United States: Two Recent Circuit Court Decisions Address the FCA's Public Disclosure Bar

The civil False Claims Act's (FCA) public disclosure bar prohibits FCA suits based on allegations that have been disclosed publicly through certain enumerated sources, unless the relator meets the FCA's definition of "original source." Congress amended the bar in 2010, including replacing the phrase "no court shall have jurisdiction" with the phrase "[t]he court shall dismiss."

Two recent Circuit Court decisions, issued within days of each other, have focused and elaborated on the public disclosure bar.

In United States ex rel. Beauchamp v. Academi Training Center, LLC (decided on February 25, 2016), two relators alleged under the FCA that Academi Training Center knowingly submitted false claims to the United States in connection with a Government contract to provide security services in Iraq and Afghanistan. (My colleague, Luke Levasseur, briefly discussed the Beauchamp in an earlier post.) Citing the FCA's public-disclosure bar, the district court dismissed the complaint. The issue before the Fourth Circuit was whether the district court correctly applied the public disclosure bar when the sole public disclosure it found preclusive – a magazine article – was published more than one year after the relators first pled the alleged fraud.

In 2005, the U.S. Department of State hired Academi to provide security services across the Middle East.  The agreement required Academi's personnel to maintain a certain degree of proficiency with several firearms and called for Academi to submit marksmanship scores.  Relators, both former security contractors with Academi, filed their complaint in the Eastern District of Virginia in April 2011, alleging in part that Academi submitted false reports and bills to the State Department for contractors employed in positions in which they did not actually work. On May 24, 2011, relators filed their first-amended complaint, adding new allegations that Academi fraudulently billed the State Department for services performed by contractors who had not been tested for the requisite marksmanship scores (the "weapons qualification scheme").

While the relators' first-amended complaint was pending, two former Academi instructors (Robert Winston and Allan Wheeler) contacted relators' counsel with additional information about the weapons qualification scheme, and Winston and Wheeler then filed a lawsuit against Academi (the "Winston complaint"), alleging they were wrongfully terminated from Academi for reporting the weapons qualification scheme up the chain of command.  The Winston complaint was not filed as a qui tam action, so its allegations were not under seal.  An online news publication published a story about the case, describing the Winston plaintiffs' allegations of retaliation and the weapons qualification scheme.

Relators then filed a second-amended complaint, which became the operative pleading, and expanded the weapons qualification scheme allegations by adding paragraphs from the Winston complaint. Academi moved to dismiss the relators' qui tam claims under the first-to-file and public disclosure bars. The district court granted the motion under the public disclosure bar, determining that the online publication was a public disclosure. Citing the Supreme Court's 2007 decision in Rockwell International Corporation v. United States, the district court determined that only the most recent complaint was relevant for purposes of the statutory timing benchmark. Observing that relators' last pleading – the second amended complaint – postdated the online article, the court concluded the article was a qualifying public disclosure so the bar applied. The court also determined that the relators were not protected by the original source exception because they failed to disclose Academi's fraud to the Government in accordance with the FCA.

The Fourth Circuit explained that it was undisputed that the relators pled the weapons qualification scheme in their first-amended complaint prior to the online publication. The second-amended complaint added further detail about the scheme gleaned from the publication. In adopting the view that only the most recent pleading should control the public disclosure bar's timing, the district court misapprehended the factual and legal basis of Rockwell. Even though the relator in that case may have been an original source as to claims asserted in the original complaint, the Court found those allegations irrelevant because the relator had abandoned them in favor of a different fraud theory. Instead of examining the Supreme Court's rationale, the district court mechanically applied the statement that "courts look to the amended complaint to determine jurisdiction." The Supreme Court in Rockwell focused on the relator's last complaint only because that was where the relevant fraud had been pled. In the instant case, the district court failed to evaluate the relevant fraud claim – the weapons qualification scheme – under the pleading that first alleged that fraud: the first-amended complaint. The Fourth Circuit noted that the Fifth Circuit had been reluctant to expand Rockwell's last-pleading rule as the district court did. The Fourth Circuit held that the determination of when a plaintiff's claims arise for purposes of the public disclosure bar is governed by the date of the first pleading to allege the relevant fraud and not by the timing of any subsequent pleading. The Circuit further explained that its holding does not suggest that a plaintiff can raise skeletal claims of fraud and then use such a pleading to avoid the public disclosure bar when he or she later filed an amended complaint that adds necessary facts gleaned from the public domain.

In the second case, Cause of Action v. Chicago Transit Authority (decided on February 29, 2016), a nonprofit government watchdog brought a qui tam action alleging that, for several decades, the Chicago Transit Authority (CTA) had been misreporting transit data to the Federal Transit Administration (FTA) in order to secure inflated Federal grant allocations. The district court dismissed the action, holding that the FCA claims had been publicly disclosed at the time the action was filed. The Seventh Circuit affirmed.

The FTA administers grant funding to urban transit programs. Grant recipients are required to submit certain information. FTA apportions grants based in part on the number of Vehicle Revenue Miles (VRM) reported; VRM accrue while a vehicle is "in revenue service." So-called "deadhead miles" – miles accumulated while a vehicle is out of revenue service – are excluded from the VRM calculation.

In 2005, the Illinois House of Representatives directed the Illinois Auditor General (IL-AG) to audit the CTA. A subcontractor (Mr. Rubin) on the IL-AG audit team helped prepare a Technical Report that examined in detail the CTA's VRM reporting practices; that Report concluded that CTA had been overstating its VRM when making annual certifications and thus had received higher than justified grant disbursement. In March 2007, the IL-AG released an Audit Report, concluding that CTA may have incorrectly reported some deadhead hours/miles as revenue hours/miles. In 2009, Mr. Rubin notified the Department of Transportation Inspector General of CTA's misreporting and provided it with a copy of his Technical Report. Mr. Rubin also provided copies of the Technical Report and the Audit Report to Cause of Action. In March 2012, Cause of Action sent a letter to the Department of Justice requesting an investigation into CTA's reporting practices. In April 2012, the FTA sent a letter (FTA Letter) to CTA explaining that FTA conducted an in-depth review of CTA's reporting of VRM data, and that CTA had cooperated in the review. The FTA Letter directed CTA to revise its VRM data for reporting year 2011 and future years, but did not require CTA to revise any VRM data for prior years.

Cause of action brought its qui tam action in the District Court for the District of Maryland in 2012, alleging fraudulent conduct by CTA based on its inaccurate VRM reporting. The Maryland court transferred the case to the Northern District of Illinois, and the United States declined to intervene.

CTA moved to dismiss based on the public disclosure bar. The district court held that Cause of Action's allegations had been publicly disclosed in the FTA Letter, as well as the Technical and Audit Report, and thus Cause of Action's suit was precluded by the public disclosure bar.

The Seventh Circuit first considered whether the allegations were "in the public domain," recognizing the uncontroversial proposition that material is in the public domain when the information is open or manifest to the public at large. Beyond revelation to the public, however, the Circuit stated that it has recognized an alternative meaning: where the facts disclosing the fraud itself are in the Government's possession. The Circuit referred to its decision in United States v. Bank of Farmington, in which it held that disclosure of information to a public official is a public disclosure under the FCA when the disclosure is made to one who has managerial responsibility for the very claims being made. Cause of Action argued that the Government had done nothing to recover the money that CTA should not have received. The Circuit rejected that argument, explaining that there is no support in either the FCA or the Circuit's case law for attaching jurisdictional significance to the outcome of an administrative investigation beyond its undertaking. Thus, the FTA Letter was placed in the public domain when it was sent to CTA.

The Seventh Circuit acknowledged that the First and Fourth Circuits had criticized the court's reading, explaining that, in their view, a public disclosure requires that there be some act of disclosure outside of the Government. The Seventh Circuit stated that there is significant force in the position of the other Circuits, and that if the FTA Letter were the only document before the court, respect for the position of the other Circuits would warrant in-depth reconsideration of the court's precedent. However, as Cause of Action conceded, the Audit Report was "in the public domain" at the time the complaint was filed.

The Circuit next considered whether the Audit Report contained the critical elements exposing the transaction as fraudulent. Cause of Action contended that it would be unreasonable to infer from the Audit Report that CTA possessed the scienter required by the FCA. The Circuit disagreed, nothing that the Audit Report provided a sufficient basis to infer directly that CTA knew it was presenting a false set of facts to the Government – the definition of VRM explicitly excluded deadhead miles, and the Audit Report disclosed that the IL-AG suspected that CTA was incorrectly classifying deadhead miles as VRM. Finally, the court found that Cause of Action was not an original source of the information upon which its allegations were based – its knowledge of the CTA's alleged wrongdoing was neither independent of nor materially added to the publicly disclosed Audit Report.

It is rare for Circuit courts to issue decisions on the same aspect of the FCA so close in time. The Fourth Circuit's decision in Beauchamp is noteworthy in part for its reading of the Supreme Court's Rockwell decision as applied to the public disclosure bar. The Seventh Circuit's decision in Cause of Action is fairly straightforward, but suggests a possible future shift in that Circuit's law concerning whether certain information in the possession of a public official with managerial responsibility for the claims being made constitutes a public disclosure.

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