United States: "Unleash The Hounds!" – Third Circuit Gives Lawyers The Green Light To File Their Own FCA Claims Based On Information They Learn Through Discovery

Last Updated: February 17 2016
Article by Pablo A. Nichols

On February 2, 2016, the U.S. Court of Appeals for the Third Circuit held that a law firm qualified as an "original source" and could bring its own claim under the False Claims Act (FCA) based on information it learned during discovery in a federal civil case in which the United States was not a party.  U.S. ex rel. Moore & Co. v. Majestic Blue Fisheries, LLC, et al., 2016 WL 386087 (3d Cir. Feb. 2, 2016).  The decision is a boon to the enterprising and arguably unethical attorney who, when conducting depositions and reviewing documents on behalf of his or her clients, keeps a watchful eye for evidence that can be used for the attorney's own future profitable FCA claim.

Background

In June 2010, the F/V Majestic Blue sank in the South Pacific resulting in the death of its captain.  The law firm of Moore & Co. (Moore) represented the captain's wife in a wrongful death action in federal court against Majestic Blue LLC and Dongwon Industries, the owners of the vessel.  During discovery in that action, Moore obtained documents and deposed individuals related to the ownership of the F/V Majestic Blue and its sister vessel, the F/V Pacific Breeze.  Through this discovery, Moore learned that the owners of the two vessels allegedly obtained lucrative fishing licenses under the South Pacific Tuna Treaty by fraudulently certifying to the U.S. Coast Guard that the two vessels were commanded, owned, and controlled by U.S. citizens, but in fact the vessels were commanded by Korean nationals and the American LLCs that purported to own the vessels were shell companies designed to mask the true owner, Korea-based Dongwon Industries.  Moore added the information it learned during discovery to information it acquired from a Freedom of Information Act (FOIA) request as well as media and public blog reports, and filed a qui tam claim in 2012 against purported the shell company LLCs and their true Korean owners.

The defendants filed a motion to dismiss for lack of subject matter jurisdiction and for failure to state a claim.  The district court granted the Rule 12(b)(1) motion on the basis that the allegations fell within the FCA's public disclosure bar and that Moore did not qualify for the "original source" exception.  69 F. Supp. 3d 416 (D. Del. 2014).

Third Circuit

The Third Circuit reversed based on three critical changes that were made to the FCA in the 2010 Patient Protection and Affordable Care Act (PPACA).  First, the amended FCA eliminated the language stating that a court lacked jurisdiction over the action if the public disclosure bar applied.  Second, the amended FCA reduced the number of enumerated public disclosure sources, specifically providing that information disclosed in a prior federal case qualified as "public" only if the government or its agent was a party.  Third, the amended FCA expanded the "original source" exception by eliminating the requirement that the relator must have direct knowledge of the fraud and allowing a relator that "materially adds" to publicly disclosed information to qualify for the exception.  Compare 31 U.S.C. § 3730(e)(4) (2006) with 31 U.S.C. § 3730(e)(4) (2012).  The Circuit described these three changes as "radically chang[ing] the 'hurdle' for relators[,]" and found that the first and third changes required reversal of the district court's decision.  2016 WL 386087 at *3.

Addressing the jurisdictional question first, the Third Circuit followed decisions in the Eleventh and Fourth Circuits, and had little trouble concluding that the amended public disclosure bar is no longer jurisdictional in character.  Id. at *4 (citing U.S. ex rel. Osherhoff v. Humana, Inc., 776 F.3d 805, 810 (11th Cir. 2015); U.S. ex rel. May v. Purdue Pharma L.P., 737 F.3d 908, 916 (4th Cir. 2013)).

Regarding whether the defendants' alleged fraud was publicly disclosed, the Circuit held that substantially the same allegations of the fraud as alleged in Moore's claim were publicly disclosed in two Internet news articles and in reports produced in response to Moore's FOIA requests.  Id. at *5-8.  Interestingly, the Third Circuit punted on the question of whether information revealed in a public podcast or blog qualifies as news media under the FCA.  Id. at *5 n. 7.

Turning finally to whether Moore qualified as an original source, the Third Circuit found information that Moore learned during discovery in the wrongful death action "materially add[ed]" to the publicly disclosed allegations of fraud in the news articles and FOIA reports.  Id. at 8-10.  In reaching this result, the Circuit applied a two-part test: whether the information is "independent of" the fraud already disclosed in the public sources enumerated in the statute, and whether the information "materially adds" to the fraud disclosed in the enumerated public sources.  The Circuit described the "materially adds" element as "information—distinct from what was publicly disclosed—that adds in a significant way to the essential factual background: 'the who, what, when, where and how of the events at issue.'"  Id. at *10 (quotation omitted).  The Circuit found that Moore met this standard when it contributed "significant, specific details" learned through the wrongful death action discovery, such as how the fraud began when the Korean executive used his two U.S. citizen daughters as strawperson owners of two U.S. LLCs that had no operating capital yet purportedly purchased the two Korean vessels.

In the end:

While the information set forth in the two news articles and the FOIA documents publicly disclosed the basic elements of the fraud's transaction [], the information Moore acquired from discovery in the wrongful death action added significant details to the essential factual background of the fraud—the who, what, when, where, and how of the alleged fraud—that were not publicly disclosed.

Id. at *12.  Consequently, Moore fell within the post-PPACA original source exception to the public disclosure bar, and its FCA claim survived despite being based solely on information learned in news articles, FOIA reports, and through discovery in its client's litigation.

Moore's Application of the Amended FCA Significantly Departs from Precedent

Moore demonstrates the significant impact of the PPACA's changes to the FCA in at least three ways.  First, the amended statute more narrowly defines qualifying public sources.  Under the pre-2010 FCA, federal litigation in which the government was not a party qualified as a public source.  See, e.g., U.S. ex rel. Kreindler & Kreindler v. United Techs. Corp., 985 F.2d 1148, 1158-59 (2d Cir. 1993) (applying the pre-2010 public disclosure bar to information learned during prior litigation between two private parties); U.S. ex rel. Stinson, Lyons, Gerlin & Bustamonte, P.A. v. Prudential Ins. Co., 944 F.2d 1149 (3d Cir. 1991) (same).  Following the 2010 PPACA changes to the FCA, litigation qualifies as a public source only when the government or its agent is a party.  Moore, 2016 WL 386087 at *3 (citing § 3730(e)(4)(A)(i) (2012).  The difference between all prior federal cases and only those cases in which the government or its agent was a party is huge.  That distinction proved critical in Moore as the government was not a party in the original wrongful death action.  Had it been, Moore's claim would have been dismissed because all of the information underlying Moore's claim came from news media, FOIA reports, or the litigation.

Second under the pre-2010 FCA, a relator would fail to qualify as an original source unless his or her knowledge was both direct and independent of information disclosed in the FCA's listed public sources and information readily available in the public domain.  See, e.g., U.S. ex rel. Atkinson v. Pa. Shipbuilding Co., 473 F.3d 506, 521 (3d Cir. 2007) (learning of the fraud through a review of county records did not qualify as an original source, but declining to adopt a rigid rule for information in the public domain); U.S. ex rel. May v. Purdue Pharma L.P., 2016 WL 362250 (4th Cir. 2016) (pre-PPACA public disclosure bar applied to relators who only learned of the alleged fraud through their attorney, who in turn learned it while representing another client); Stinson, Lyons, Gerlin & Bustamonte, P.A., 944 F.2d 1149 (3d Cir. 1991) (lawyer who learned of alleged fraud while conducting discovery on behalf a client did not qualify as original source).  Merely reviewing and repackaging information that was in the public domain but not disclosed in one of the statute's enumerated public sources would not qualify a relator as an original source.  In contrast, the post-PPACA FCA and Moore require only that some of the relator's claim be independent of the FCA's limited list of public sources.  Moore, 2016 WL 386087 at *9 (citing § 3730(e)(4)(B) (2012)).  This distinction is critical as the amount of information readily available in the public domain far exceeds information found in the statute's enumerated public sources.  In particular, all information gleaned during litigation in which the government is not a party qualifies as "independent" for purposes of satisfying the amended original source definition.

Third, and perhaps most troubling, Moore's definition of "materially adds" leaves open a wide window for creative plaintiffs to qualify for the original source exception.  Under Moore, a plaintiff whose claim is substantially the same as the publicly disclosed fraud may still qualify as an original source where he or she "materially adds" significant details to the public disclosed fraud regarding the who, what, where, when, and how of the fraud.  One has a hard time imagining how an attorney armed with the often voluminous universe of discovery from a litigation matter could fail to identify new significant details relevant to an already disclosed fraud.  Time will tell, but the only scenario in which the "materially adds" hurdle is likely to not be overcome is one in which all of the important facts regarding the fraud are already disclosed in one of the statute's enumerated public sources – in other words, not often.

For these three reasons, Moore's application of the post-PPACA amended FCA represents a significant departure from prior cases applying the public disclosure bar to claims based on information disclosed in private litigation as well as information readily available in the public domain.

Solutions

It is highly doubtful that Congress intended for the post-PPACA amended FCA to enable enterprising and self-interested attorneys to file their own FCA claims based on information that they learned while representing their clients in litigation.  The question now, however, is what can be done to seal this leak before the dam bursts.  A few options:

  • Prior to responding to discovery requests, private litigants need to evaluate the risk of FCA liability related to the information they produce to the other side. It does not matter whether the litigation involves a contract dispute between two businesses, an employment claim, or, as in Moore, a wrongful death action information provided to the other side is eligible to be used, and often may be used, to build an FCA claim that quickly dwarfs the amount in dispute in the original litigation.
  • Whenever possible, litigants should require all parties and their attorneys to enter into confidentiality agreements or protective orders that limit the use of information learned during discovery to solely the matter in dispute. Of course, protective orders will not stop non-parties from reviewing and using filings and exhibits placed on the public docket.
  • Before handing over evidence that can be used to build an FCA claim, companies should explore mechanisms by which they can later show that the details of the fraud were already disclosed in one of the statute's enumerated sources. This is particularly true where the government is aware of the fraud through the company's compliance with the mandatory disclosure rule, but such disclosure may not trigger the public disclosure bar under § 3730(e)(4) (2012).
  • Congress should amend the FCA's definition of original source to reinstitute the pre-PPACA version.  Requiring an original source to demonstrate that he or she has direct and independent knowledge of the information upon which the allegations are based is not an unduly high hurdle.  The purpose of the original source exception to the public disclosure bar is to encourage those with first-hand knowledge of fraudulent conduct to come forward, not to reward enterprising attorneys who gain access to confidential documents and witnesses while litigating on behalf of their clients.

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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