Amicus Curiae Brief — Hughes Aircraft Co. v. United States Ex Rel. Schumer

Supreme Court of the United States

OCTOBER TERM, 1996

HUGHES AIRCRAFT COMPANY,

_ Petitioner,

v.

UNITED STATES EX REL. WILLIAM J. SCHUMER,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

BRIEF AMICUS CURIAE OF

THE WASHINGTON LEGAL FOUNDATION

IN SUPPORT OF PETITIONER

Daniel J. Popeo Stuart M. Gerson

Paul D. Kamenar Counsel of Record

WASHINGTON LEGAL Leslie V. Norwalk

FOUNDATION EPSTEIN BECKER & GREEN, P.C.

2009 Massachusetts Ave..N.W. 1227 25th Street, N.W.

Washington, DC 20036 Suite 800

(202) 588-0302 Washington, D.C. 20037

(202) 861-0900

i

QUESTIONS PRESENTED

The Washington Legal Foundation will address the

following questions:

1. Whether the False Claims Act’s “public disclosure”

bar to suits by gui tam relators who are not original sources

is activated when the misconduct at issue previously had

been disclosed to a non-participant in the alleged fraudulent

conduct.

2. Whether actual or potential financial loss to the

government is an essential element of a claim under the

False Claims Act.

TABLE OF CONTENTS

Page

TABLE OF CONTENTS.................. ii

TABLE OF AUTHORITIES................ v

INTERESTS OF AMICUS CURIAE ..........

ee, eee ee 2

SE 2

B. Factual Background ................ 3

SUMMARY OF ARGUMENT .............. 5

Ee 7

I. BECAUSE THERE WAS A _ “PUBLIC

DISCLOSURE” OF THE ALLEGED FRAUD

PRECEDING THE LAWSUIT, THE

JURISDICTIONAL BAR AGAINST PARASITIC

EE i a a ae 7

A. The Statutory Framework and the

ee 7

B. “Public Disclosure” Includes Disclosure

By the Government to Private Individuals

Previously Unaware of the Fraud. ...__ . . 10

F. The Rule of Lenity Also Requires a

Narrow Reading of Qui Tam

SD - s héw'en4 bh 665d ok oe

. THIS ACTION SHOULD BE DISMISSED FOR

WANT OF A CASE OR CONTROVERSY

BECAUSE MERE TECHNICAL COST

ACCOUNTING STANDARDS VIOLATIONS

v

TABLE OF AUTHORITIES

CASES Page

BMW of North America, Inc. y. Gore,

oS 3. Ch. IS (ISH... wij ‘Nits 2

Buckley v. Valeo,

0 8 EE oe 21

Consumer Product Safety Commission v. GTE

Sylvania, Inc., 447 U.S. 102 re 10

Crandon v. United States,

ER a ae 22

Diamond v. Charles,

i oS 21

FW/PBS, Inc. v. City of Dallas,

SUS. 25 (90H)... wit 25

881 F.2d 494 (7th Cir. 1989) ........__ 14

In re Confiscation Cases,

74 U.S. (7 Wall.) 454 (1868) ........__. 21

Lujan v. Defenders of Wildlife,

SOUS. SS Gey ............... 1, 21

MOB UNS. 39D (1987)... ww ee ee 22

MeNumw v General Manors Acceptance Corp. .

WOO WS. ITB CIGDD .... 2 ee ewe eees 10

Peterson v. Weinberger,

$08 F.2d 45 (Sth Cir. 1975) ........--5-- 26

Price v. United States General Services Admin. ,

894 F.2d 323 (Oth Cir. 1990) .......... 10

Public Citizen v. Department of Justice,

ro. ee SY ee 21

Rex Trailer v. United States,

.. 2S Be) YS 26

United States ex rel. Barth vy. Ridgedale Elec., Inc.,

44 F.3d 699 (8th Cir. 1995) ...........-.- 9

United States ex rel. Dick v. Long Island Lighting Co. ,

912 F.2d 13 QQd Cir. 1990) ......... 13, 14

United States ex rel. Doe v. John Doe Corp.,

960 F.2d 318 (2d Cir. 1992) .......... passim

United States ex rel. Fine v. Advanced Sciences,

1996 WL 638448 (10th Cir. Nov. 6, 1996) . 11-13

United States ex rel. Fine v. MK-Ferguson,

1996 WL 638479

(10th Cir. Nov. 6, 1996) .......... 9, 11, 13

vii

United States ex rel. Kelly v. Boeing Co.,

9 F.3d 743 (9th Cir. 1993),

cert. denied, 114. Ct. 1125 (199@) ...._... 2

United States ex rel. Kreindler & Kreindler

v. United Technologies ¥

985 F.2d 1148 (2d Cir. 1993) ............ 2

United States ex rel. Lindenthal y General

Dynamics Corp. , »

61 F.3d 1402, 1412 (th Cir. 1995),

cert. denied, 116 8. Ct. 1319 (1996) ..._... 27

United States ex rel. Marcus v. Hess.

ff Se 8, 20), 24

United States ex rel. Milam vy. University of Texas M.D

961 F.2d 46 (4th Cir 1992) _........ 20), 24

United States ex rel. Precision Co. v. Koch Industrial, inc. ,

971 F.2d 548 (10th Cir. 1992). ........ 18-19

United States ex rel. Springfield Terminal Ry. Co. v.

Quinn, 14 F.3d 645 (D.C. Cir. 1994) ........ 12

United States ex rel. Schumer v. Hughes Aircraft Co. ,

63 F.3d 1512 (th Cir. 1995) ......... passim

United States ex rel. Stinson, Lyons, Gerlin &

Bustamante, P.A. v. Prudential Insurance Co.,

736 F. Supp. 614 (D.N.J. 1990),

aff'd, 944 F.2d 1149 (3d Cir. 1991) ....... il

Vili

United States ex rel. Stinson, Lyons, Gerlin &

Bustamante, P.A. v. Prudential Insurance Co., .

944 F.2d 1149 (3d Cir. 1991) .... 9, 11, 13, 18

United States ex rel. Windsor v. DynCorp, Inc.,

895 F. Supp. 844 (B.D. Va. 1995) ...... 26, 29

United States v. Bornstein,

ee 22

United States v. Lawson,

522 F. Supp. 746 (D.N.J. 1981) ......... 25

United States v. Margiotta,

688 F.2d 108 (2d Cir. 1983) ............ 22

United States v. McNinch,

EE .. 6 6 0:6» ediemind’s cote 25

United States v. Morris,

23 U.S. (10 Wheat.) 246 (1825).......... 21

United States v. Neifert-White Co. ,

Fe ee A dn o0:t0 kn 00 6-0 ee Ot 26

United States v. TDC Management Corp.,

24 F.3d 292 (D.C. Cir. 1994) ........... 28

United States v. Thompson/Center Arms,

Se Ce a GE ds 0 0-6 4ide bon 00 00102 Oe 22

Valley Forge Christian College v. Americans United

for Separation of Church and State, Inc. ,

454 UB. SERGI 6 ccc eee 24, 30

ix

Wang ex rel. United States v. FMC Corp.,

975 F.2d 1412 (9th Cir. 1992).......... 9,14

STATUTES AND REGULATIONS

Appointments Clause,

U.S. Const. Art. 1,§2,cl2........... 20

MIRE GIN oi seis ose.ed. 22

I ee eS ay 24

False Claims Act, 31 U.S.C. §§ 3729-32 passim

IR Sort ais ek as, idle waded 23

ET ills oy dle eues od Cue 23

ok ee eee 23

eer eee 23

MISCELLANEOUS

J. Cibinic & R. Nash, Cost-Reimbursement

Contracting 1106 (2d ed. 1993)............. 28

Allan J. Joseph et al., Update: Defective Pricing - When

It Defective? When lis It Fraud?, 54 Fed. Cont.

(BNA) 136 Quly 30,1990) .............. 28

x

William E. Kovacic, Whistleblower Bounty Lawsuits as

Monitoring Devices in Government Contracting, 29 Loy.

aM. Ee. Rov. STOP CISD ow. ww ccc ces 16, 28

Overview of False Claims and Fraud Legislation: Hearing

Before the Senate Comm. on the Judiciary, 99th Cong., 2d

Sess. (1986) (S. Hrg. 99-976) .............. 17

Qui Tam Suits: Government Has Recovered $800 Million

Through Whistle-blower Litigation, BNA Fed. Cont. Daily,

ty Ue Oe ene kbeuewaeeuihctuceon 18

Robert Salcido, Screening out Unworthy Whistleblower

Actions: An Historical Analysis of The Public Disclosure

Jurisdictional Bar to Qui Tam Actions Under the False

Claims Act, 24 Pub. Cont. L.J. 237, 238 (1995) 11, 18

U.S. Dep't of Justice Press Release, Justice Department

Recovers Over $1 Billion in Qui Tam Awards and

Settlements (Oct. 18, 1995) ............... 15

Webster's Third New International Dictionary (1981) , 10

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1996

No. 95-1340

HUGHES AIRCRAFT COMPANY ;

Petitioner,

v.

UNITED STATES EX REL. WILLIAM J. SCHUMER,

Respondent.

On Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit

BRIEF AMICUS CURIAE OF

THE WASHINGTON LEGAL FOUNDATION

IN SUPPORT OF PETITIONER

INTERESTS OF AMICUS CURIAE

The Washington Legal Foundation (WLF) is a non-

profit public interest law and policy center based in

Washington, D.C., with supporters nationwide. While

WLE engages in litigation and the administrative process in

a variety of areas of the law, W! F devotes a substantial

portion of its resources to ensure that the civil justice

system and the courts are not abused by excessive or

unwarranted litigation. See, e.g., Lujan v. Defenders of

2

Wildlife, 504 U.S. 555 (1992) (lack of injury te plaintiff

precludes citizen suit under Article I); BMW of North

America, Inc. v. Gore, 115 §. Ct. 1589 (1996) (excessive

punitive damages violates Due Process Clause); United

States ex rel. Kreindler & Kreindler v. United Technologies

Corp. , 985 F.2d 1148 (2d Cir. 1993); United States ex rel.

Kelly v. Boeing Co., 9 F.3d 743 (9th Cir. 1993), cert.

denied, 114 S. Ct. 1125 (1994) (constitutionality of gui

fam provisions).

In particular, WLF believes that the qui tam provisions

of the False Claims Act which themselves are

constitutionally suspect, have been abused by the

proliferation of "parasitic" lawsuits by relators in meritless

cases such as this one. These meritless cases drain scarce

judicial and governmental resources. WHLF can bring a

broader perspective to this case than can the parties, and

believes that its participation will assist this Court in

deciding the case. By letters filed with the Clerk of the

Court, the parties have consented to the filing of this brief.

STATEMENT

A. Introduction

The Federal False Claims Act ("FCA"), 31 U.S.C.

§§ 3729-32 (1996), 18 U.S.C. § 287 (1995), is the

government's principal civil and criminal weapon against

fraud in federally-financed programs including defense

contracting and health care. Most of the viable cases

brought under the FCA have been originated or assumed by

the Department of Justice; most of the cases brought by

qui tam relators -- private individuals suing in the name of

the United States -- have proved meritless and wasteful of

the resources of the Justice Department, which is required

3

to investigate each such case. However, though the 1986

qui tam amendments to the FCA are precariously

positioned as a constitutional matter, their offer of

potentially-vast financial rewards to relators has created a

kind of litigation lottery that has led to increasing numbers

of relator suits and, because of draconian penalties and

potential exclusion from federal programs, to increasing

risk even to contractors who believe that they are law

abiding but fear the vagaries and expense of litigation.

The nature and effect of the 1986 amendments require

restraint in judicial interpretation of their reach. One

particularly troublesome form of these qui tam cases is

found in actions brought by "parasitic" relators -- persons

who are not original sources of information provided to

investigators but who latch on to active government

investigations or corporate self-disclosures -- who bring

suits that the government has concluded are unmeritorious

or premature. Congress had sought to limit the reach of

these parasites, while assuring that original sources and

true whistleblowers could maintain actions in the name of

the United States. Thus, the 1986 FCA amendments

preclude a relator’s action if the subject of his claim had

been publicly disclosed, unless the relator was the original

source of the information.

This Court should hold that "public" disclosure

includes disclosure to any person not involved in the

alleged fraud, and accordingly should reverse the judgment

of the Ninth Circuit. This Court also should reverse

because a false claim cannot properly be premised on

conduct that neither caused nor could have caused any loss

to the government.

4

B. Factual Background

In the interests of judicial economy, amicus hereby

adopts by reference the statement of the case as presented

by the Petitioner. Nevertheless, amicus wishes to highlight

several salient facts.

Hughes Aircraft was a subcontractor to develop radar

for four separate government programs. Hughes allocated

costs among the four programs according to “commonality

agreements," which typically allow for allocation of costs

in government contracts where work is common to both.

It was undisputed that, during a government audit

conducted several years before the instant suit was brought,

the questions concerning the propriety of the commonality

agreements about which the relator later complained were

widely discussed among employees of Hughes, the prime

contractor, Northrop, and the government. (See J.A. at 30

4 3, 172 47.) The government then withheld about $15.4

million in payments which were later made when the

government concluded, during the normal dispute

resolution process, that the commonality agreements had

saved, not cost, the government money. United States ex

rel. Schumer v. Hughes Aircraft Co., 63 F.3d 1512, 1516

(9th Cir. 1995).

In 1989, the relator, a former Hughes employee, filed

suit claiming that the company had violated the FCA by

mischarging costs from a fixed-price government contract

to a cost-reimbursement contract. After fully investigating

the matter, the Justice Department declined to intervene.

Ultimately, the Ninth Circuit held that, while the

commonality accounting practices employed by Hughes

complied with government regulations, and indeed “had

5

actually saved the government money," id., the relator

stated a viable FCA action by Challenging the adequacy and

timeliness of Hughes’ disclosure of its accounting methods.

Hughes argued to the Ninth Circuit, among other

things, that the undisputed disclosure of alleged fraud to

"innocent employees" of a contractor constituted an actual

public disclosure. The court rejected the argument and the

reasoning of the Second Circuit in United States ex rel.

Doe v. John Doe Corp., 960 F.2d 318 (2d Cir. 1992).

The court concluded that "the Doe court's treatment of

employees as members of the public is unrealistic,"

Hughes, 63 F.3d at 1518, because such employees have

strong incentives not to disclose their employer's

misconduct to others and hence contravenes the intention of

the drafters of the 1986 amendments to the FCA. The

Ninth Circuit also held that the application sought by

Hughes would run contrary to the purpose of the FCA by

somehow restricting "the ability of insiders to bring suit

pe “7 senna rn becomes involved in the matter." Jd.

at ;

' The Ninth Circuit also rejected Petitioner's argument that

the potential availability through the Freedom of Information Act

of the information concerning fraud constituted another means of

public disclosure. Although the WLF sees merit in this

argument, we concentrate our attention upon the actual

disclosure that indisputably was made to persons not involved in

the alleged fraud. Similarly, while it has not presented argument

on the issue, WLF believes that Hughes has presented a

meritorious argument that this case should be dismissed because

the 1986 amendments to the FCA should not be afforded

retroactive application.

6

SUMMARY OF ARGUMENT

Of the various arguments presented to the Court, WLF

addresses two of them: 1) the applicability of the “public

disclosure" bar to parasitic qui tam lawsuits under the

FCA; and 2) the absence of any cogiizable "claim" upon

which an FCA suit could be based. Congress expressed a

strong desire to bar qui tam actions brought by persons

who were not the original source of the allegations of

fraud, when there has been a prior "public" disclosure of

the information at issue. Among the means specified for

such disclosures are government audits and investigations.

In the instant case, the information upon which the relator’s

case was based had been disclosed to "innocent" individuals

in the context of the sort of administrative audit and

investigation specifically described in the statutory bar to

parasitic suits. Given the plain meaning of the statute, the

constitutional precariousness of the qui tam regime, and the

need for maximum clarity in view of the vast risks that

even innocent contractors experience through FCA

litigation, this Court should adopt the reasoning of the

Second, Third and Tenth Circuits, holding that public

disclosure occurs when the subject of the fraud is revealed

to any stranger to the fraud. This satisfies the FCA’s

definition of “public” and the congressional intent to

encourage fraud cases. Because of the onus of the FCA

and because most of the cases in this burgeoning area of

the law turn out to be non-meritorious, this Court also

should adopt a bright-line rule for the summary disposition

of public disclosure issues.

The Ninth Circuit also erred in holding that the relator

had set forth a "claim" within the meaning of the FCA.

The court of appeals itself recognized that the accounting

procedures at issue not only had resulted in no loss to the

J

government but indeed had saved it money. In order to

satisfy the constitutional case-or-controversy requirement of

injury in fact, as well as the plain meaning of the statute,

an FCA case must be based upon an actual or, in the case

of an attempt, potential loss to the public fisc. Under the

Statute, “claim” is equated to an attempt to get payment; if

a prohibited payment was impossible because the

government suffered no loss, there is no “claim.” While

Hughes might have made an untimely or inaccurate

"statement" -- subject to other federal laws or regulations --

it did not present a false "claim."

ARGUMENT

I. BECAUSE THERE WAS A “PUBLIC

DISCLOSURE" OF THE ALLEGED FRAUD

PRECEDING THE LAWSUIT, THE

JURISDICTIONAL BAR AGAINST PARASITIC

RELATORS APPLIES.

A. The Statutory Framework and the

Jurisdictional Bar.

Expressing a congressional desire to prevent purely

"parasitic" actions, the 1986 amendments to the FCA bar

any would-be qui iam plaintiff from bringing suit if the

information on which the action is based has been publicly

disclosed and the relator is not the original source of the

disclosed information. 31 U.S.C. § 3730(e)(4). The

complaint here represents exactly the type of “parasitic”

Tee ent Conereas intended to preclude when it amended

w.

The FCA creates liability for any individual who

"knowingly presents . . . to an officer or employee of the

United States Government . . . a false or fraudulent claim

for payment or approval." 31 U.S.C. § 3729(a)(1).. A

private citizen may bring a claim on behalf of himself and

the United States Government for a violation of the FCA.

31 U.S.C. § 3730(b). The government is given an

opportunity to investigate the complaint and determine

whether to intervene and proceed with the action, and if the

government declines to intervene (which is the case here),

the private citizen may proceed with the action alone. 31

U.S.C. § 3730(e)(4). But he may do so only if he is not

barred by the jurisdictional impediments set out in 31

U.S.C. § 3730(e).

From the FCA’s original passage until 1943, someone

could originate a suit based on privately-obtained, or even

publicly-available, information, and could maintain it to the

exclusion of the Attorney General. In 1943, Congress

amended the Act in response to the Court’s decision in

United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943),

to prevent “parasitical” suits. The 1943 amendments added

a jurisdictional provision barring gui tam actions whenever

the government had prior knowledge of the information in

the complaint. Those amendments also authorized the

Attorney General to enter the gui tam action and assume

sole responsibility for its conduct. The relator still could

continue the prosecution on his own if the Attorney General

declined to take it over. In 1986, Congress amended the

bar on “parasitical" suits and provided the relator with an

ongoing, active litigation role even when the Attorney

General enters the case.

From the inception of the FCA, the qui tam provisions

attempted to satisfy competing interests: the creation of

incentives designed to encourage disclosure of first-hand

information regarding false claims in order to facilitate

9

private legal action by persons possessing such information,

and the establishment of statutory protections designed to

prevent opportunistic plaintiffs from filing frivolous

actions. United States ex rel. Barth v. Ridgedale Elec.,

Inc., 44 F.3d 699, 702 (8th Cir. 1995).

Section 3730(e)(4)(A) now provides:

31 U.S.C. § 3730(e)(4)(A).

Section 3730(e)(4) was “designed to preclude qui tam

Suits based on information that would have been equally

available to strangers to the fraud transaction had they

chosen to look for it as it was to the relator." United States

ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. y.

Prudential Ins. Co., 944 F.2d 1149, 1155-56 (3d Cir.

1991). To comply with this jurisdictional limitation, a

“public disclosure” of the information on which his

complaint is based or that he was the “original source" of

the information Wang ex rel. United States y. FMC Corp.,

975 F.2d 1412, 1416 (9th Cir. 1992). "[T}he False Claims

Act should not be read in a manner that impennissibly

expands federal jurisdiction. [The relator] thus bears the

burden of alleging facts essential to jurisdiction and

10

supporting those facts by competent proof." United States

ex rel. Fine v. MK-Ferguson, 1996 WL 638479 at *5 (10th

Cir. Nov. 6, 1996) (citation omitted); see also, Price v.

United States Gen. Servs. Admin. , 894 F.2d 323, 324 (9th

Cir. 1990); McNutt v. General Motors Acceptance Corp..,

298 U.S. 178, 189 (1936). The Ninth Circuit was

manifestly incorrect in concluding that this relator, who

clearly is not an original source and who bears the burden

of proof on the issue of jurisdiction, demonstrated that

there had not been a public disclosure that should have

barred his suit.

B. “Public Disclosure" Includes Disclosure By

the Government to Private Individuals

Previously Unaware of the Fraud.

“[T}he starting point for interpreting a statute is the

language of the statute itself. Absent a clearly expressed

legislative intention to the contrary, that language must

ordinarily be regarded as conclusive." Consumer Prod.

Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102

(1980). Using normal rules of grammar, the jurisdictional

bar can be restated as: FCA jurisdiction is foreclosed if the

underlying allegations had been disclosed to the “public,”

i.e., to a stranger to the fraud, through an administrative

report, audit, or investigation. "Disclose" is defined as “to

expose to view" or “to make known." Webster’s Third

New International Dictionary 645 (1981). In this instance

government auditors who were investigating possible fraud

made known their investigation and the allegations and

transactions that later would undergird the instant suit to

Hughes and Northrop employees who had not been aware

of any fraud. Contrary to the illogical reading of the

statutory bar given by the Ninth Circuit, this is precisely

one form of “public disclosure” anticipated by Congress in

section 3730(e)(4)(A).

The Second, Third, and Tenth Circuits have opined as

to what qualifies as a “public disclosure” and how widely

disseminated the underlying information must be. See Doe,

960 F.2d 318; Stinson, 944 F.2d 1149; MK-Ferguson, 1996

WL 638479; United States ex rel. Fine vy. Advanced

Sciences, 1996 WL 638448 (10th Cir. Nov. 6, 1996).

Generally, these circuits have “construed ‘public’ strictly

to reach disclosures revealed to a single person, and even

to reach information that has not been disclosed to the

‘Public,’ but merely is accessible to the public." Robert

Salcido, Screening out Unworthy Whistleblower Actions:

An Historical Analysis of The Public Disclosure

Jurisdictional Bar to Qui Tam Actions Under the False

Claims Act, 24 Pub. Cont. L.J. 237, 238 (1995). The

bright line rule adopted by the Second, Third and Tenth

Circuits is both workable and textually warranted.

“Public disclosure" as defined by the False Claims Act

is “a general phrase, not specifically limited by the

“[IJn order fur the jurisdictional bar to apply, the

allegations of fraud or fraudulent transactions must

be contained in one of the forms, or be available

from one of the sources, listed in section

3730(e)(4)(A). That section defines the sources of

allegations and transactions which trigger the bar

12

but it does not define the only means by which

public disclosure can occur."

Advanced Sciences, 1996 WL 638448 at *4 (citations

omitted); see also, United States ex rel. Springfield

Terminal Ry. Co. v. Quinn, 14 F.3d 645, 654 (D.C. Cir.

1994) (Qui tam actions are barred “when either the

allegation of fraud or the critical elements of the fraudulent

transaction themselves were in the public domain.").

As noted above, the natural reading of the text of the

jurisdictional bar has led the Second, Third, and Tenth

Circuits to conclude that a public disclosure occurs when

information concerning the allegations or transactions is

revealed to one or more persons who had no prior

knowledge of the fraud. The “public disclosure”

jurisdictional bar was designed to prohibit all suits “based

upon allegations" of fraud that are accessible to "strangers

to the fraud."

Because qui tam plaintiffs (‘relators’) are entitled

to a portion of the proceeds of successful suits,

there is the potential for parasitic lawsuits by those

who learn of the fraud through public channels

and seek remuneration although they contributed

nothing to the exposure of the fraud. To

discourage such chicanery, Congress carefully

crafted a jurisdictional bar to qui tam claims that

are based on publicly disclosed information.

Doe, 960 F.2d at 319; see Advanced Sciences, 1996 WL

638448 at *1l ("[P]jublic disclosure occurs when the

allegations of fraud or fraudulent transactions upon which

the gui tam suit is based are affirmatively disclosed to

13

mom of the public who are otherwise strangers to the

i '

Doe was a case in which investigators made "innocent

employees," i.e. those not involved in the alleged fraud,

aware of the alleged fraud. In holding that this amounted

to “public disclosure," the court noted that because “the

disclosure occurred in a combined criminal and

administrative investigation, and because the administrative

investigations are listed in the statute, the action is barred."

Doe, 960 F.2d at 322-23. The Third and Tenth Circuits

have held similarly. Stinson, 944 F.2d 1149; MK-Ferguson,

1996 WL 638479; Advanced Sciences, 1996 WL 638448.

The holdings of all of these three courts of appeals, logical

in themselves, are equally applicable to the investigative

disclosure to uninvolved persons here.’

In United States ex rel. Dick y. Long Island Lighting

Co., 912 F.2d 13 (2d Cir. 1990), the Second Circuit held

that allegations of fraud are publicly disclosed when they

are placed in the “public domain." Jd. at 12 ("The fact that

[the allegations of fraud] may not be widely disseminated

does not inure to the benefit of a qui tam relator."). That

is precisely what has occurred here, and it has occurred

through means -- the disclosure of an administrative audit

and investigation -- Specifically described by Congress in

crafting the jurisdictional bar to parasitic relators such as

Respondent.

. Even the dissent in Doe would apply the jurisdictional bar

where the ee was not actually in the hands or an

innocent employee, but merely “generally accessible by the

public." United States ex rel. Doe v. John Doe Corp., 960 F.2d

318, 325 (2d Cir. 1992) (Walker, J., dissenting).

14

A strict reading of the “public disclosure" bar satisfies

the policy need that Congress intended to address. A

whistleblower presents no advantage to the public when the

transactions of which he would complain are already in the

public domain. Once the government has been informed of

an alleged fraud and has begun an “administrative

investigation," public disclosure will likely occur, inasmuch

as during the investigation, “strangers to the fraud" will

learn of the underlying allegations and transactions.

However, in the event that the government does not

pursue fraudulent conduct, the matter will not escape

further public scrutiny. Notwithstanding public disclosure,

a relator who is an original source of the information

reported may proceed with a qui tam lawsuit. 31 U.S.C.

§ 3730(e)(4)(B). “Qui tam suits are meant to encourage

insiders privy to a fraud on the government to blow the

whistle on the crime. In such a scheme, there is little point

in rewarding a second toot." Wang, 975 F.2d at 1419. If

the relator would not have known the information without

the public disclosure, he does not have “direct and

independent knowledge" of the information. Houck on

Behalf of the United States v. Folding Carton Admin.

Comm. , 881 F.2d 494, 505 (7th Cir. 1989); see also, Dick,

912 F.2d at 18 ("[I}f the information on which a qui tam

suit is based is in the public domain, and the qui tam

plaintiff was not a source of that information, then the suit

is barred").

C. The Ninth Circuit’s Reasoning as to Public

Disclosure is Illogical.

In rejecting the bright line rule of Doe, the Ninth

Circuit opined that "[bJecause the employee has a strong

economic incentive to protect the information from

15

outsiders, revelation of information to an employee does

not trigger the potential for corrective action presented by

other forms of disclosure." Hughes, 63 F.3d at 1518. The

instant case demonstrates the illogic of this conclusion. We

note at the outset that the FCA mandates protection to

whistleblowers against retaliation by employers.’ 31 U.S.C.

§ 3730(h). This provision permits awards of double back

pay, along with interest and special damages, id., over and

above the 25 to 30% of the settlement or award the relator

might receive if his suit were successful. 31 U.S.C. §

3730(d)(2).

Besides these protections, the financial incentives for

employees and non-employees alike are so vast that it is no

surprise that employees commonly bring qui tam cases.

Indeed, the relator himself was a Hughes employee. In

short, the steady rise in qui tam filings suggest no

impediment, psychological or otherwise, to the bringing of

such claims. In fiscal year 1987, just after the effective

date of the 1986 amendments, only 33 qui tam suits were

filed. This number has skyrocketed over 800 hundred

percent. For example, in fiscal year 1995, the most recent

year for which there are published data, relators filed 274

qui tam suits, and the number is growing. Stuart M.

Gerson, Issues and Developments in Qui Tam Suits Under

the Federal False Claims Act, in Citizen Suits and Qui Tam

Actions: Private Enforcement of Public Policy 140 (1996)

(citing U.S. Dep't of Justice Press Release, Justice

Department Recovers Over $1 Billion in Qui Tam Awards

and Settlements (Oct. 18, 1995)).

> Qui tam suits are filed in camera, 31 U.S.C. §

3730(b)(2), and a relator may move the court to have his or her

name remain under seal, as was the case in Doe, 960 F.2d 318.

16

Indeed, if there is any problem at all, it is that so

many qui tam suits are being filed that the Department of

Justice’s Civil Division resources have been stretched to the

breaking point. For example, six months prior to the

enactment of the 1986 FCA amendments, Civil Division

attorneys devoted approximately 1,100 hours on qui tam

matters. In contrast, from January to June 1990, the Civil

Division spent roughly 11,000 hours on qui tam matters.

William E. Kovacic, Whistleblower Bounty Lawsuits as

Monitoring Devices in Government Contracting, 29 Loy.

L.A. L. Rev. 1799, 1840 (1996) (citation omitted). With

the increasing number of qui tam cases filed since then, the

investigative time has grown proportionately. This is

explained not only by the explosion in the number of qui

tam suits filed, but also the fact that the Department of

Justice must investigate each suit to determine whether or

not to join the relator. 31 U.S.C. § 3730(b).

Since the 1986 amendments through fiscal year 1995,

when the Department of Justice intervened or settled FCA

cases, recoveries of $1,058,177,552 have resulted. Yet,

when the government has declined to intervene and the

relator “goes it alone" the results have diminished

considerably, recovering $15,597,141, approximately one

percent of the total. U.S. Dep't of Justice, Justice

Department Recovers Over $1 Billion in Qui Tam Awards

and Settlements (Oct. 18, 1995). Inasmuch as a majority

of these suits is deemed unmeritorious by the Department

of Justice and rarely produces awards where the

Department does not intervene, it is clear that if there is

any problem at all, it is that the lucrative potential awards

are encouraging too many, not too few, relators’ actions.

The Ninth Circuit’s reasoning is contradicted by this fact.

17

D. A Bright Line Rule Regarding "Public

Disclosure" Is Consistent with the Purpose

of the FCA.

The 1986 amendments to the FCA were designed to

encourage employees, former employees and other putative

"whistleblowers" with inside knowledge to come forward

with evidence of "false claims". Overview of False Claims

and Fraud Legislation: Hearing Before the Senate Comm.

on the Judiciary, 99th Cong., 2d Sess. 12 (1986) (S. Hrg.

99-976) (statement of R. Willard, Asst. Att'y Gen.). At

the same time, the 1986 amendments were carefully crafted

to continue to prevent “parasitic” lawsuits of the kind that

_ prompted the previously enacted 1943 amendments.

In order to limit actions to those individuals who could

benefit the government because of their possession of first-

hand knowledge of fraud, Congress enacted four

jurisdictional bars, including the public disclosure bar at

issue here. A strict reading of each of these bars is

consistent with congressional intendment. However the

vast number of unmeritorious qui tam actions, many of

them brought by parasitic relators, suggest that judicial

screening of such cases has been insufficiently stringent.

This Court should adopt a bright line standard whereby

“public disclosure" must be found to have occurred

whenever any person unrelated to the fraud is informed of

the activities that might give rise to an FCA suit. Any

such individual ‘s perfectly able to act as Congress intended

relators to act. There is no useful distinction to be drawn,

e.g., between employee and non-employee relators, given

the number of qui tam cases that are entering the federal

courts. It is unduly burdensome to both defendants, a

18

statistical majority’ of whom is nonculpable and to the

courts themselves to engage in a broad-based, pretrial

litigation over whether a particular kind of potential relator

falls within or without the public disclosure bar.

The purpose of the FCA is met whether the disclosure

reaches a small audience or a large one. “Indeed, an

audience of one is sufficient because, as the Third Circuit

pointed out in Stinson, that one person may disclose the

information to many." Salcido, supra, at 265.* A restrictive

interpretation of the “public disclosure" bar

is consistent with practical considerations of

judicial economy. It is one thing to expect the

court to evaluate the quantity and quality of

information in the public domain versus that

possessed by the qui fam plaintiff after trial for

purposes of fee determination; it is quite another

to expect a similar evaluation as part of a pre-trial

jurisdictional inquiry. This type pre-trial inquiry

would be onerous, impractical and ultimately

would serve neither the interests of the parties nor

the court.

‘ By the end of fiscal year 1994 (the most recent year for

which there are published data on this statistic), 21 of the 455

qui tam cases the Department of Justice declined to pursue had

resulted in a recovery. Qui Tam Suits: Government Has

Recovered $800 Million Through Whistle-blower Litigation, BNA

Fed. Cont. Daily, Nov. 10, 1994 at d4.

5 Amicus notes with the growing use of computers, one

person can disclose information to the entire world by posting it

on the Internet.

19

United States ex rel. Precisio

nm Co. v. K

971 F.2d 548, 551-52 (10th Cir. 1992), 0”

It is hardly sensible for courts to hold on

- ble one hand that

orm a ve gra completed investigations are

poets Be ad On continuing investigations are

“ it sensible to hold that a qui tam recove

cou _ be allowed even where a case is under ported

ae a and the government is about to get recovery in

worn, f rather Prvsgenan this Court should hold that trial

‘onuiiiamaeaes yo determinations as to whether a

of whether the resale aha bce — “tm

not a party to the alleged fraud. All suct wipe

oe to bring a qui tam action if Dm "cope

reo a this more than satisfies the

cn t to encourage private anti-fraud

E, pos Uncertain Constitutionality of FCA

ions Requires a Narrow Interpretation

of Qui Tam Jurisdiction.

Although Amicus recognizes that the Court did not

— wl ney on the constitutional questions presented

reser Ys those questions should inform the Court as to

Isposition to the statutory issues presented

PAE 5 aan ep prone antipathy to parasitic claims

perv yr qui fam jurisdiction should be closely

af : an ae oe Public re bar

d | R view oO

Constitutional B cqpecnnsn surrounding a fe leloate

era cee a Case in the name of the United States, this

adopt the narrowest plausible interpretation of

20

qui tam jurisdiction. Cf. Edward J. DeBartolo Corp. v.

Florida Gulf Coast Bldg. & Constr. Trades Council, 485

U.S. 568, 575 (1988). This Court, in other words, need

not and must not construe the scope of the FCA’s qui tam

provisions in a constitutional vacuum.

Qui tam litigation may enjoy considerable historical

precedent, see Marcus, 317 U.S. at 541 n.4, but the

constitutional principles it seemingly contradicts are

fundamental. Congress cannot delegate to private parties

the power to enforce, in a nominal governmental capacity,

the laws of the United States. That is a core power of the

Executive Branch, and deeply-rooted separation-of-powers —

principles should prevent (or, here, starkly limit), the

alienation of this power by the legislature.

The FCA “let[s] loose a posse of ad hoc deputies to

uncover and prosecute frauds against the government. r

United States ex rel. Milam y. University of Texas M.D.

Anderson Cancer Ctr., 961 F.2d 46, 49 (4th Cir. 1992).

The Attorney General, who plays no role in appointing

relators, cannot prevent a qui tam action from being filed.

And, although the Attorney General has the right to

intervene in an action, see 31 U.S.C. § 3730(b)(2), she can

neither remove the relator nor apparently dismiss the action

without court approval. See id. § 3730(c)(2). This case

itself represents such an encroachment: the relator has

continued to press it on behalf and in the name of the

United States notwithstanding the Executive’s conclusion

that it is unwarranted,

A corollary to this general separation-of-powers point

is that the FCA’s qui tam provisions also raise serious

questions under the Appointments Clause, U.S. Const. Art.

Il, § 2, cl. 2. The maintenance of an FCA case is an

21

on exercise of significant governmental! authority.

» €.8., Buckley v. Valeo, 424 U.S. 1, 124-27, 140

(1976) (per curiam). But qui tam relators are appointed by

no one but themselves, and it is questionable that Congress

consistent with the Appointments Clause, should assign

execution of the laws to such self-appointed officers. Cf

Public Citizen v. Department of Justice, 491 U.S. 440,

485-86 (1989) (Kennedy, J., joi

orc = = joined by Rehnquist, C.J., and

It also is far from clear whether Congress

pres eos with the “case or controversy" eiianen of

le I, confer standing on qui tam relators to litigate on

behalf and in the name of the United States. The only

conceivable “injury-in-fact" suffered by a qui tam relator

is the loss of a statutory bounty created by Congress. Such

an “injury, however does not satisfy the “irreducible

constitutional minima" required by Article I. Cf

Diamond v. Charles, 476 U.S. 54, 69-71 (1986); In re

Confiscation Cases, 74 U.S. (7 Wall.) 454, 458-59 (1868);

United States v. Morris, 23 U.S. (10 Wheat.) 246 (1825);

Lujan, 504 U.S. at 576-78. In this case, no one, the

government itself included, has suffered economic injury

(an independent reason for reversal, see infra at 23), but in

no case such as this does a relator suffer such harm.

Historical reasons may be among those

Court to decline to consider a facial constitutional challenge

to Gs validity of the qui tam amendments. However, in

deciding the issues before it, we believe the seeming

22

F. The Rule of Lenity Also Requires a Narrow

Reading of Qui Tam Jurisdiction.

The FCA is both a civil and criminal statute. 31

U.S.C. §§ 3729-32; 18 U.S.C. § 287. The “Rule of

Lenity” requires that “ambiguous laws which impose penal

sanctions are to be strictly construed against the

Government." United States v. Margiotia, 688 F.2d 108,

120 (2d Cir. 1983). United States v. Thompson/Center

Arms, 504 U.S. 505, 518 n.10 (1992); see also, Crandon

v. United States, 494 U.S. 152, 168 (1990) (applying lenity

in interpreting a criminal statute invoked in a civil action).

"The doctrine of lenity is, of course, sound, for the citizen

is entitled to fair notice of what sort of conduct may give

rise to punishment." McNally v. United States, 483 U.S.

350, 374 (1987).

The FCA assesses a hefty liability: treble damages

sustained by the Government, in addition to a $5,000 to

$10,000 penalty for each false claim. 31 U.S.C. § 3729(a).

The number of false claims submitted to the government

can give rise to penalty assessments that overwhelmingly

exceed the amount lost to the Treasury. Damages under

the FCA are not solely based on the size of the claims

submitted. They are also calculated on a per claim basis,

even if the claim is never paid. United States v. Bornstein,

423 U.S. 303 (1976). Where, as here, the FCA is being

used a punitive measure rather than a remedial one --

because there was no overpayment (because Hughes was

entitled to the payments received) -- the Rule of Lenity

applies.

In addition to draconian financial penalties, a

government contractor may also face debarment or

suspension from further government contracting. 10

23

U.S.C. § 2393(c) (1996); 48 C.F.R. § 9.403 (1995). In

addition the contractor is debarred from serving as a

subcontractor to a nondebarred prime contractor. 48

C.F.R. § 9.405 (1995). Debarment and suspension from

one agency automatically extends to procurement activities

with all other agencies. 48 C.F.R. §§ 9.406-I(c),

9.407-1(d) (1995). Thus, the penalties of FCA litigation

are so severe, that the Rule of Lenity must require a

narrow interpretation of who might bring such a suit in

order that order that the consequences of a potential

defendant's actions be predictable to him. Clearly, in the

advisability of self-disclosure that might lead to such a

proceeding, a federal contractor ought to be able to

participate candidly without the fear that a parasitic relator

will expand its risk by bringing a civil action.

ll. THIS ACTION SHOULD BE DISMISSED FOR

WANT OF A CASE OR CONTROVERSY

BECAUSE MERE TECHNICAL COST

ACCOUNTING STANDARDS VIOLATIONS DO

NOT INJURE THE PUBLIC FISC.

rule of lenity all mandate that the public disclosure bar of

section 3730(e) be read restrictively. These same

considerations, we submit, mandate reversal of the Ninth

24

should have ended the matter, but the Court went on to

hold that there was a potential FCA violation in the fact

that the accounting methods at issue were not timely

disclosed. Jd. at 1525. This holding violated both statutory

and constitutional mandates and should be reversed. A

false “statement,” in and of itself, is not the equivalent of

a false “claim,” and it tortures the FCA to extend it this

way.°

A. Respondent Has Not Satisfied the Article

III Requirement of Injury-in-Fact.

Although the Constitution might not prohibit Congress

from granting standing to a relator suing on behalf of the

government to remedy an injury to the United States,

Marcus, 317 U.S. 537, no plaintiff, including the

government itself, who cannot demonstrate the

constitutional minimum of injury-in-fact may maintain a

lawsuit in federal court. Valley Forge Christian College v.

Americans United for Separation of Church and State, Inc. ,

454 U.S. 464, 488 n.24 (1982). It is “[t}he government,

and not the relator, [who] must have suffered the ‘injury-

in-fact’ required for Article III standing.” Milam, 961 F.2d

at 49. Given the Ninth Circuit's recognition that the

conduct at issue saved the government money, its ultimate

holding is inexplicable. Because the government cannot

° There are prohibitions against making false statements.

See 18 U.S.C. § 1001 (1996). Congress could have included the

making of mere false statements in the FCA’s definitions, but it

did not do so. Cf 31 U.S.C. § 3279%(a)(2).

25

meet the constitutional minimum of injury-in-fact here,

neither can the relator.’

B. While the Issues Remaining Might Be

Based Upon false Statements, They Are Not

Derived From "“Claims" Within the

Meaning of the FCA.

"The False Claims Act was not designed to reach

every kind of fraud practiced on the Government." United

States v. McNinch, 356 U.S. 595, 599 (1958). A claim for

payment or approval “normally connotes a demand for

money or for some transfer of public property." United

States v. Lawson, 522 F. Supp. 746, 750 (D.N.J. 1981)

(citing McNinch, 356 U.S. at 599).

The FCA defines “claim” to include

any request or demand, whether under a contract

or otherwise, for money or property which is

made to a contractor, grantee, or other recipient if

the United States Government provides any

portion of the money or property which is

requested or demanded, or if the Government will

reimburse such contractor, grantee, or other

” Although the Court limited its grant of certiorari to the

Statutory issues, including that related to the public fisc, while

declining to consider a facial constitutional challenge to the qui

tam provisions, the issue of standing as applied in a particular

case is always reviewable by this Court because it is a

jurisdictional question. See FW/PBS, Inc. v. Dallas, 493

U.S. 215, 230 (1990). at

26

recipient for any portion of the money or property

which is requested or demanded.

31 U.S.C. § 3729%(c). “[O}nly (i) ‘actions which have the

purpose and effect of causing the government to pay out

money’ where it is not due, or (ii) actions which

intentionally deprive the government of money it is

lawfully owed, are considered ‘claims’ within the meaning

of the FCA." United States ex rel. Windsor v. DynCorp,

Inc., 895 F. Supp. 844, 850 (B.D. Va. 1995) (citations

omitted). While “there is no requirement, statutory or

judicial, that specific damages be shown," Rex Trailer v.

United States, 350 U.S. 148, 152 (1956), an FCA claim

must be derived from the presentation of “a false or

fraudulent claim for payment or approval.” 31 U.S.C. §

3729(a)(1).

This terminology clearly implies an act which either

has secured or attempted to get payment. United States v.

Neifert-White Co., 390 U.S. 228, 233 (1968). A mere

false statement or non-disclosure cannot satisfy this

definition. Thus, the Ninth Circuit's holding that Hughes

might not have sufficiently disclosed* the terms of the

commonality agreements, (Pet. Cert. at 20a, 24a), can not

amount to a “claim,” much less a false one. Peterson v.

Weinberger, 508 F.2d 45, 52 (Sth Cir. 1975) ("A claim is

* We note that the Resident Auditor of the Defense

Contract Audit Agency found (two years after the relator’s

original suit was filed) that "the cost allocation system adopted

pursuant to Hughes’ internal commonality agreements was

disclosed to Northrop and the Air Force. Therefore, the

contractor’s claim for reimbursement of costs incurred on the B-

2 radar contract is valid." (J.A. at 134.)

27

within the purview of the False Claims Act if it is

grounded in fraud which might result in financial loss to

the Government.").

The Ninth Circuit suggested that the alleged defects in

Hughes’s disclosure of its commonality accounting methods

to Northrop and the Government “may” have rendered

unspecified costs “unallowable” within the meaning of a

federal regulation. Hughes, 63 F.3d at 1525. This purely

procedural and immaterial alleged violation of the Cost

Accounting Standards ("CAS") simply is not a “false

claim" as intended under the FCA. To begin with,

notwithstanding the alleged CAS _ violation, — the

administrative contracting officer found that Hughes was

entitled to be paid for all of the costs that Hughes incurred.

J.A. at 134. First, the decision of the Defense Contract

Audit Agency ("DCAA") suggests that there were no such

unallowable costs. "We concur with the contractor’s claim

for reimbursement of costs incurred for the design,

development, fabrication, assembly, and testing of modules

and components incorporated into the Analog Signal

Converter and Radar Data Processor units for the B-2 radar

system." (J.A. at 134.)

Second, the disclosure, however complete or

incomplete it might have been, could have been no more

than a technical violation of the CAS. It was not a "claim"

as it is defined by the FCA or as is commonly understood.

* The government audit only determined that Hughes’s

practices were not disclosed in a timely fashion, and “therefore

not in compliance with its disclosure statement." (Pet. Cert. at

66a.) But, because the noncompliance did not have a

“significant cost impact," it was found to be "not material." /d.

28

“Logically, then, any claims for payment based on work

that satisfied [Hughes's] contractual obligations to the AF

could not have been ‘false or fraudulent’ within the

meaning of the FCA." United Staies ex rel. Lindenthal v.

General Dynamics Corp., 61 F.3d 1402, 1412 (9th Cir.

1995), cert. denied, 116 S. Ct. 1319 (1996). This is

because “a determination by a contracting officer that a

cost is allowable, combined with payment of that cost,

binds the government so that no challenge to the

allowability of the cost can be maintained." J. Cibinic &

R. Nash, Cost-Reimbursement Contracting 1106 (2d ed.

1993); see United States v. TDC Management Corp., 24

F.3d 292 (D.C. Cir. 1994).

Whether as a matter simple literal construction or of

strict interpretation, in view of potential constitutional

issues, or the Rule of Lenity, the Court should not

transmogrify technical violations of complicated

government regulations into a false "claim." The FCA

should only apply to those whose conduct is “sufficiently

culpable to justify the formidable remedies enacted by

Congress in its efforts to minimize procurement fraud."

Allan J. Joseph et al., Update: Defective Pricing - When Is

It Defective? When Is It Fraud?, 54 Fed. Cont. Rept.

(BNA) 136 (July 30, 1990). This is particularly true with

qui tam suits where “[flaulty diagnoses of observed

behavior are inescapable given the complexity and

murkiness of the regulatory commands controlling

government contractors. . . . Relators may be particularly

prone to misapprehend the legal significance of contractor

efforts to comply with the government’s complex cost

allocation and accounting conventions." Kovacic, supra, at

1831-32 (footnotes omitted).

29

The standards for government contracting, such as the

CAS, are such that "Congress, agency regulators, courts

and Boards have been unable to define [them] with

precision." Joseph, supra, at 136. Especially considering

the financial and debarment risks posed to contractors by

the FCA, "claim" must be read to exclude merely technical

violations of complex regulations, so that the lack of

precision in defining the regulations will not give rise to

liability to unknowing government contractors.

Hughes’s untimely disclosure, which did nor lead to

any "unallowable" costs, is analogous to a government

contractor's not submitting payroll reports in a timely

fashion. In considering such conduct under the FCA in the

Windsor case, the district court found that there was

“simply no falsity, no misrepresentation, in a contractor's

failure to submit required payroll reports or to do so in a

timely fashion. . . . Moreover, a contractor’s failure to

submit payroll reports, in and of itself, causes no economic

loss to the government and is not a ‘claim’ within the

meaning of the FCA." 895 F. Supp. at 850. That court

oon an example for illustration that is instructive in

case:

[C]onsider, for example, a situation where the

workers were paid properly, but DynCorp failed

to submit the required documentation. In that

event, there would certainly be no false claim for

payment, despite the reporting violation. This

example demonstrates that the mere failure to

submit required payroll reports, without more,

does not subject the delinquent contractor to FCA

liability. There is simply no logical nexus

y a? y 4 : . go Me te

a > 7. oY _ hy ‘ir eet So A —

aire ee eteet eke fer I - satin i xe Wheres ee

30

between the failure to submit reports, by itself,

|

;

: