Identifying a potential whistleblower claim

How to determine whether a potential client may be able to assert claims under federal and state programs

2016 February

Consider this scenario: A potential client walks into your office and tells you that his employer fired him without any legitimate reason. He explains that for years he was a model employee, receiving positive work reviews, regular raises and bonuses, and even notes in his personnel file documenting his achievements above and beyond expectations. But everything changed after he complained about the company’s unlawful billing practices. The potential client tells you that, after he raised this issue internally, his manager wrote him up on trumped-up charges and terminated him. The client’s story checks all of the boxes for a strong wrongful termination case, and you agree to represent him for those individual claims.

Unbeknownst to some attorneys, there may be additional, and perhaps more valuable, causes of action buried within these facts. For example, the unlawful billing your potential client observed may be costing the government millions of dollars in fraudulently-obtained funds. Or his former company may be engaging in a serious breach of the federal securities laws. In these situations, Congress (and some state governments) has incentivized whistleblowers with the possibility of sizeable monetary awards to either bring claims on the government’s behalf through the False Claims Act or report corporate malfeasance to the appropriate authorities under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Knowledge of this legal landscape, as well as its many pitfalls, should be an essential part of every plaintiff’s lawyer’s playbook when evaluating all of a potential client’s options.

What are the programs?

So what is the False Claims Act? That law, commonly known as the “FCA,” is one of the government’s primary tools for fighting fraud. See 31 U.S.C. § 3729 et seq. It allows the government to recover treble damages and civil penalties between $5,500 and $11,000 per claim against entities who submit or cause the submission of false claims to the government or use a false statement to ensure that the government pays claims.

But it isn’t just the government who can bring an FCA case. Instead, under a system dating from the time of the Civil War, private parties who know of fraud against the government (like the potential client in the example above) may sue the wrongdoer on the government’s behalf. These types of FCA cases are usually referred to as “qui tam,” a shorthand form of a Latin phrase meaning “[he] who sues in this matter for the king as well as for himself.” The private parties who bring them are referred to as “relators” or, more colloquially, as “whistleblowers.”

The idea behind the FCA is simple: Given the billions and billions of dollars the government spends each year on expenditures ranging from prescription drugs to fighter jets to document shredding services, it is impracticable (if not impossible) for the government to track down every instance of fraud on its own. The FCA therefore allows relators to file a lawsuit under the FCA and, if it is successful, to share in the government’s recovery. Said differently, in order to detect and discourage fraud, the government offers private citizens a bounty to use their knowledge to help the government recover its money from wrongdoers. That system has worked remarkably well over the years; for example, in fiscal year 2014, the federal government recovered nearly $3 billion from qui tam cases (about three-fifths of the government’s total FCA recoveries, which were in excess of $5 billion) and paid $435 million to whistleblowers.

Along with the qui tam provisions of the FCA, Congress created whistleblower programs designed to root out securities fraud (administered by the Securities and Exchange Commission) and commodities fraud (administered by the Commodities Futures Trading Commission) with the passage of Dodd-Frank in 2010. See 15 U.S.C. § 78u-6 (SEC program); 7 U.S.C. § 26 (CFTC program). These whistleblower programs are not limited to fraud perpetrated against the government, but rather are focused on violations of the securities and commodities exchange laws. Instead of filing a complaint, the whistleblower relays his or her information to the SEC or the CFTC, which, armed with the whistleblower’s knowledge, investigates the potential wrongdoing. The whistleblower is entitled to an award if his or her information results in a monetary sanction over $1 million. These programs have been successful in resolving securities and commodities fraud; for example, since its inception in 2011, the SEC program has paid more than $54 million to 22 whistleblowers whose information led to successful SEC enforcement actions.

How do you bring a qui tam case?

Although the reasoning behind qui tam lawsuits is straightforward, the procedure can be somewhat daunting to those practitioners unfamiliar with this specialized area of law. To start with, a qui tam lawsuit must be filed under seal and served only on the government, not the defendants. Filing under seal gives the government time to investigate the relator’s claims without tipping off the defendants that a lawsuit is pending. The FCA provides for any qui tam case to remain under seal for at least 60 days; in practice, cases stay under seal for much longer periods (sometimes for years) while the government completes its investigation. Service on the federal government is always made on the Department of Justice in Washington, D.C., and the local U.S. Attorney’s Office.

Given the wide-ranging venue provisions of the FCA – an action may be filed in any district “in which the defendant or, in the case of multiple defendants, any one defendant can be found, resides, transacts business, or in which any act proscribed by section 3729 occurred,” see 31 U.S.C. § 3732(a) – in nationwide cases the relator oftentimes may choose a forum that will be the most advantageous for litigating the action. Experienced relator’s counsel often consider factors such as the status of the law in each particular circuit or the local U.S. Attorney’s interest in pursuing qui tam cases when determining where to file nationwide cases.

Where to file

Determining where to file may also depend on the availability of state FCA law. Twenty-nine states (including California) and seven municipalities have enacted their own versions of the FCA. Some state FCAs apply generally to all government expenditures while others apply to discrete areas like the state’s Medicaid plan; regardless, they are all modeled on and take guidance from the federal version of the FCA, including analogous service requirements for the state attorney general. Thus, where only state programs are implicated, a relator may pursue a qui tam case under state FCA law in state court. Alternatively, qui tam cases involving both state and federal programs routinely plead claims under the various state FCAs alongside claims under the federal FCA in the same complaint filed in federal court.

The complaint is not the only piece of information the government receives while the case is under seal. A relator must also prepare a written disclosure statement of substantially all material evidence and information in his or her possession and serve that on the government as well. This document, commonly called the “relator’s statement,” assists the government in its investigation of the relator’s claim. Although qui tam defendants often attempt to obtain the relator’s statement in discovery after they are served with the complaint, most courts hold that the relator’s statement is protected as work product or under the joint investigation or prosecution privilege.

Will the government intervene?

After filing and serving the government, the next question for relators is whether the government will intervene in the case. Under the FCA, the government has discretion to intervene and litigate a relator’s case itself – after all, the relator brings his claims on the government’s behalf, so it only makes sense that it should be allowed to litigate the matter if it wishes. Generally speaking, the government makes its intervention decision during the time the case is under seal, but the FCA allows the government to intervene at a later time upon a showing of “good cause.” (31 U.S.C. § 3730(c)(3).) Although the number fluctuates each year, the general rate of government intervention in qui tam cases is about twenty percent.

Non-intervention does not mean the end of the case. Instead, the FCA provides that if the government declines intervention (known as “declination”), the relator “shall have the right to conduct the action.” (31 U.S.C. § 3730(c)(3).)  Declination also does not mean that the case lacks merit. To the contrary, courts have long held that the government’s decision to not intervene is not relevant to the merits of the action. As the Fourth Circuit observed, “Given its limited time and resources, the government cannot intervene in every FCA action, nor can the government pursue every meritorious FCA claim.” (U.S. ex rel. Ubl v. IIF Data Solutions, 650 F.3d 445, 457 (4th Cir. 2011).) Moreover, the FCA specifically allows the government to dismiss a qui tam action “notwithstanding the objections of” the relator. (31 U.S.C. § 3730(c)(2)(A).)

In most cases, after the government informs the relator and the Court of its intervention decision, the Court will unseal the complaint and order that it be served on defendants. For relators in non-intervened cases, the case then proceeds along the same lines as an ordinary lawsuit, with motion practice, discovery, and, eventually, trial.

Common qui tam pitfalls

Along with its complicated procedural starting gate, the FCA erects several barriers to qui tam lawsuits which can sink a relator’s case before it even starts. Three of the most common are the “public disclosure bar,” the “first-to-file rule,” and the statute of limitations. Although these doctrines do not necessarily apply in every qui tam case, they share a unifying characteristic: they are all affected, and usually exacerbated, by the passage of time. Thus, as a general rule, it is important to consider the passage of time when evaluating and preparing a potential qui tam matter.

• The “Public Disclosure Bar”

For many years Congress struggled with who could be a relator in a qui tam action: A true “insider” with previously undisclosed information, or anyone that read about fraudulent conduct in the newspaper and was quick enough to beat others and the government to the courthouse? For a period in the 1930’s and 1940’s, culminating with the Supreme Court’s decision in Marcus v. Hess (1943) 317 U.S. 537, several “parasitic” relators successfully recovered under the FCA even though they had no original information and contributed nothing to uncovering the defendants’ fraud. Congress superseded Hess by statute, but that amendment proved too restrictive and greatly diminished the FCA’s efficacy in combating fraud. Thus, in a major overhaul in 1986, Congress amended the FCA to include the “public disclosure bar” and its primary exception, the “original source” doctrine. Congress has tweaked the 1986 amendments a few times since, most notably in 2010.

The “public disclosure bar” precludes a relator from pursuing a qui tam suit “if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed” through certain kinds of official proceedings or in the news media. (31 U.S.C. § 3730(e)(4)(A).) However, a relator who qualifies as an “original source” may still maintain an action notwithstanding a “public disclosure.” To qualify as an “original source,” a relator must show that she either (1) voluntarily disclosed information to the government prior to the public disclosure or (2) voluntarily disclosed to the government his or her knowledge that is “independent of and materially adds” to the publicly disclosed information before filing a qui tam action. (31 U.S.C. § 3730(e)(4)(B).) In other words, if a person reads about a government investigation of his employer in the newspaper and realizes that he has personal knowledge of the conduct under investigation, that person cannot qualify as an original source under the first prong of the test because he did not provide his information to the government prior to the public disclosure. However, if that same person can show that his knowledge is “independent of and materially adds” to the information already in the public forum and that he provided that information to the government prior to filing a qui tam case, there is a strong chance he will qualify as an “original source” under the second prong of the test.

Evaluating a potential public disclosure and a relator’s status as an original source is critical even in actions where it does not appear that the wrongdoer’s conduct has been publicly disclosed. Likewise, proper pleading in the qui tam complaint is essential to protect against this argument, which is commonly brought by defendants in non-intervened cases on a motion to dismiss.

• “First to File” Rule

Given the scope and complexity of government-related fraud schemes, oftentimes more than one whistleblower will attempt to bring an FCA action based upon the same wrongful conduct. Anticipating this, Congress decided to prefer the first-filed case over all subsequent, “related” matters. (31 U.S.C. § 3730(b)(5).) Congress also chose to use the word “related,” which courts have interpreted as covering similar (and not just identical) allegations of fraud. At the same time, Congress made clear that the first-filed action would only have preference while it was “pending,” which, as the Supreme Court decided last term, meant that the “first-to-file” bar would no longer apply if the first-filed case was no longer pending. (See Kellogg, Brown & Root Services, Inc. v. U.S. ex rel. Carter (2015)135 S. Ct. 1970, 1979.)

Given the first-to-file doctrine, it is essential to determine whether there are any “related” actions pending prior to filing a qui tam case. Keep in mind, however, that a docket check only tells half of the story because an earlier-filed case may be pending under seal. Thus, the best course with a potential qui tam action is to balance a pre-filing investigation against the potential that someone else may undercut the relator’s ability to pursue the case.

• Statute of limitations

Similar to most individual causes of action, the FCA imposes a statute of limitations, which runs six years from the date of the violation or three years from the time the United States should have known about the violation. The FCA also imposes a statute of repose, which provides that no case may be brought more than ten years from the date of the violation. (31 U.S.C. § 3731(b).) Compliance with these limitations periods is essential for a successful qui tam case, as recent efforts to toll the statute have not fared well. For example, in the Kellogg, Brown & Root decision issued last term, the Supreme Court held that the Wartime Suspensions of Limitations Act, which suspends the limitations period for “any offense” against the federal government during wartime (see 18 U.S.C. § 3287), applied only to criminal offenses and not to the FCA’s civil statute of limitations even though the relator’s allegations concerned fraudulently billing the military for water purification services in Iraq. (135 S. Ct. at 1975.) As Kellogg, Brown & Root illustrates, compliance with the FCA’s statute of limitations is essential for a successful qui tam action. Thus, early evaluation of when the violations occurred and whether the government had reason to know of the claim are critical.

How do you submit a tip to whistleblower program?

Although undoubtedly inspired by the FCA’s well-documented track record of success in combating fraud, the procedure to submit an SEC or CFTC whistleblower tip is different from filing a qui tam complaint. As a result, both programs contain their own procedural pitfalls and traps for the unwary.

Using the SEC’s program as a guide (the CFTC program is substantially similar), the threshold question is whether a person qualifies as an “eligible whistleblower.” To be an “eligible whistleblower,” a person must be an individual (not a business or entity) and voluntarily provide the SEC with information that leads to a penalty in excess of $1 million. (17 C.F.R. § 240.21F-2.) Moreover, a whistleblower must provide “original information,” which is either independent knowledge (which may not be based upon publicly-available sources) or independent analysis (which may be based upon publicly-available sources) that is not already known by the SEC. (17 C.F.R. § 240.21F-4(b).) However, like the FCA, the SEC whistleblower program allows the whistleblower to participate despite the SEC’s prior knowledge if that whistleblower can show that he or she was the “original source” of the knowledge. Id. The requirements to qualify as an “original source” are sometimes governed by tight timelines; for example, if a whistleblower reports misconduct internally, she must report the same information to the SEC within 120 days to preserve her ability to claim an award. See 17 C.F.R. § 240.21F-4(b)(7), 17 C.F.R. § 240.21F-4(c)(3).

Perhaps most critical to the SEC program is how a whistleblower reports such information to the SEC. As a general matter, the SEC provides a form (called a “TCR”) which is available online. The TCR must be submitted with every whistleblower tip, but it may be augmented with attachments and long-form descriptions of the whistleblower’s knowledge. Thus, unlike the FCA, the whistleblower does not file a complaint in court, but instead simply provides the information to the government. The government uses that information (usually in conjunction with follow-up interviews with the whistleblower) to conduct its own investigation and bring its own action.

Also unlike the FCA, which requires the relator to identify herself after the complaint is unsealed, the SEC program allows whistleblowers to remain anonymous without destroying the whistleblower’s interest in a potential award. The steps necessary to preserve anonymity and the client’s interest in an award can be a large trap for the unwary. To do so, a whistleblower must be represented by counsel and must strictly comply with the SEC’s requirements. (17 C.F.R. § 240.21F-7(b).) Thus, when protection of a client’s identity is essential, review of the procedural requirements can avoid any missteps that may jeopardize the client’s anonymity.

Benefits for whistleblowers

Under the system established by Congress in the FCA and Dodd-Frank, whistleblowers whose information leads to a successful outcome for the government – either through recovery of funds or administration of a penalty – are entitled to share in the recovery.

As noted above, the federal FCA provides for treble damages and civil penalties ranging from $5,500 to $11,000 for each false claim. The percentage of that award provided to the relator, known as the “relator’s share,” depends upon the government’s decision to intervene. In intervened cases, the relator’s share is generally set between 15 and 25 percent depending upon the relator’s substantial contributions (or not) to the prosecution of the action. (31 U.S.C. § 3730(d)(1).) In non-intervened cases, however, the relator is guaranteed a much higher relator’s share; the FCA sets the relator’s share in such cases at 25 to 30 percent of the recovery. (31 U.S.C. § 3730(d)(2).) Some state laws increase these percentages; for example, California’s FCA provides for ranges of 15 to 33 percent in intervened cases and 25 to 50 percent in non-intervened cases. (Cal. Gov. Code, § 12652(g).) Finally, successful relators in either an intervened or non-intervened federal case are entitled to attorneys’ fees and expenses from the defendant. (31 U.S.C. § 3730(d); see also Cal. Gov. Code, § 12652(g)(8).)

The SEC and CFTC programs also offer the potential of large awards for whistleblowers whose information “leads to” successful SEC or CFTC action. Unlike the relator’s share under the FCA, which is based upon a relator’s complaint, the SEC and CFTC use their whistleblower programs to gather information that may support a variety of investigations and actions. As such, the enabling rules allow whistleblowers to receive awards where their information opens a new investigation, reopens a closed one, or contributes to an existing investigation that eventually leads to a monetary sanction in excess of $1 million. (17 C.F.R. § 240.21F-4(c) (SEC program); 17 C.F.R. § 165.2(i) (CFTC program).)

Both the SEC and CFTC offer an award between 10 and 30 percent of the monetary sanctions awarded. (17 C.F.R. § 240.21F-5(b); 17 C.F.R. § 165.8(a).) Similarly, both consider certain criteria to increase the amount of the award (such as significance of the information or assistance provided by the whistleblower) or decrease the amount of the award (such as culpability or unreasonable reporting delay). (17 C.F.R. § 240.21F-6; 17 C.F.R. § 165.9.) Finally, because many whistleblowers choose to preserve their anonymity by hiring counsel, both programs provide detailed procedures for claiming awards following a successful resolution. (17 C.F.R. § 240.21F-10; 17 C.F.R. § 165.7.) Thus, whistleblowers and their counsel must be cognizant of both the procedural hurdles to obtain an award and the enhancing and mitigating factors which may decide the amount provided to the whistleblower.

Protections for whistleblowers?

As in the example at the outset of the article, whistleblowers often contact lawyers after an employer has retaliated against them for questioning, challenging or reporting unlawful company practices. Conversely, whistleblowers who initiate qui tam lawsuits or submit tips under the SEC or CFTC programs while they are still employed are at risk of experiencing negative performance evaluations, workplace harassment, involuntary transfers, demotions, and even termination in response to their efforts to correct wrongdoing.

In addition to the remedies available under California state law for such conduct, the FCA and Dodd-Frank provide strong protections against unlawful retaliation. Under the FCA’s anti-retaliation provisions, an employee who is discharged, demoted, harassed, or otherwise discriminated against because of his or her efforts to investigate, report or stop an employer from engaging in practices that defraud the government is entitled to relief such as reinstatement, double back pay, and attorneys’ fees and expenses. (31 U.S.C. § 3730(h).) The SEC and CFTC whistleblower programs offer similar protections. See (15 U.S.C. § 78u-6(h) (SEC program); (7 U.S.C. § 26(h) (CFTC program).)

Conclusion

Given the importance of protecting public funds and the integrity of public markets, Congress has explicitly encouraged whistleblowers to use their information with the promise of sharing in the recovery. Obtaining that recovery is far from easy; companies often fight the actions tooth-and-nail, and, given the complexity of contemporary government programs, cases routinely hinge upon expert testimony and detailed data analysis. That said, qui tam cases offer a significant upside that can greatly increase the value to clients and help rectify fraud against taxpayer dollars. As a result, early evaluation and identification of potential FCA claims or SEC/CFTC whistleblower tips is critical to avoid missing these claims and the opportunity for the client to use her information to root out fraud and achieve a favorable result above and beyond her individual claims.