United States: Disclosures In Public SEC Filings Aren't Really "Public" After All – At Least Not In California

Last Updated: February 2 2016
Article by Pablo A. Nichols

On January 19, 2016, the California Court of Appeals ruled that disclosures made in publicly available SEC filings do not qualify as public disclosures under the California False Claims Act ("CFCA").  State of Ca. ex rel. Bartlett v. Miller, 2016 WL 229468.  The ruling, while perhaps defensible as a matter of strict statutory interpretation, severely undercuts the policy goal of the CFCA's public disclosure bar: preventing parasitic actions in which the relator takes advantage of public information and fails to assist in exposing the fraud.

In 2011, ClubCorp, which owns a large number of country clubs throughout the United States, terminated the membership of one of its members, Robert Bartlett.  Mr. Bartlett responded by suing ClubCorp based on a variety of allegations, including the company's failure to refund his $7,500 initiation fee.  One year later, Mr. Bartlett amended his complaint with a qui tam claim alleging that ClubCorp failed to escheat to the State of California millions of dollars in unclaimed initiation deposits in violation of California law.

There were at least two problems with Mr. Bartlett's qui tam claim.  First, he based his qui tam claim solely on statements made by ClubCorp in its publicly available SEC filings as far back as March 2011.  In those public filings, ClubCorp acknowledged its practice of not escheating any members' unclaimed deposits.  ClubCorp's public filings also disclosed the fact that 20 states were reviewing its escheatment practice, and that the company may have to pay some amount to the investigating states.  Second, the State of California had been investigating and auditing ClubCorp's escheatment practice since 2008, and Mr. Bartlett's regurgitation of information from ClubCorp's SEC filings added no new information to that investigation.

Taken together, Mr. Bartlett sought to use ClubCorp's public disclosures in SEC filings to acquire a share of any potential recovery the State might receive from its ongoing investigation.  Unsurprisingly, the State Attorney General sought to prevent this opportunistic litigation and moved to dismiss Mr. Bartlett's qui tam claim as barred by the CFCA's public disclosure bar (CA Gov. Code § 12652).1  The trial court agreed, but the California Court of Appeals reversed.

The appellate court strictly construed the CFCA's public disclosure bar, which provides that no court has jurisdiction over an action based on the public disclosure of allegations "in a criminal, civil, or administrative hearing, in an investigation, report, hearing or audit conducted by or at the request of the Senate, Assembly, auditor, or governing body of a political subdivision, or by the news media, unless the action is brought by the State AG or the prosecuting authority of the political subdivision, or the person bringing the action is an original source of the information."  § 12652(d)(3)(A).  According to the court, a disclosure made in a federally mandated and publicly available SEC filing is not "public" because SEC filings are not one of the listed sources in the statute.  The court distinguished federal cases holding that SEC filings qualify as public disclosures based on the different language in the federal FCA and the CFCA.  While the federal FCA's list of public sources barring a claim includes administrative reports, the CFCA's corresponding list requires that the report be requested by the State or one of its political subdivisions.  Consequently, according to the appellate court, federal administrative reports do not qualify under the CFCA.

As the appellate court recognized, its decision conflicts with the policy goal of the public disclosure bar, which is to prevent "parasitic or opportunistic actions by persons simply taking advantage of public information without contributing to or assisting in the exposure of the fraud."  Slip Op. at 8, 14-15.  The court even suggested that the State Legislature might want to add the "Internet" to the list of categories barring a parasitic qui tam claim.  But at least for now, the court held it could not do what the Legislature had, to date, chosen not to do.

Key Takeaways

Unfortunately, the court's decision in Bartlett gives the green light to opportunistic plaintiffs to mine public SEC reports and other non-media online sources to find information upon which to allege a violation of the CFCA.  Companies doing business or residing in California, including non-government contractors like ClubCorp, are likely to see an uptick in parasitic qui tam claims as a result.  Ultimately, the State Legislature will need to amend the CFCA to close this loophole in the CFCA's public disclosure bar.  Allowing a windfall for relators who only regurgitate publicly available information and make no contribution toward uncovering fraud against the State violates the policy goal of the public disclosure bar and should be corrected by the Legislature.


1 The CFCA was amended effective January 1, 2013, including slight modifications to the public disclosure bar.  Both parties and the appellate court agreed that the pre-2013 version of the statute applied as nothing in the amendment indicated an intent to make it retroactive.  While all citations and discussion here relate to the pre-2013 statute, the slight changes in the amended statute would not likely impact the appellate court's reasoning.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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