may at any time be pending' or 'may by law be brought' before a public official.' … The Supreme Court made two key clarifications as to this required showing. First, the Court defined a 'question' or 'matter' as 'similar in nature to a cause, suit, proceeding, or controversy.' … The Court further clarified that the 'question' or 'matter' must 'involve a formal exercise of governmental power that is similar in nature to a lawsuit before a court, a determination before an agency, or a hearing before a committee.' … Second, the Court observed that the 'question' or 'matter' must also be 'something specific and focused' that is 'pending' or 'may by law be brought.' … It described a 'question' or 'matter' that is 'pending' as 'something that is relatively circumscribed—the kind of thing that can be put on an agenda, tracked for progress, and then checked off as complete.' The second part of the showing to prove an 'official act' requires the Government to 'demonstrate that the public official made a decision or took an action "on" that question, matter, cause, suit, proceeding, or controversy, or agreed to do so.'"
The court said that Repak's argument that the first step for proving an "official act" was not met in his case was "off the mark," stating "[t]he awarding of a JRA contract is not only akin to an agency determination—it is an agency determination." The court also found "unpersuasive" Repak's argument that the award of JRA contracts is not a "specific and focused [question or matter] that is 'pending,'" stating that "[i]n the language of McDonnell, the award of JRA contracts is 'specific and focused.' It is a concrete determination made by the JRA's Board of Directors and 'the kind of thing that can be put on an agenda, tracked for progress, and then checked off as complete.'" Finally, the court found the facilitation of the award of the JRA contracts to be a decision or action "on" a question or matter as required by McDonnell. The court thus concluded that "[t]herefore, the facilitation of the award of JRA contracts is an 'official act' as defined by McDonnell."
The final case we want to highlight comes from the Fifth Circuit. On April 13, 2017, in John Doe v. United States, the Fifth Circuit affirmed a ruling by a Southern District of Texas court that had dismissed the plaintiff John Doe's due process claims in connection with a 2008 Foreign Corrupt Practices Act enforcement action in which Doe was not the target and only generically referred to as a "consultant."
The FCPA action at the heart of John Doe involved the former CEO of KBR Inc., who was criminally charged in 2008 and eventually pleaded guilty to conspiracy to violate the FCPA in connection with bribes paid to land liquefied natural gas projects in Nigeria. In each of the criminal information, the subsequent plea agreement and the 2012 sentencing of the KBR CEO, plaintiff Doe was referred to as "LNG Consultant" and described as a person with dual U.S. and foreign citizenship. Doe alleged that enough details were provided about his companies and the projects he worked on where the kickbacks allegedly took place that, by the 2012 sentencing of the KBR CEO, "the Government's description of the Consultant identified him 'in all respects except by name' because 'there are few contractors and customers that comprise' the particular industry in which he worked, and 'no other person in the industry possesses these same personal and biographical characteristics.'" Doe further alleged that "his clients were able to identify him from this description, causing some clients to cease engaging Doe and his companies for consulting and ultimately costing him 'many millions of dollars in consulting fees.'" Doe also alleged that he "was unable to obtain further consulting work[,] … which was a direct result of the prosecutor's public statements during the [Doe] plea hearing and elsewhere that the [Government's] investigation of the  Consultant and others was 'ongoing.'"
Doe filed a lawsuit against the U.S. in 2015 in the Southern District of Texas, claiming that the government "violated his Fifth Amendment due process rights by accusing him of a crime during the course of a criminal proceeding in which he was not named as a defendant," which affirmatively denied him a forum for vindication. As relief, Doe sought a declaration from the government that his Fifth Amendment due process rights had been violated as well as the expungement of all references to him from court and DOJ records.
The district court judge granted the government's motion to dismiss with prejudice. With respect to Doe's claims relating to statements made in 2008, the judge found that Doe's lawsuit was barred by the statute of limitations found in 28 U.S.C. § 2401(a) ("every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues.") Moreover, with respect to Doe's claims relating to statements made at the 2012 sentencing hearing, the judge found that Doe did not "allege a viable due process violation" because the statements were devoid of "potentially identifying information" and were made in furtherance of the government's legitimate interests in the sentencing of the KBR CEO.
The Fifth Circuit affirmed. As to the statements made in 2008, the court found that the Section 2401(a) six-year statute of limitations was indeed applicable:
"Doe argues that he did not have a complete and present cause of action until he 'was affirmatively denied a forum for vindication,' that is, until either the Government notified him that he would not be indicted for his alleged involvement in the kickback scheme or the Government would be barred by limitations from prosecuting Doe for his alleged criminal activity. … The 2008 records that Doe seeks to expunge have been public for many years, and the harm to Doe commenced in 2008. … The statute of limitations is not deferred until the power to indict is legally beyond the Government's reach or the Government affirmatively states that it will not indict. Doe's claim that the Fifth Amendment was violated … accrued when the Government purportedly accused him of criminal activity without indicting him."
The court also affirmed with respect to the 2012 statements made during sentencing of the KBR CEO:
"The references to a 'consultant' during the sentencing hearing contained minimal identifying information. To the extent that Doe contends it was only in conjunction with the 2008 statements that the 2012 reference to a 'consultant' made him identifiable, he seeks to expand the limitations period to include the 2008 statements. That is impermissible. We therefore consider only the 2012 references, standing alone, and conclude that references as nondescript as those to which Doe objects do not violate due process. Doe has not alleged a plausible due process violation."