United States: Seventh Circuit Rules Municipalities Can Be Sued Under The False Claims Act But Stays Decision Pending Appeal

Co-authored by Mr James Spizzo

Under federal law, state and local government employers are generally immune from punitive monetary damage awards, primarily because punitive damages are meant to punish and deter future illegal behavior, and if a public employer were required to pay punitive damages, the punishment would be borne by the taxpayers who did not benefit from and certainly had no involvement in the illegal behavior of a few government employees.

The False Claims Act ("FCA") establishes civil penalties for "[a]ny person" who "knowingly presents, or causes to be presented, to an officer or employee of the United States Government . . . a false or fraudulent claim for payment or approval," or who "conspires to defraud the Government by getting a false or fraudulent claim allowed or paid." Such persons are liable for a civil penalty between $5,000 and $10,000, plus three times the amount of damages the Government sustained because of the person’s act. The FCA also provides relief to any employee who suffers retaliation after filing a good faith claim under the FCA on behalf of the Federal Government against his or her employer, or one who assists such an employee.

In 2000, the United States Supreme Court definitively held in Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000), that states are not subject to the provisions of the FCA. The Stevens Court reasoned, in part, that states, as sovereign entities within the federal union, are not included in the FCA’s term "person," which is not defined in the Act.

Soon after Stevens, the United States Court of Appeals for the Third Circuit (Pennsylvania, New Jersey and Delaware) and Fifth Circuit (Texas, Louisiana and Mississippi) addressed the next logical step: whether local governments are also exempt from the FCA. In United States ex rel. Dunleavy v. County of Delaware, 279 F.3d 219 (3d Cir. 2002), and United States ex rel. Garibaldi v. Orleans Parish School Board, 244 F.3d 486, 493 (5th Cir. 2001), the Third and Fifth Circuits, respectively, held that the treble damages provision of the FCA, added in 1986 to replace a less burdensome remedial damages scheme, renders the Act punitive in nature, and therefore the FCA does not apply to local governments because they enjoy a common law immunity from punitive damages. Both Circuits relied heavily upon the following passage in the Supreme Court’s decision in Stevens: "[T]he current version of the FCA imposes damages that are essentially punitive in nature, which would be inconsistent with state qui tam liability in light of the presumption against imposition of punitive damages on governmental entities."

Despite the FCA’s mandatory punitive damages provision, the Court of Appeals for the Seventh Circuit (Illinois, Indiana and Wisconsin) recently took a different approach and held that local governments can be sued under the FCA. In United States ex re. Chandler v. Cook County, 282 F.3d 448 (7th Cir. 2002), an FCA action was brought against the Hektoen Institute for Medical Research ("Hektoen") and Cook County, Illinois, alleging misconduct by Hektoen and Cook County Hospital in their handling of a $5 million federal research grant they received from the National Institute of Drug Abuse to study the treatment of drug-dependent pregnant women. The District Court dismissed Cook County from the case, holding that a municipality could not be sued under the FCA. Chandler appealed, and the Seventh Circuit reversed, allowing the FCA claim to proceed against Cook County.

However, recognizing the impact of its ruling, particularly to Cook County if it were required to go to trial on the FCA claims brought against it, the Seventh Circuit has issued a stay in the Chandler case, effectively halting further proceedings while the County appeals the ruling to the U.S. Supreme Court. The County filed its petition for certiorari with the Supreme Court on April 19, 2002.

In its Chandler decision, the Seventh Circuit rejected the reasoning in Dunleavy and Garibaldi, instead finding that Cook County can be sued under the FCA, including its provision allowing for the award of punitive damages.

The Seventh Circuit framed the issue as whether Cook County is a "person" within the meaning of the FCA. It held that common law immunity from suit for local governments is "inconsistent with Congress’ purpose in adopting the FCA." The Court noted that the definition of "person" has remained the same since the FCA was adopted in 1863, when municipalities were considered "persons" under the Act. Significantly, the Court found that Congress failed to specifically exempt municipalities from coverage under the FCA in 1986 when Congress increased the FCA’s damages provisions to a level considered to be punitive.

Focusing on the economic reasoning behind municipality immunity from punitive damages in other contexts, the Seventh Circuit reasoned that in the context of the FCA, "at least a portion of the recovery will come from the monies taken by the municipality through its false claims." Moreover, "even though some of the burden of the FCA’s treble damages shifts to the local taxpayers, this shift is not unjust, because the local taxpayers have already received, without justification, some of the benefit" under the presumption that "any ill-gotten gains from the federal government produce more services and lower taxes."

There is no guarantee the Supreme Court will choose to hear the Chandler appeal. The Supreme Court denied certiorari of the Fifth Circuit’s Garibaldi ruling in early January 2002 and denied rehearing in Garibaldi in February 2002, after the Seventh Circuit’s Chandler decision was issued. If the Supreme Court declines to hear the County’s appeal, the Seventh Circuit’s stay will be lifted and the Chandler case will proceed against Cook County. Precedent will then exist for future FCA claims for punitive damages to be brought against municipalities within this Circuit.