United States: Civil False Claims Act: Supreme Court Agrees to Decide Another "Public Disclosure" Issue: Are Documents Obtained Through FOIA Requests "Public Disclosures" Under the False Claims Act?

For years, the circuit courts have been clearly and deeply split on the issue of what "public disclosure" means when the qui tam relator learns critical elements of his or her claim as a result of receiving documents from a government agency under the Freedom of Information Act ("FOIA"). Yesterday, after declining to weigh in on a separate "public disclosure" circuit split earlier this summer,¹ the Supreme Court granted certiorari in Schindler Elevator Corp. v. United States ex rel. Kirk, No. 10-188 and will resolve that conflict. The decision below, United States ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94 (2d Cir. 2010), was wrong on a number of issues; however, the Question Presented in the petition for certiorari was limited to the public disclosure issue. If the Court rules in favor of the defendant and holds that a FOIA response qualifies as a public disclosure, that ruling could prompt another round of misguided legislative action that will again unsettle this area of FCA law. Although the specific public disclosure provision at issue in Schindler was amended in the 2010 Patient Protection and Affordable Care Act, the new language―which refers to a disclosure via a "Federal report"―is sufficiently similar to the old "administrative report" provision that the Court's decision in Schindler should continue to carry weight even after the recent amendments.

Schindler is the classic "false certification" case, and the facts demonstrate why this type of case is subject to relator abuse. The qui tam complaint alleged that the defendant received and performed (and was paid for performing) hundreds of contracts with Federal government agencies which were subject to the Vietnam Era Veterans Readjustment Act ("VEVRAA"), which requires certain contractors to submit reports to the Department of Labor ("DOL") certifying the number of qualified covered veterans they employ. 38 U.S.C. § 4212(d); 48 C.F.R. §§ 22.1310(b), 52.222.37(c). The government investigated the case and declined to intervene. The relator, a former employee, alleged that Schindler had violated the FCA by obtaining government contracts subject to VEVRAA while representing it had filed the required VEVRAA reports or had filed a false report. According to the Second Circuit, Kirk based his allegations in the qui tam complaint "in large part on information he obtained after submitting requests under [FOIA]." There was never a question or allegation in the complaint that Schindler had not performed under the contracts or had provided substandard goods or services under the contracts, other than the alleged failure to prepare and file, or to accurately prepare and file, the required reports with the Department of Labor, which was not the agency awarding or paying the contracts. According to the complaint, the contracts were worth over $100 million, so that the trebled damages, if the defendant were found fully liable under the FCA, were over $300 million, plus penalties.

The district court dismissed the case on two grounds. See United States ex rel. Kirk v. Schindler Elevator Corp., 606 F. Supp. 2d 448 (S.D.N.Y. 2009). First, the court held that the complaint failed to state a claim because the filing of false VEVRAA reports was not a condition of payment under the relevant statute and regulations. 606 F. Supp. 2d at 457. Second, with regard to the failure to file any VEVRAA report at all, the court held that such claims were barred by the FCA's public disclosure/original source bar since the allegations were based on information that Kirk's wife had obtained from FOIA requests to the DOL. 606 F.Supp. 2d at 460.

The Second Circuit reversed and remanded the case holding, in the first instance, that basing FCA allegations on material obtained pursuant to FOIA requests did not constitute a "public disclosure" unless the FOIA material was itself an "administrative report or investigation." 601 F.3d at 111. Second, having dispensed with the public disclosure challenge, the court held that failing to file, or filing false, VEVRAA reports with the DOL was a "condition of payment" such that the allegations stated a claim under the FCA. 601 F.3d at 115-17.

Schindler filed a petition for certiorari with the Supreme Court only on the "public disclosure" issue. The issue now before the Court is as follows:

The Circuit Conflict

There is no dispute that the issue now before the Supreme Court has resulted in a circuit split. The Second Circuit admitted up front that "[o]ur sister Circuits are divided on this issue." 601 F.3d at 98. The Courts of Appeals for the First, Third, Fifth and Tenth Circuits have held that disclosure under FOIA of information on which the allegations are based constitutes "public disclosure" under the FCA. Indeed, the Third Circuit decision, which is the one routinely cited by other circuits, was authored by now-Justice Alito when he was on the Third Circuit. See United States ex rel. Mistick PBT v. Housing Authority of the City of Pittsburgh, 186 F.3d 376 (3d Cir. 1999). The Ninth Circuit, on the other hand, has disagreed with Mistick, holding that a "response to a FOIA request is not necessarily a report or investigation, although it can be, if it is from one of the sources enumerated in the statute." United States ex rel. Haight v. Catholic Healthcare West, 445 F.3d 1147, 1153 (9th Cir. 2006). The Fourth Circuit, in an unpublished opinion, sided with the Ninth Circuit. The Second Circuit opinion in Schindler specifically noted and rejected the majority view.

Interestingly, the Second Circuit held that the limited dissemination of the FOIA material – i.e., to the relator and his wife – was not relevant to the public disclosure question: "every circuit to have considered this issue has determined that information produced in response to a FOIA request becomes public once it is received by the requester." 601 F.3d at 104. Citing a much earlier Second Circuit decision, United States ex rel. Doe v. John Doe Corp., 960 F.2d 318 (2d Cir. 1992), the court stated that it had "rejected the contention that, in order for public disclosure to have taken place, the information must be more broadly disseminated." 601 F.3d at 104.

However, the Second Circuit made clear that mere public disclosure is not enough and that the "public disclosure" has to have been in an "administrative...report...or investigation" under 31 U.S.C. § 3730(e)(4)(A). Rejecting the Third Circuit's holding in Mistick that a FOIA request is, by definition, an administrative action, the Second Circuit adopted the Ninth Circuit view that, to qualify as a public disclosure under the FCA, the FOIA disclosure itself has to disclose another administrative report or investigation. Thus, whether an admittedly public document is "public" for purposes of the FCA depends upon the nature of the document.

The Elephant in the Room: The False Certification Issue

While spending 25 pages of its Schindler decision addressing the public disclosure issue, the Second Circuit spent a mere 10 pages analyzing the much more important issue of whether the alleged unfiled or false VEVRAA reports could render claims for an otherwise fully and properly performed contract "false" under the False Claims Act. Without analysis, the Second Circuit first stated that the applicable provisions of the FCA were 31 U.S.C. § 3729(a)(1) and 31 U.S.C. § 3729(a)(1)(B), essentially assuming that the 2009 FERA amendments to former § 3729(a)(2) were retroactive. 601 F.3d at 113. Proceeding to the analysis of whether the claims submitted by the defendant were "false," the Second Circuit began by looking to its decision in United States ex rel. Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001), where the court had held that the FCA does not "encompass those instances of regulatory noncompliance that are irrelevant to the government's disbursement decisions." Mikes, 274 F.3d at 697.

The Second Circuit then quoted and relied upon 31 U.S.C. § 1354(a)(1), which provides that "no agency may obligate or expend funds appropriated for the agency...to enter into a contract [covered by VEVRAA] with a contractor from which a [VETS-100] report was required...with respect to the preceding fiscal year if such contractor did not submit such a report." 601 F.3d at 114. Using a rather simplistic view of both Federal contracts and the False Claims Act, the Second Circuit held (despite its previous decision in Mikes) that this provision and the implementing regulation made any claims by a contractor who had submitted a VEVRAA report false as a matter of law because the contractor "implicitly certifies compliance" with the VEVRAA reporting requirement. In addition, the Second Circuit, applying the post-FERA version of the FCA and without analyzing whether retroactive application of the FERA amendments is constitutional, held that, under this new version of the statute, conduct that predated the passage of the FERA amendments could be subject to the new provision. 601 F.3d at 115.

The petition for certiorari, unfortunately, did not address the false certification issue directly. Rather, focusing on the public interest with regard to resolving the public disclosure issue, the petition explained that DOJ had not intervened in the case below and had never previously invoked the False Claims Act to enforce the VEVRAA. See Petition at 20. In arguing that the definition of public disclosure under the FCA should be broadly interpreted, the defendant argued that a qui tam relator, unlike the DOJ, "will not utilize a more calibrated enforcement mechanism when an FCA claim might be available." Id. Essentially, this argument invokes the policy reasons behind the false certification argument without directly addressing it. But that would not keep another qui tam relator, who did not learn of the allegations from a public disclosure, from using the same dangerous theory to abuse the False Claims Act, nor would it keep the government from asserting such claims. The better result, in our opinion, would have been to ask the Supreme Court to address this issue directly.

The use and abuse of the False Claims Act to pursue cases based on false certifications deserves its own attention, review, and analysis by the Supreme Court. The Schindler case demonstrates, as many do, the damage that this FCA theory can impose on defendants, and why so many lawsuits result in settlements that are little more than legal shakedowns. After all, the defendant here was retained by government agencies to install and service elevators in government buildings. By all accounts, the company did so, and the agencies who received those elevators were perfectly satisfied with the goods and services delivered. Yet, the qui tam relator here alleges that, under the FCA, the defendant is liable for over $300 million in damages, and the tone (if not the holding) of the Second Circuit opinion demonstrates no concern or outrage at such a result.

While these important issues deserve their own briefing and analysis, they likely will be relegated to mere undertones when the Supreme Court hears this case.

Footnote

1. See FraudMail Alert No. 10-06-01.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.