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

rf al

9 Supreme Court, U.S,

FILED

IN THE

Supreme Court of the Uni

October Term, 1996

HUGHES AIRCRAFT COMPANY,

PETITIONER,

:

( od en)

ERK

eer Ow

Vv.

UNITED STATES EX REL. WILLIAM J. SCHUMER,

RESPONDENT.

On Writ of Certiorari to the

United States Court of Appeals for the Ninth Circuit

BRIEF AMICI CURIAE OF THE ASSOCIATION

OF AMERICAN MEDICAL COLLEGES, THE AMERICAN

HOSPITAL ASSOCIATION,

AND THE AMERICAN MEDICAL ASSOCIATION

IN SUPPORT OF PETITIONER

FREDRIC J. ENTIN JOHN T. BOESE

JOHN E. STEINER, JR. Counsel of Record

AMERICAN HOSPITAL RICHARD A. SAUBER

ASSOCIATION ANTHONY S. Yoo

1 North Franklin, Suite 3400 J. Topp HUTCHINS

Chicago, Illinois 60606 FRIED, FRANK, HARRIS,

(312) 422-3000 SHRIVER & JACOBSON

. 1001 Pennsylvania Avenue,

N.W., Suite 800

Washington, D.C. 20004

(202) 639-7000

JOSEPH A. KEYES, JR. KIRK B. JOHNSON

IvY BAER MICHAEL L. ILE

ASSOCIATION OF AMERICAN AMERICAN MEDICAL

MEDICAL COLLEGES ASSOCIATION

2450 N Street, N.W. 515 N. State Street

Washington, D.C. 20037 Chicago, Illinois 60610

(202) 828-0400 (312) 464-5000

Baimar Legal Publishing Department, Washington, D.C. (202) 682-9800 mn A

QUESTIONS PRESENTED

Whether the 1986 amendments to the False Claims

Act, which relaxed the restrictions on qui tam law-

suits, apply retroactively to actions challenging pre-

1986 conduct.

Whether the False Claims Act permits employees of

government contractors to file “parasitic” qui tam

actions based on allegations disclosed by the Gov-

ernment in an audit or investigation.

Whether the False Claims Act imposes liability for

alleged infractions of other statutes or regulations

regardless of whether such infractions result in a

“false claim” against the public fisc.

For ease of reference, these are the revised questions set

forth in Petitioner’s main brief. The questions are a clarifica-

tion of the original questions presented in the petition for cer-

tiorari.

ii

TABLE OF CONTENTS

1. GIVEN CONGRESS’ CLEAR INTENT TO

BAR PARASITIC SUITS, DISCLOSURE

OF ALLEGATIONS TO ANY SEGMENT

OF THE PUBLIC IN THE COURSE OF A

GOVERNMENT OR GOVERNMENT-

MANDATED AUDIT OR INVESTIGA-

TION IS “PUBLIC DISCLOSURE” UNDER

31 U.S.C. § 3730(€)(4)(A) secscccscccsssessssnsssesesseenssees

A. The Historical Development Of The

Jrisdictional Bar To “Parasitic” Qui Ta-%

LE ee 11

B. The Court Of Appeals’ Restrictive Inter-

pretation Of “Public Disclosure” Is In-

consistent With The Language And

Intent Of Section 3730(€)(4).......ccccccceeeseees 14

C. “Public Disclosure” Also Includes Dis-

ll. HARM TO THE PUBLIC FISC IS AN

ESSENTIAL ELEMENT FOR A CAUSE OF

ACTION UNDER THE FALSE CLAIMS

iv

TABLE OF AUTHORITIES

Cases | Page(s)

Bastian v. Petren Resources Corp., 892 F.2d 680 (7th

Cir.), cert. denied, 496 U.S. 906 (1990) .0......ccccccccceeveeserees 23

Bridges v. United States, 346 U.S. 209 (1953) .......cccccc00e 24

Healy v. Ratta, 292 U.S. 263 (1934).......ccccccecerereesesecesesnerenees 16

Ming v. Woolfolk, 116 U.S. 599 (1886) .........ccccccccccsseseeeseene 23

Rainwater v. United States, 356 U.S. 590 (1958)... 22

Rex Trailer Co. v. United States,

ETS RE EE ae oe 24, 25, 27, 28

United States v. Advance Tool Co., 902 F. Supp. 1011

(W.D. Mo. 1995), aff'd, 86 F.3d 1159 (8th Cir.

ALE SNe RE Le ee eC 28

United States v. Bornstein, 423 U.S. 303 (1976) ......cccceveve. 22

United States v. Cohn, 270 U.S. 339 (1926) .......ccecee0e00e 22, 23

United States v. Gilliland, 312 U.S. 86 (1941) ........000000. 23, 24

United States v. Halper, 490 U.S. 435 (1989).....21, 25, 26, 27

United States v. Jain, 93 F.3d 436, 1996 WL 444885

AS Cit rrinssncrstenensinmnseesinincnetinmesnstetmeseeanes 29

United States v. McNinch,

ee icitatachicencrcctinasrencitrtntiniatas 21, 23, 25, 26

United States v. Neifert-White Co., 390 U.S. 228

a ee 26

United States v. Rex Trailer Co., 218 F.2d 880 (7th

Cir. 1955), aff'd, 350 U.S. 148 (1956).......cccccecevereseerereees 25

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

I aa inicieesiesticinesnenntinrprtnnieneaeins 14

Cases Page(s)

United States ex rel. Fine v. Advanced Sciences, Inc.,

__ F.3d __, No. 95-2014, 1996 WL 638448 (10th

Cir. Nov. 6, 1996) ....c.csceseseresnensnensnsnensnanensnsnsnnnenenennsnssnnens 14

United States ex rel. Fine v. M-K Ferguson Co., ___

F.3d __, No. 95-2011, 95-2021, 1996 WL 638479

(10th Cir. Nov. 6, 1996).........sssssvesesseenssnencsneensenenreneensenes 15

United States ex rel. Marcus v. Hess,

317 U.S. 537 (1943) ......cecsessveneeessrenesssnensesensnees 12, 21, 23, 29

United States ex rel. Precision Co. v. Koch Indus.,

Inc., 971 F.2d 548 (10th Cir. 1992), cert. denied,

14, 15, 16, 17

G50 CE, 908 CIID ieccicicccsecninclibenientelect

United States ex rel. Ramseyer v. Century Healthcare

Corp., 90 F.3d 1514 (10th Cir. 1996) .....-..-r-sresnecneenesveneenes 14

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

63 F.3d 1512 (9th Cir. 1995) ......--ccererenensnrerenenenenenees 17, 27

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

Quinn, 14 F.3d 645 (D.C. Cir. 1994) ....-cc-ceeverneneneenennenens 14

United States ex rel. Stinson, Lyons, Gerlin & Bus-

tamante, P_A. v. Prudential Ins. Co., 944 F.2d 1149

14

(3d Cir. 1991) .......seccecsecsesnenssneensenesnssnsnnsnssneneennnnssnenssnnanesnss

United States ex rel. Wisconsin v. Dean, 729 F.2d

1100 (7th Cir. 1984).........cccvcsesesenenensnssnsnensnenenenennenanens 6, 13

Victory Carriers, Inc. v. Law, 404 U.S. 202 (1971) .--.-----0-00 16

Wang v. FMC Corp., 975 F.2d 1412

(Sth Cir. 1992)......-cecrecssesnsnenesnsseenssnsnensanensenenennenens 13, 14, 16

vi

Statutes and Rules

LOU S.C. BSS oo ececcrcrrersene rare

jit 2

sniees tieiesionn oe oreo 29

iu

=

USCS la Binsin 9

USC § aa con gener 13

WER Sei on,

31 U.S.C. § 3730(€)(4)(A) cnennineineaneee as Uy

31 USC. § 3730(€(4)B) een ong

a 3 email Maa is =a

“itt. 25

ma 29

“mitt: 2

wee 2

to 2

sede 2

Congressional Materials

cone: Globe, 37th Cong., 34 Sess. 952 (1863)......... 12, 21, 22

S: Rep. No. 77-1708 NRT | 13

S. Rep. No. 78-291 (1943)...

ee,

vii

Miscellaneous

26 CJ. 1169

INTRODUCTION

This case will resolve two diverse issues under the civil

False Claims Act, 31 U.S.C. §§ 3729-3733, of significant inter-

est to amici.' The first of these issues (revised Question 2) is

the proper interpretation of the term “public disclosure” found

in 31 U.S.C. § 3730(e)(4)(A), which specifically limits subject

matter jurisdiction for actions under the civil False Claims Act

brought by private qui tam relators. The Court of Appeals for

the Ninth Circuit interpreted the term “public disclosure” so

narrowly that it permitted an employee of petitioner to proceed

with a qui tam case even though that employee restated allega-

tions in four Federal audit reports that had been disclosed long

before the qui tam suit was filed. Both the express language

and the purpose of Section 3730(e)(4)(A) demonstrate that,

unless brought by an “original source,” such a parasitic suit is

barred. The second issue to be resolved (revised Question 3) is

whether the Court of Appeals properly held that a relator could

assert a cause of action under the civil False Claims Act for a

regulatory violation even if the alleged violation did not and

could not cause a financial loss to the United States. In this

case, the alleged “fraud” even resulted in a financial benefit to

the government. The Court below improperly ruled that harm

to the Federal treasury was not an essential element under the

False Claims Act.

Amici urge this Court to reverse on both issues. °

INTEREST OF AMICI CURIAE

The Association of American Medical Colleges

(“AAMC”) was founded more than a century ago to improve

the process and quality of medical education. Its members

include all accredited medical schools in both the United

States and Canada; nearly 400 major teaching hospitals; more

than 90 academic and professional societies representing

' Amici will not address the retroactivity issue addressed in revised

Question 1.

2

some 72,000 members of medical facilities; and students and

medical residents at these schools and hospitals.

The American Hospital Association (“AHA”) is the pri-

mary national membership organization for hospitals in this

country, consisting of approximately 5,400 hospitals and

other healthcare institutions. The AHA’s goal is to promote

high-quality healthcare and health services through leadership

and assistance to hospitals in meeting the healthcare needs of

their communities. Many of the AHA’s members are teaching

hospitals.

The American Medical Association (“AMA”), founded

nearly 150 years ago, is a private, non-profit organization of

physicians. With 290,000 members who practice in all 50

states and in all fields of medicine, the AMA is the primary

national organization of physicians in America. The AMA is

dedicated to promoting the art and science of medicine and

the betterment of public health, and serves physicians and pa-

tients by, among other things, establishing and promoting

ethical, educational, and clinical standards for the medical

profession.

These three associations (collectively the “Healthcare

Associations”) have a compelling interest in the proper reso-

lution of the questions at issue in this case. The members of

the Healthcare Associations, either individually as physicians

or institutionally as hospitals, deliver health services to an

overwhelming majority of citizens in this country. A signifi-

cant part of those health services are fully or partially funded

by the Federal government through a variety of programs, in-

cluding Medicare? (healthcare for the aged), Medicaid°

(healthcare for the poor and disabled), CHAMPUS*

* Codified in various sections of Title 42 of the United States Code,

primarily at 42 U.S.C. § 1395, et seq.

* Codified in various sections of Title 42 of the United States Code,

primarily at 42 U.S.C. § 1396, et seq.

* 10 U.S.C. ch. 55; see 32 C.F.R. § 199.

3

(healthcare for civilian dependents of military personnel), the

Railroad Retirement Act’ (benefits including Medicare-like

coverage for retired or disabled railroad workers), and other

Federal healthcare programs. Like contractors in the defense

industry, providers of health services under these programs

are highly regulated by various Federal agencies. These Fed-

eral agencies, along with Federal claims processing contrac-

tors and related state agencies, conduct both routine and

special investigations, audits and reviews of program and fi-

nancial operations of members of the Healthcare Associa-

tions. These audits, reports and reviews are regularly

circulated to various employees and agents outside of the

government.

The Healthcare Associations, and their members, are

committed to providing high-quality medical services to the

American people in full compliance with all rules and regula-

tions adopted for such programs. Nonetheless, the complexity

of the rules and regulations under which these programs oper-

ate often makes such compliance difficult, resulting in numer-

ous disputes over regulatory interpretation and compliance.

As a result, in the past ten years, various members of the

Healthcare Associations have found themselves defending

lawsuits by individuals -- called qui tam relators -- alleging

that these regulatory disputes amount to “false and fraudu-

lent” claims in violation of the False Claims Act, and that the

Act’s full remedies of treble damages plus penalties of $5,000

to $10,000 per false claim are applicable to these regulatory

disputes. As Congress and the Federal enforcement agencies

focus more on allegations of healthcare fraud, these qui tam

cases are increasing rapidly.®

* 45 U.S.C. § 231, et seq.

* Indeed, the last three years have seen a dramatic shift in the atten-

tion of qui tam relators towards the healthcare industry. Whereas qui tam

recoveries related to alleged healthcare fraud represented approximately 1

to 8 percent of the total qui tam recoveries in the years 1988 to 1992,

4

In many instances, these relators are not original sources

of the allegations. Instead, they learn of these violations from

auditors or investigators of the Federal government or its

agents, the contractors who process and pay the claims on be-

half of the government, or from the healthcare institutions

themselves, who ave conducting internai audits at the request,

and often at the insistence, of the Federal government. The

Healthcare Associations believe that such parasitic qui tam

suits are barred by the subject matter jurisdictional provision

of the False Claims Act, 31 U.S.C. § 3730(e)(4). Accord-

ingly, they seek reversal of the decision below because the

interpretation of the term “public disclosure” by the Court of

Appeals was unreasonably narrow and would subject the

members of the Healthcare Associations to numerous unwar-

ranted parasitic gui tam suits.

Indeed, absent some clarification by this Court, the fu-

ture is likely to hold even more opportunities for parasitic

suits by opportunistic qui tam relators seeking to extract set-

tlements. For instance, in June 1996 the Department of

Health and Human Services Office of the Inspector General

(“OIG”) commenced the Physicians At Teaching Hospitals

(“PATH”) initiative, a series of nationwide compliance audits

focusing primarily upon the Medicare rules governing the

billing of physician services provided by residents and their

teaching physicians. (See Amici App. at 4a through 6a). As

part of the PATH initiative, OIG “encourages” internal audits

within the teaching hospitals by offering potential liability

reductions if such internal investigations are implemented in

compliance with an OIG protocol. This protocol limits whom

the party may select as the investigator; requires the waiver of

all privileges, including attorney-client privilege, and rights to

withhold documents; and permits the government to receive

all draft audit reports and to be present for any relevant dis-

healthcare-related qui tam recoveries accounted for 36 to 46 percent of

total qui tam recoveries in 1993, 1994, and 1995. (See Amici App. at 3a).

5

cussions with the independent reviewer. At every stage of

this process, the institution must fear that an opportunistic in-

dividual, who learns of the regulatory noncompliance only

through the PATH audit, could seek to file a qui tam case and

argue that no “public disclosure” has occurred.

The PATH initiative is just one example of future audits

and reviews of program compliance likely to be conducted by

the members themselves at government direction.’ The

enormous complexity of the Federal healthcare regulatory

system, and the desire of members of the Healthcare Associa-

tions to discover and resolve any regulatory disputes with the

government, will result in increasing reliance, both by the

government and the members, on initiatives like PATH. Ab-

sent this Court’s clarification of the jurisdictional bar, initia-

tives in which both the government and the industry are

auditing compliance with a complex regulatory scheme will

likely be fertile grounds for opportunistic qui tam relators

who will simply lie in wait until these audits provide the nec-

essary informational framework for a qui tam action.

In addition, members of the Healthcare Associations

have been threatened, both by qui tam relators and by gov-

ernment attorneys, with False Claims Act (“FCA”) suits

seeking penalties in the millions of dollars even though the

government suffered no financial loss. In most cases, these

situations arise because the government (or commonly the

relator alone) believes that a healthcare provider is violating a

statute or regulation whose violation has no impact on the

” The Secretary of Health and Human Services announced in June

1995 a pilot voluntary disclosure program for the healthcare industry

modeled on the voluntary disclosure program that has been in operatior

for many years at the Department of Defense. Although initially limited

to key states and specific types of healthcare service providers, the Secre-

tary stated her intent that this program will be a nationwide program. Like

PATH, a healthcare institution which is accepted into the HHS voluntary

disclosure program is “strongly encouraged” to conduct a full financial

audit and review and report to HHS about the results of that internal audit.

6

Federal treasury and would generate no “damages.” Despite

this lack of financial harm, these plaintiffs seek to extract

large settlements by arguing that the FCA nevertheless allows

imposition of the civil penalties found in 31 U.S.C. § 3729(a)

of between $5,000 to $10,000 for each alleged false claim.

The Healthcare Associations believe that use of the False

Claims Act in such situations is abusive and beyond the scope

of the Act. Indeed, the assertion by the qui tam relator in this

case that a violation of the False Claims Act can exist without

financial loss to the Federal treasury exemplifies the manner

in which the Act is abused by private qui tam relators and the

government in an attempt not to remedy losses, but to bully

members of amici into inflated settlements. The relator’s ar-

gument has no basis in the language or purpose of the Act,

and amici urge this Court to reject the holding of the Court of

Appeals.

In recognition of the AAMC’s, the AHA’s and the

AMA’s interest in this case, the parties have consented to the

filing of this brief.

SUMMARY OF ARGUMENT

I. The limitation on subject matter jurisdiction found

in 31 U.S.C. § 3730(e)(4) balances two competing interests:

to bar “parasitic” qui tam suits based on allegations already

disclosed either through the public media or through existing

government audits and investigations and, at the same time, to

encourage true “whistleblowers” to come forward with evi-

dence of fraud. By passing Section 3730(e)(4) in 1986, Con-

gress intended to overrule the result in cases such as United

States ex rel. Wisconsin v. Dean, 729 F.2d 1100 (7th Cir.

1984), in which, under the pre-1986 jurisdictional bar, true

whistleblowers who had brought evidence of fraud to the at-

tention of Federal auditors and investigators were barred from

bringing a qui ‘am suit.

Congress fashioned a two-step remedy in 1986 that

barred qui tam cases which reassert “publicly disclosed” alle-

7

gations or transactions, unless the relator who brings the case

is an “original source.” Under this jurisdictional regime, once

the allegations of fraud are “publicly disclosed,” an FCA suit

may be brought only by the government itself (which is not

affected by this jurisdictional bar) or by a true whistleblower

-- an “original source” -- who knew of the fraud and voluntar-

ily disclosed the allegations to the government in the first in-

stance, precisely the situation of the State of Wisconsin in the

Dean case cited above.

The initial question in the application of this jurisdic-

tional bar is whether the allegation or transaction has been

“publicly disclosed” in one of many ways: in the course of a

civil or criminal hearing or trial; in a government report,

hearing, audit or investigation; or in the news media. This

requirement for “public disclosure” was designed by Con-

gress as a threshold test, a “quick trigger,” to determine which

cases warrant the more exacting determination of whether the

relator is an “original source” that Congress intended to en-

courage and reward.

The restrictive interpretation of the term “public disclo-

sure” in the Court of Appeals decision below is contrary to

both the language and the purpose of the jurisdictional bar.

The language in Section 3730(e)(4)(A) does not limit the na-

ture, form or extent of the disclosure necessary for that disclo-

sure to be “public.” The disclosure could be written (e.g.,

“report”) or oral (e.g., “hearing”). The disclosure can be to

large numbers (e.g., in the “news media”) or small numbers

(e.g., in an “audit or investigation”). Congress intended only

that the allegations or transactions be disclosed outside the

government, where an opportunistic relator might file a para-

sitic qui tam suit. This “quick trigger” guarantees that when-

ever a parasitic suit is possible -- that is, whenever there has

been any form of public disclosure -- only the true whistle-

blower, the “original source,” may file the qui tam case.

II. Since its passage in 1863, the civil False Claims Act

has always been intended and applied as a remedial statute to

8

reimburse the Federal treasury for financial loss resulting

from fraud. The FCA is not, and has never been, an all-

purpose remedy for any type of regulatory violation. The

conclusory holding of the Court of Appeals below that “the

lack of ... actual harm from the [regulatory] violation does

not preclude a claim under the FCA” not only misreads the

Supreme Court case cited, but also disregards over 70 years of

law on this subject.

In that time frame, this Court has found civil False

Claims Act liability only in those cases in which there has

been financial loss to the Federal treasury. Other cases, de-

spite finding regulatory or statutory violations, have found no

False Claims Act liability where the government can show no

financial loss. The per-claim “penalties” in the civil False

Claims Act, now $5,000 to $10,000 per false claim, were de-

signed not to penalize regulatory violations but as a form of

“rough justice” to remedy those situations where the financial

loss is certain but difficult to calculate. Both the damages and

the penalties imposed under the FCA are intended to remedy

financial harm caused by fraud; they are not intended to pun-

ish false statements or regulatory violations resulting in no

financial loss in order to fund the payroll for government

auditors and investigators.

ARGUMENT

I. GIVEN CONGRESS’ CLEAR INTENT TO BAR

PARASITIC SUITS, DISCLOSURE OF

ALLEGATIONS TO ANY SEGMENT OF THE

PUBLIC IN THE COURSE OF A GOVERNMENT

OR GOVERNMENT-MANDATED AUDIT OR

INVESTIGATION IS “PUBLIC DISCLOSURE”

UNDER 31 U.S.C. § 3730(e)(4)(A)

The 1986 amendments to the False Claims Act, while

clearly intended to expand the role of qui tam relators in False

Claims Act litigation, were just as clearly intended to bar

“parasitic” suits in which a qui tam relator simply reasserts

9

allegations that the government is already investigating or that

others have already disclosed. In furtherance of these goals,

Congress enacted the jurisdictional bar in 31 U.S.C.

§ 3730(e)(4), which provides a two-part test for subject matter

— Specifically, the False Claims Act bars qui tam

greet upon the public disclosure of allegations or

transactions in a criminal, civil, or administrative

hearing, in a congressional, administrative, or Gov-

ernment Accounting Office report, hearing, audit, or

investigation, or from the news media, unless the

action is brought by the Attorney General or the

person bringing the action is an original source of

the information.

31 U.S.C. § 3730(e)(4)(A). In short, if the allegations have

been “publicly disclosed,” then the qui tam relator must be an

“original source,” as that term is defined in 31 U.S.C.

§ 3730(e)(4)(B).*

The jurisdictional bar, of course, does not prevent the

government itself from remedying false claims, since it ex-

plicitly does not apply to the Attorney General. 31 U.S.C.

§ 3730(e)(4)(A). Instead, the jurisdictional bar applies only in

those qui tam cases which the Attorney General has fully in-

vestigated and determined are not of sufficient merit to war-

rant intervention and prosecution by the Department of

Justice. If the Department of Justice does intervene, then

subject matter ,uvisdiction is established and questions re-

garding the “public disclosure” of allegations or the “original

source” status of the qui tam relator are largely irrelevant. 31

U.S.C. § 3730(b). Moreover, the jurisdictional bar applies

only where there has been disclosure (1) in a government

* Because the District Court and the Court of Appeals both held that

the government had not made a public disclosure, if this Court reverses

the Court of Appeals on the “public disclosure” issue, the lower courts

would need to resolve the original source question.

10

hearing, audit, investigation or report -- in which case the

government hes already focused upon the plaintiff’s allega-

tions or transactions -- or (2) in a civil, criminal or adminis-

trative hearing or some form of news media coverage -- in

which case the government is likely to learn of such allega-

tions or transactions regardless of whether a qui tam action is

filed. 31 U.S.C. §3730(e)(4)(A) Thus, the government’s

ability to remedy false claims is noi affected significantly by

the issue at bar.?

Since Congress intended to bar parasitic actions based on

allegations arising out of government inquiries disclosed to the

public, the term “public disclosure” -- at least in the context of

a disclosure of a government audit, report or investigation --

must encompass any disclosure to a non-government person or

entity. The jurisdictional bar of the qui tam provisions of the

FCA harmonizes the need to offer an incentive for informants

to reveal frauds hidden from the government and the desire to

prevent parasitic claims that offer no benefit to the government.

To achieve this harmony, Congress excluded qui tam actions

based upon allegations disclosed in the course of government

tions do not assist in exposing fraud but instead unfairly reward

opportunistic plaintiffs who contribute nothing to the discovery

"Indeed, qui tam cases pursued by relators after the government de-

clines to intervene have made a minuscule contribution to government fraud

recoveries in the nearly ten years of liberalized qui tam enforcement fol-

lowing the 1986 Amendments. As of October 1995 (the date of the most

recent official DOJ press release on this subject), relators have recovered

only $15 million in qui tam cases in which the government, after investiga-

tion, declines to intervene and allows the relator to proceed alone. That sum

is trifling compared to the $1.13 billion in recoveries in gui tam cases in

which the government intervenes and prosecutes the civil claims. See U.S.

Department of Justice Press Release, Justice Department Recovers Over $1

Billion in Qui Tam Awards and Settlements, October 18, 1995. (Amici App.

at la-3a). In other words, qui tam cases pursued by the Department of Jus-

tice account for nearly 99 percent of the total false claims recoveries to the

government in cases originally filed by gui tam relators.

11

of fraud. This common sense interpretation of “public disclo-

sure” would not preclude qui tam actions by true whistleblow-

ers, of course, because a qui tam action based on publicly

disclosed information may still be brought by an “original

source,” as defined in 31 U.S.C. § 3730(e\(4)B).

In this context, it makes little difference how widely the

government’s disclosure of the relevant allegations of false

“public” -- that is, are disclosed outside of the government

and are no longer private -- creates, virtually by definition, the

risk of a parasitic claim. Moreover, barring such claims, even

where the public disclosure was not widely disseminated,

does not undermine the purposes of the FCA. Qui tam plain-

tiffs who merely repeat allegations upon which the govern-

ment has already focused its inquiries, and who are not

“original sources,” contribute nothing to the government’s

efforts at ferreting out false claims. Accordingly, whether or

not the government’s public disclosure is widespread or lim-

ited, this type of qui tam action does not in any meaningful

way contribute to the government’s efforts to uncover and

remedy fraud.

Here, Schumer’s qui tam complaint is based upon alle-

gations contained in several government audit reports going

back over three years that were disclosed to various innocent

individuals at Hughes and at Northrop, the prime contractor,

which was unquestionably innocent of any — of

wrongdoing. His complaint added nothing to govern-

ment’s efforts at uncovering fraud. Thus, the claim falls

squarely in the category of parasitic claims excluded by the

jurisdictional bar of the qui tam provisions unless brought by

an original source.

A. The Historical Development Of The Jurisdic-

tional Bar To “Parasitic” Qui Tam Suits

The meaning of the term “public disclosure,” and the ap-

plicability of the jurisdictional bar to Schumer’s claims, be-

comes apparent through an analysis of Congress’ intent in

12

crafting the jurisdictional bar in 1986. The history of the ju-

risdictional bar reveals Congress’ intent to exclude “parasitic”

qui tam suits and reward true whistleblowers.

Congress enacted the False Claims Act, including the qui

‘am enforcement procedures, in 1863 to address allegations of

rampant fraud by Union contractors during the Civil War. S.

Rep. No. 99-345, at 8-10 (1986), reprinted in 1986

U.S.C.C.A.N. (100 Stat.) 5266, 5273-75. The qui tam provi-

sions of the FCA were included in order to meet Congress’

goal of “setting a rogue to catch a rogue” by inducing inform-

ers “to betray [their] coconspirators.” Cong. Globe, 37th

Cong., 3d Sess. 955-96 (Feb. 14, 1863). Congress accom-

plished this purpose by permitting anyone at all to bring such

qui tam actions. This original statute contained no jurisdic-

tional bar.

Congress first enacted a jurisdictional bar in 1943 upon

recognizing that the original statute permitted such free use of

parasitic Claims that contributed little or nothing to the gov-

ernment ccmateainenee fraud but nevertheless resulted

in wi recoveries to the relators. Congress’ recognition

of this problem was triggered primarily by the case of United

States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), in which a

plaintiff who had no personal knowledge of a false claim sim-

ply copied the indictment as his qui tam complaint. The

Court found a lack of statutory language barring such cases

and, stating that the recovery of money to the government was

itself a contribution that satisfied the intent of the FCA, per-

mitted the gui tam action to stand. Id. at 545.

Congress quickly rejected the Court’s reasoning that the

mere recovery of money by the federal treasury justified such

qui tam actions and reversed the Court’s allowance of such

13

608, recodified in 31 U.S.C. § 3730(b)(4) (1982) (super-

seded); S. Rep. No. 78-291 (June 8, 1943); S. Rep. No. 77-

1708 (Nov. 25, 1942).

Congress, however, overcompensated for the problem of

parasitic suits in two ways. First, the 1943 jurisdictional bar

excluded any action based upon information in the possession

of the government, whether or not it was part of a government

audit, investigation, report or other proceeding. Second, and

most importantly, the 1943 amendment contained no excep-

tion for true whistleblowers, viz., the informants who were the

original source of the government’s knowledge. Act of De-

cember 23, 1943, 57 Stat. 608, recodified in 31 U.S.C.

§ 3730(b)(4) (1982) (superseded). Accordingly, even plain-

tiffs who first made the government aware of a fraud were

barred from filing qui tam actions. The best example of this

overcompensation, according to a later Congress, is the case

of United States ex rel. Wisconsin v. Dean, 729 F.2d 1100

(7th Cir. 1984). S. Rep. No. 99-345, at 12-13. In that case, a

qui tam action by the State of Wisconsin was dismissed on the

basis of the pre-1986 jurisdictional bar of “government

knowledge” even though the Federal government only learned

of the fraud because of Wisconsin’s extensive investigation.

The present jurisdictional bar is the result of Congress’

correcting this overcompensation and seeking simply to im-

plement “what it apparently thought it had in 1943: a law re-

quiring that the relator be the original source of the

government’s information.” Wang v. FMC Corp., 975 F.2d

1412, 1410 (9th Cir. 1992) (citing S. Rep. No. 99-345, at 4

(1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5269).'° Thus,

"” The full quote by the Court in Wang is instructive:

“This restrictive interpretation [in the Dean case] was too

much for Congress. In part, the 1986 amendments to the Act

were ‘aimed at correcting restrictive [court] interpretations of

the act’s .. . qui tam jurisdiction’ provisions. Senate Report,

at 4, 1986 U.S.C.C_A.N. 5269. The 1986 amendments to qui

14

Congress intended to refine the line between encouraging pri-

vate citizens to expose fraud to the government and avoiding

parasitic suits by opportunistic plaintiffs who do not meaning-

fully contribute to that goal. United States ex rel. Doe v. John

Doe Corp., 960 F.2d 318, 321 (2d Cir. 1992); United States ex

rel. Stinson, Lyons, Gerlin & Bustamante, PA. v. Prudential

Ins. Co., 944 F.2d 1149, 1154 (3d Cir. 1991); Wang v. FMC

Corp., 975 F.2d at 1419; United States ex rel. Ramseyer v.

Century Healthcare Corp., 90 F.3d 1514, 1519-20 (10th Cir.

1996); United States ex rel. Springfield Terminal Ry. Co. v.

Quinn, 14 F.3d 645, 649 (D.C. Cir. 1994). Congress’ action

resulted in the two-part test now found in 31 U.S.C.

§ 3730(e)(4). The “public disclosure” element of that test

must be broadly construed to fulfill this dual purpose.

B. The Court of Appeals’ Restrictive Interpretation

Of “Public Disclosure” Is Inconsistent With The

Language And Intent Of Section 3730(e)(4)

Congress’ intent to exclude parasitic claims clearly re-

quires that the term “public disclosure” be broadly applied to

encompass any disclosure to a person or entity outside of the

government, i.e., any member of the general public. United

States ex rel. Doe v. John Doe, supra, 960 F.2d at 323; United

States ex rel. Fine v. Advanced Sciences, Inc., __ F.3d __,

No. 95-2014, 1996 WL 638448 (10th Cir. Nov. 6, 1996).1!

wanted in 1986 what it apparently thought it had in 1943: a

law requiring that the relator be the original source of the gov-

ernment’s information. Seeking only to ‘correct’ opinions

like Dean, Congress permitted one who publicly disclosed the

information to bring a qui tam suit. There is nothing to sug-

gest that Congress meant to do any more than that, and some

evidence that it meant to do less. See § 3730(e\2)\A) (qui

tam suits against political officials still barred if involving in-

formation already possessed by the government).” Wang, 975

F.2d at 1419 (emphasis in original).

" The Court of Appeals for the Tenth Circuit has also discussed this

issue in two other cases. In United States ex rel. Precision Co. v. Koch

15

Congress intended, as detailed above, that the jurisdictional

bar prevent parasitic claims by any individual whose claims or

allegations have already been addressed and disclosed to any

segment of the public by, among other methods, a govern-

ment hearing, audit, investigation or report. This jurisdic-

tional bar certainly cannot depend upon how widely the

government disseminated such information. If allegations in a

government report or audit were disclosed to a member of the

general public, there is an immediate threat of a qui tam ac-

tion by a relator who did not contribute to the disclosure of

the fraud. Such an action is parasitic. It does not further the

goals of uncovering fraud, and it simply rewards individuals

who have contributed nothing to combatting fraud. It matters

little whether the government disclosed such allegations to

five, five hundred, or five million individuals. Any disclosure

outside of the government raises the threat of a parasitic

claim.

Congress’ intent to adopt a broad definition of “public

disclosure” is evident in the statutory language. Section

3730(e)(4(A) encompasses a number of different types of

disclosure. “Public disclosure” includes written disclosures

(in “reports”) as well as oral disclosures (in criminal or civil

“hearings”). “Public disclosure” includes both wide public

release in the “news media,” as well as much more limited

disclosure in an administrative “audit or investigation.” This

language is intended to cover a broad spectrum.

The requirement of public disclosure simply identifies a

broad category of potentially parasitic cases to be subjected to

Industries, Inc., 971 F.2d 548, 553 (10th Cir. 1992), cert. denied, 507 U.S.

951 (1993), the Court held that the determination of “public” is not based

on how many people were informed of the alleged fraud. The only issue

is whether the disclosure is made to any member of the public not previ-

ously informed. See also United States ex rel. Fine v. MK-Ferguson Co.,

___ F.3d ___, No. 95-2011, 95-2021, 1996 WL 638479 (10th Cir. Nov. 6,

1996).

16

the more exacting and more precise “original source” analy-

sis. Cf, Precision Co., 971 F.2d at 552-53. As the Court of

Appeals for the Tenth Circuit recognized, the dual goals of

Section 3730 -- to encourage the exposure of fraud by inform-

ers and to avoid parasitic claims by opportunists who do not

contribute to unearthing the fraud -- are carried out primarily

through the original source exception, id., which is the heart

and soul of the FCA’s jurisdictional bar. Wang, 975 F.2d at

1410. Interpreting “public disclosure” broadly to include dis-

closure outside of the government fulfills these dual purposes

of the qui tam provisions of the FCA, permitting full applica-

tion of the “original source” test.!2

Nor is a broad interpretation of “public disclosure” in-

consistent with the FCA’s goal of encouraging informers to

come forward. Once the government has initiated or con-

ducted an inquiry into a fraud, there is simply no need to pro-

vide such an incentive unless, as is the case with those relators

who are original sources, they have already contributed to the

disclosure. In addition, a restrictive interpretation of “public

disclosure” would be inconsistent with the Congressional

purpose to encourage and reward true whistleblowers. If

“public disclosure” is interpreted narrowly, as in the decision

below, the logical result is a race to the courthouse by which

an opportunistic relator who adds nothing to the government’s

investigation of fraud may be the first to file a qui tam case

and may thus exclude the true whistleblower, the “original

source,” from filing a qui tam case.'3

. r A broad interpretation of “public disclosure,” tending to restrict ju-

risdiction, is also more consistent with the Court’s long-held understand-

ing that statutory grants of jurisdiction to federal courts should be strictly

construed; federal courts should “scrupulously confine their own jurisdic-

tion to the precise limits which [a federal] statute has defined.” Victory

Carriers, Inc. v. Law, 404 U.S. 202, 212 (1971); Healy v. Ratta, 292 U.S.

263, 270 (1934).

" Under 31 U.S.C. § 3730(b)(5), once a qui tam case is brought, no other

person other than the government may intervene or bring another qui tam

17

Moreover, a broad interpretation of “public disclosure” is

also consistent with general principles of judicial economy. A

restrictive interpretation of “public disclosure” would require

a pre-trial jurisdictional inquiry into the extent to which the

government had publicly disclosed the relevant allegations or

transactions and the sufficiency of such disclosures for the

purposes of the jurisdictional bar. Such a pre-trial jurisdic-

tional inquiry would be “onerous, impractical, and ultimately

would serve neither the interests of the parties nor the court.”

Precision Co., supra, 971 F.2d at 553. In many cases, ascer-

taining the scope of such public disclosure would be nearly

impossible. The parties, and the court, would be forced to

make inquiries regarding every federal employee who could

have made such a disclosure, every member of the general

public who spoke to a federal employee regarding topics re-

lated to the relevant allegations or transactions, every person

who received communications from those individuals on such

topics, ad infinitum -- all in the context of a pre-trial jurisdic-

tional determination. Unlike the discrete, focused inquiry that

can be made in the context of determining whether the qui

tam relator is an “original source,” the inquiry required to de-

termine the scope of public dissemination would be endless.

Conducting such an inquiry in the course of a full trial is dif-

ficult; expecting it in a pre-trial jurisdictional inquiry seems

more than a little absurd. Jd.

Similarly, to the extent the Ninth Circuit may be con-

cerned about a return to the pre-1986 government knowledge

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

63 F.3d 1512, 1519 (9th Cir. 1995), Pet. App. at 10a, such con-

cern is misguided. Not only does the jurisdictional bar now

contain an exception to allow a qui tam case to be filed by an

“original source” -- a significant exception which did not

exist before 1986 -- but Congress also has limited the ju-

case based on those same facts. A broad interpretation of “public disclosure”

thus reserves the right to file a qui tam case for the “original source.”

18

risdictional bar to public disclosures “in a criminal, civil, or

administrative hearing, in a congressional, administrative, or

Government Accounting Office report, hearing, audit, or in-

vestigation, or from the news media.” 31 U.S.C. § 3730(e)

(4)(A). This category is somewhat more narrow than the pre-

1986 standard of mere “government knowledge” by some em-

ployee in some agency. Moreover, the creation of the jurisdic-

tional bar was premised upon the determination that a qui tam

suit restating allegations already unearthed through govern-

ment inquiries, and which contributes nothing to the uncover-

ing of fraud, was parasitic and undesirable. In any event, under

the present jurisdictional bar, the mere existence of a govern-

ment investigation is not enough to bar a qui tam action. In-

stead, there must be a disclosure (1) in the course of that

investigation (2) to a member of the general public (3) of the

relevant allegations and/or transactions relating to a false

claim; and, most importantly, (4) the plaintiff must not be an

original source. 31 U.S.C. § 3730(e)(4)(A).

Here, Schumer’s qui tam suit contributed nothing to the

uncovering of a fraud. Acting upon information given to the

government by Northrop, the government conducted audits of

possible fraudulent conduct. Once the inquiry was completed,

the government then distributed the findings in the audit re-

ports, which alleged improper allocation of costs resulting in

possible unauthorized charges to the government, to innocent

employees of Hughes and Northrop. The government initially

withheld $15.4 million, and ultimately paid the amount after it

determined that the alleged misallocation in fact was favorable

to the government. Only after the government had fully ad-

dressed the allegations did Schumer file this action alleging, in

substance, what was contained in the government’s audit re-

ports -- exactly the type of parasitic claim Congress never in-

tended unless brought by an original source. This narrow

interpretation by the Court of Appeals must be reversed.

19

C. “Public Disclosure” Also Includes Disclosure

Through Internal Audits By Healthcare Institu-

tions

Amici submit that the phrase “administrative audits, re-

ports and investigations” is not limited solely to such inquiries

by the government alone. For example, as discussed above,

the Inspector General of the United States Department of

Health and Human Services is demanding that many health-

care providers conduct audits of alleged regulatory noncom-

pliance and report those findings directly to the Secretary.

These investigations and audits, while nominally conducted

by the institutions, are in fact administrative reviews con-

ducted at the express request of, and under rules set by, the

government. As such, disclosure of allegations from such

audits and investigations should also be considered “public”

disclosure through an administrative audit or investigation

under 31 U.S.C. § 3730(e€)(4)(A).

Information uncovered during audits such as those per-

formed pursuant to the Inspector General’s PATH initiative is

certain to be brought to the attention of the government,

making whistleblowers unnecessary. However, during both

the investigative stage, when facts are developing, and at the

reporting stage, when the audit results are reported both to the

government and to other non-government entities, the allega-

tions are certain to be more widespread. As a result, such

“internal” audits are fertile ground for opportunistic qui tam

relators.

As detailed above in the statement of interest of the

amici curiae, the PATH audits demanded by the government

are investigations which will inform the government of any

regulatory noncompliance as effectively as if the audits were

performed by the government itself. Hospitals performing

audits pursuant to the PATH initiative must waive all privi-

leges and must submit to the presence of government investi-

gators during any relevant discussions with the auditors.

Moreover, the audits must be performed by government-

20

approved independent investigators, who must follow gov-

ernment-dictated procedures during the course of their inves-

tigations. Such investigations are thus designed to function as

government audits -- that is, the PATH audits are designed

not as private self-investigations initiated for purposes of en-

suring compliance, but as a means of providing detailed in-

formation to the government regarding the extent of

compliance. The PATH initiative is but one example of nu-

merous government initiatives which prompt audits that are

the functional equivalent of government-conducted audits and

investigations. Under such circumstances, qui tam relators

who have nothing new to contribute to the investigations are

just as parasitic -- and the government needs their aid just as

little -- as they are in cases based on investigations performed

by government-employed auditors, rather than by private

auditors acting at the government’s behest.

Il. HARM TO THE PUBLIC FISC IS AN ESSENTIAL

ELEMENT FOR A CAUSE OF ACTION UNDER

THE FALSE CLAIMS ACT

The Ninth Circuit’s decision stands for the rather re-

markable position that the mere violation of a regulation by

petitioner in the course of its performance of its contracts

violates the civil False Claims Act even though the peti-

tioner’s action did not result in financial loss to the govern-

ment. Indeed, the DCAA itself found that Hughes’ conduct

actually resulted in a positive gain for the government. The

facts presented by this qui tam case demonstrate quite clearly

why financial loss is an essential element of a False Claims

Act violation.

There is no single act or type of act that generates liability

under the False Claims Act; instead, those acts vary widely.

See 31 U.S.C. § 3729 (aX(1)-(7). They include submission of a

“false or fraudulent claim for payment” (subsection (a)(1));

entry into a “conspiracy to defraud” the government

(subsection (a)(3)); deliberate concealment of government

21

property (subsection (a)(4)); or use of a false record to decrease

an obligation to the government (subsection (a)(7)). What is

common in all of these acts, however, is the existence of a fi-

nancial or monetary loss to the Federal treasury.

The civil FCA was not intended to punish a claim, state-

ment, conspiracy or other conduct which, while in violation of

other Federal laws and regulations, does not result in a loss to

the Federal treasury. It is not “designed to reach every kind of

fraud practiced on the government.” United States v.

McNinch, 356 U.S. 595, 599 (1958). Rather, the FCA is a

remedial statute designed to remedy the government’s pecu-

niary and proprietary losses by compensating the Treasury

for damages it suffered as a result of successful execution of

fraud. United States v. Halper, 490 U.S. 435 (1989); see also

United States ex rel. Marcus v. Hess, 317 U.S. 537, 551

(1943) (the “chief purpose of the [civil FCA] was to provide

for restitution to the government of money taken from it by

fraud . . .”) (emphasis added). The summary conclusion of

the Court of Appeals decision below, that “the lack of deter-

mination of actual harm from the [regulatory] violation does

not preclude a claim under the FCA,” simply misconstrues the

clear purpose of the False Claims Act.

A. This Court Has Consistently Interpreted The

False Claims Act As A Statute Designed To Re-

coup Losses To The Treasury

As explained above, the FCA was enacted during the

Civil War, at the request of the War Department and the

Treasury Department, as a response to rampant fraud com-

mitted by suppliers to the Union Army. Cong. Globe, 37th

Cong., 3d Sess. 952 (1863). FCA liability was designed to

reach overbilling and billing for substandard or nonexistent

goods and services. The FCA’s sponsoring senator noted, for

example, that military contractors were billing the Army for

artillery shells filled with sawdust rather than explosives. /d.

at 955. The civil provisions of the FCA provide the govern-

ment with “the privilege of coming upon [a fraudulent con-

22

tractor] or his estate and his heirs and recovering the money of

which it is defrauded.” Jd. at 958. Congress’ concern at the

time was that “our Treasury is plundered day to day by bands

of conspirators,” id. at 955, with “diabolical schemes for the

purpose of procuring money from a distracted, and what will

in a short time be an impoverished country.” Jd. at 954. The

FCA was plainly enacted to protect the public fisc, and its

civil provisions were meant to recoup Treasury losses, not to

penalize general dishonesty.

It strains credulity to argue that the FCA provides a qui

tam relator or the government with a cause of action to pe-

nalize a technical regulatory violation which cost the Treasury

nothing -- indeed, which in this case saved the government

money. This Court has recognized repeatedly the distinction

between false or fraudulent claims or other acts that “plunder

the Treasury,” and other false, fraudulent or illegal conduct

which does not affect the public fisc, and thus do not fall

within the scope of the FCA.

Seventy years ago, in United States v. Cohn, this Court

emphasized that under the False Claims Act, actionable false

claims are only those which fraudulently cause the government

“pecuniary or property loss.” 270 U.S. 339, 347 (1926).'4

* The Cohn case, as well as the Gilliland and Bridges cases discussed

infra, though criminal cases, are instructive as to the scope of the civil

False Claims Act because of the historical development of the civil False

Claims Act language. The original FCA passed in 1863 provided for both

civil and criminal liability for the same proscribed acts. The FCA was

later codified in the Revised Statutes of 1878. The criminal provisions

were codified at Section 5438; the civil provisions, Section 3490, simply

triggered civil liability on those acts identified in Section 5438. The

criminal False Claims Act was slightly modified ia 1909 and 1918, and

was amended significantly in 1934 (see Gilliland, infra), but Section 5438

of the 1878 Revised Statutes, while no longer an operative criminal stat-

ute, continued to specify the acts giving rise to civil liability until the civil

FCA was codified at 31 U.S.C. § 3729, et seg. by the 1986 FCA amend-

ments. See Rainwater v. United States, 356 U.S. 590, 592 n.8 (1958);

United States v. Bornstein, 423 U.S. 303, 305 n.1 (1976).

23

Cohn was indicted under the criminal False Claims Act, which

at that time punished basically the same “acts” that resulted in a

civil action under the civil portions of the Act. The indictment

alleged that Mr. Cohn had fraudulently claimed a shipment of

government possessed as bailee. This Court held that, because

the government was a mere bailee with only temporary posses-

sion of the cigars, Cohn did not “defraud” the government

within the meaning of the False Claims Act. He did not de-

prive the government of its money or property -- rather, he

cheated the rightful owner of the cigars. See id. at 346-47.

This Court squarely rejected the government’s argument that

the False Claims Act addresses such intangibles as

“interference with lawful government functions,” and held that

the Act addresses fraud in “its usual and primary sense.” /d. at

346.'5 Because Cohn did not “wrongfully obtain{] money [or]

other property of the Government,” id. at 347, his false claim

to the goods did not violate the FCA. This Court has repeat-

edly cited Cohn with approval. See, e.g., United States ex rel.

Marcus v. Hess, 317 U.S. at 545; United States v. McNinch,

356 U.S. 595, 600 n.10 (1958) (citing Cohn and holding that a

“claim” under FCA applies only to claims for the government’s

money or property).

The Court again recognized the distinction between false

statements made in furtherance of a fraudulent claim, and

false statements which do not affect the public fisc, in United

States v. Gilliland, 312 U.S. 86, 92-93 (1941). The Court in

Gilliland distinguished the provisions addressed in Cohn from

provisions which are “made to embrace false and fraudulent

statements or representations where these were knowingly and

* ‘The “usual and primary sense” of fraud is based on the common law

principle that financial loss is an essential element of any claim for fraud.

This is an age-old doctrine (see, e.g., 26 C.J. 1169; Ming v. Woolfolk, 116

U.S. 599 (1886)) that still survives today. See, ¢.g., Bastian v. Petren

Resources Corp., 892 F.2d 680, 685 (7th Cir.), cert. denied, 496 U.S. 906

(1990).

24

willfully used in documents or affidavits ‘in any matter within

the jurisdiction of any department or agency of the United

States.’” Jd. at 93. This Court held that, unlike provisions

addressing false claims, the false statements provision at issue

-- which was later severed from the False Claims Act and be-

came the False Statements Act -- in Gilliland was not re-

stricted to “cases involving pecuniary or proprietary loss to

the government.” /d. Thus, the civil and the criminal False

Claims Act apply only to false statements made in attempt to

plunder the Treasury -- that is, unlike the False Statements

The Court next commented on this issue in Rex Trailer

Co. v. United States, 350 U.S. 148 (1956). In Rex Trailer, this

Court ruled -- in the context of a non-FCA case -- that spe-

cific, quantifiable damages need not be proven in every case

in which some pecuniary or proprietary injury is plainly evi-

dent. The defendants in Rex Trailer violated a statute which

provided damages and penalties similar to that of the FCA by

falsely using the names of veterans in order to purchase gov-

ernment-owned trucks. The defendants argued that the gov-

ernment suffered no harm because they had paid the

* After Gilliland, this Court again reiterated that defrauding the gov-

ernment meant committing a pecuniary or proprietary crime -- ie., a

plundering of the Treasury -- in Bridges v. United States, 346 U.S. 209

(1953). In that case, this Court held that the Wartime Suspension of

Limitations Act, which suspended the statute of limitations to permit the

government to prosecute wartime frauds committed by government con-

tractors, did not apply to false statements about Communist Party mem-

bership made to obtain a Certificate of Naturalization. This Court ruled

that the 1942 version of the Wartime Suspension of Limitations Act --

which applied generally “to offenses involving the defrauding or attempts

to defraud the United States . . .” -- did not apply to the false statements

provision of the 1934 criminal FCA amendments addressed in Gilliland,

id. at 220-21. Rather, it applied only to “the defrauding of the United

States in any pecuniary manner or in a manner concerning property.” Id.

at 221 (emphasis added).

25

government’s offering price for the vehicles. The govern-

ment, however, was not disposing of the trucks as a commer-

cial vendor, but as a benefits package for war veterans and a

source of trucks for other government agencies. /d. at 150.

The statute gave veterans a priority opportunity to buy the

trucks at favorable prices and credit terms, which constituted

“benefits” of “great value” because the government’s surplus

of such trucks was limited, id., and a severe shortage of civil-

ian vehicles was causing non-veteran truck purchasers to suf-

fer black and gray market conditions. United States v. Rex

Trailer Co., 218 F.2d 880, 884 (7th Cir. 1955), aff'd, 350 U.S.

148 (1956). The government thus suffered proprietary harm

when the defendants swindled it out of the trucks it had ear-

marked and priced as part of a benefits package intended for a

specific class of beneficiaries. Moreover, because govern-

ment agencies had second priority after veterans under the

statute, “the government did sustain injury due to the . . . de-

crease of motor vehicles available to Government agencies”

that resulted from the defendants’ fraud. United States v.

Halper, 490 U.S. at 445 (emphasizing that Rex Trailer im-

posed penalties as liquidated damages for actual financial loss

to the government).'"

Even instances of fraud with potential -- but still incho-

ate -- fiscal ramifications do not fall within the scope of the

FCA. In United States v. McNinch, 356 U.S. 595 (1958), this

Court held that the civil False Claims Act does not impose

liability for a false application for credit insured by the Fed-

eral Housing Authority (“FHA”). Officers of a home con-

struction business had submitted fictitious credit reports and

" In the course of making the uncontroversial observation that specific

damages (as opposed to harm) need not be shown, Rex Trailer also ap-

pears to suggest in dicta that a showing of actual harm was not necessary.

See 350 U.S. 148, 153 2.5. This Court’s decision in Halper, however,

emphasized that actual harm was in fact shown in both Hess and Rex

Trailer. See 490 U.S. at 444-46. Moreover, Rex Trailer addressed a claim

under the Surplus Property Act of 1944, 40 U.S.C. § 489, not the FCA.

26

misrepresented the financial eligibility of certain homeowners

for loans backed by the FHA. /d. at 597 & n.4. Because there

was no default at issue, this Court did not decide whether a

lending institution’s claim for reimbursement on a defaulted

loan procured by fraud would constitute a claim covered by

the FCA. Jd. at 599 n.6. The Court did hold, however, that

the fraudulent credit applications themselves did not fall

within the scope of the FCA because “[i}n agreeing to insure a

home improvement loan the FHA disburses no funds nor does

it otherwise suffer immediate financial detriment. It simply

contracts, for a premium, to reimburse the lending institution

in the event of future default, if any.” Jd. at 599 (emphasis

added). The Court concluded in McNinch that while

“Congress wanted to stop . . . plundering of the public treas-

ury, ... it is equally clear that the False Claims Act was not

designed to reach every kind of fraud practiced on the United

States.” Id. (emphasis added).'*

Finally, in United States v. Halper, 490 U.S. 435 (1989),

the Court addressed the issue of whether the Double Jeopardy

Clause prohibited the imposition of grossly disproportionate

penalties under the civil False Claims Act after the defendant

had previously been convicted of criminal false claims for the

same fraudulent submissions. In Halper, there was no ques-

tion that the defendant had caused a financial loss to the Fed-

eral treasury. In that context, the Court held that allegedly

“civil” penalties of $130,000 were so “grossly disproportion-

ate” to the loss to the Treasury ($585) that imposition of those

so-called “civil” penalties was punitive and thus barred by the

Double Jeopardy Clause. The Court in Halper summed up

this Court’s holdings in Hess and Rex Trailer as follows:

" In United States v. Neifert-White Co., 390 U.S. 228 (1968), False

Claims Act liability attached when federal money was loaned in reliance

of a fraudulent loan application because, unlike McNinch, the defendant

made “a false statement with the purpose and effect of inducing the Gov-

ernment immediately to part with money.” Id. at 232 (emphasis added).

27

The relevant teaching of these cases is that the

Government is entitled to rough remedial justice,

that is, it may demand compensation according to

sornewhat imprecise formulas, such as reasonable

liquidated damages or a fixed sum plus double

damages, without being deemed to have imposed a

second punishment for the purpose of double jeop-

ardy analysis. These cases do not tell us, because

the problem was not presented in them, what the

Constitution commands when one of those impre-

cise formulas authorizes a supposedly remedial

sanction that does not remotely approximate the

Government’s damages and actual costs, and rough

justice becomes clear injustice.

490 U.S. at 446 (emphasis added). The Court’s analysis in

Halper, as in Hess and the prior decisions, assumed that some

substantial financial loss to the Federal treasury had occurred,

and that the damages and penalty provisions of the False

Claims Act were designed to reimburse the government for

these actual losses. In this long line of cases, the False Claims

Act has not been applied when a regulatory violation or other

false statement results in no financial loss to the Federal

treasury.

B. The Court Of Appeals Holding Misinterprets

The Language Of The Act And This Line Of De-

cisions

Notwithstanding the century-old understanding that False

Claims Act liability is triggered only by pecuniary or proprie-

tary harm, the Ninth Circuit ruled below that despite a showing

that Hughes’ regulatory violation cost the government nothing,

such violation “creates a genuine issue of material fact relating

to a violation of the False Claims Act.” United States ex rel.

Schumer v. Hughes Aircraft, Co., 63 F.3d 1512, 1525 (9th

Cir. 1995). The Ninth Circuit, purporting to rely on this

Court’s decision in Rex Trailer Co. v. United States, 350 US.

148, held that “the lack of a determination of actual harm

28

from the CAS violation does not preclude a claim under the

FCA.” Schumer, 63 F.3d at 1525 (emphasis added).

The Ninth Circuit misread Rex Trailer. Nothing in Rex

Trailer converts the remedial civil False Claims Act into a pu-

nitive civil False Statements Act, which is the effective result

of abandoning the FCA’s requirement that liability attach only

upon pecuniary or proprietary injury to the government. In Rex

Trailer, a non-FCA case, the government suffered financial

loss because surplus government property designed to be sold

either to veterans or to other government agencies was instead

purchased by persons not eligible to receive the benefit. Rather

than trying to prove specific damages (by, for example, esti-

mating the difference between market prices and credit terms

and the government surplus prices and terms) the government

simply requested penalties under the statute’s civil penalties

provision. This Court ruled in Rex Trailer that the civil penal-

ties provision properly served to remedy the actual harm to the

government by functioning as liquidated damages; it did not

penalize the defendants for falsity which caused no actual

harm.” In contrast, the Court of Appeals decision at issue here

concludes that Hughes should be penalized under the False

Claims Act for an alleged violation of an accounting regulation

which saved the government money. The only actual harm

* An example of applying penalties to reimburse the government for

actual losses that are difficult to quantify is United States v. Advance Tool

Co., 902 F. Supp. 1011 (W.D. Mo. 1995), aff'd, 86 F.3d 1159 (8th Cir.

1996). In Advance Tool, the defendant sold the government tools which

did not meet certain required contract specifications, but were used by the

government. Because of the difficulty of locating the nonconforming

tools, the court found that the government could not prove actual dam-

ages, even though the government did prove that the nonconforming tools

provided by the defendant were not as valuable as the tools that met speci-

fications. The court, however, imposed civil penalties as a form of rough

justice to compensate for the government’s actual -- but unproven --

financial loss.

29

Schumer alleges is that the government paid the auditors who

investigated Hughes. See Opp. at 11-12.

When the only concrete harm that Schumer can allege is

the cost of the same government investigation which

prompted the government to withdraw its finding of noncom-

pliance, he is essentially asking this Court to convert the FCA

into a civil False Statements Act designed to fund Federal

auditors. To apply civil penalties in the absence of any finan-

cial loss, relying solely on routine investigative and audit

costs, would divorce the FCA from its remedial purpose. The

False Claims Act was intended “to provide restitution to the

government of money taken from it by fraud,” and Congress

included civil penalties only to “make sure that the govern-

ment would be made completely whole.” United States ex

rel. Marcus v. Hess, 317 U.S. at 552-53 (emphasis added).”

The FCA was not intended to “remedy” the cost of rou-

tine government functions; rather, it was intended to remedy

the cost of contractors swindling the government. Civil pen-

alties may serve a remedial purpose when applied to make

” A recent criminal mail fraud case in the healthcare context illustrates

well the principle that even a violation of a criminal regulatory statute

does not necessarily constitute fraud. In United States v. Jain, 93 F.3d

436, No. 95-2014, 1996 WL 444885 (8th Cir. Aug. 8, 1996), Dr. Jain, a

psychologist, was convicted of violating both the mail fraud statute, 18

U.S.C. § 1341 and the Medicare Anti-Kickback Act, 42 U.S.C. § 1320a-

7b, by soliciting and receiving kickbacks for referring Medicare patients

to a hospital for psychiatric care. The evidence at trial showed, and the

government eventually conceded, that the patients were appropriately

hospitalized, and several government witnesses testified that the hospital

was “likely the best acute-care psychiatric hospital in the region.” /d. at

*2. In short, there was no evidence that the patients received substandard

or unnecessary care, or that the government paid a penny more than it

would have paid in the absence of Dr. Jain’s kickback scheme. /d. Al-

Kickback Act, it held that because there was no financial loss to the gov-

ernment, Dr. Jain’s illegal kickback scheme did not constitute mail fraud,

and the mail fraud conviction was reversed. See id. at *4-*6.

30

sure that the treasury has received full restitution -- including

restitution for ancillary costs of fraud -- but such penalties can

only be described as punitive when applied to penalize a

harmless failure to disclose accounting methods. Absent

some actual loss, there is nothing to remedy. It is clear, and

this Court has repeatedly recognized, that the FCA is intended

to remedy harm caused by fraud and that Congress never in-

tended for the FCA to penalize false statements resulting in no

financial loss in order to fund the payroll for government

auditors and accountants.

While government contractors and others who receive or

spend Federal funds may violate government laws and regu-

lations, it simply does not follow that such regulatory viola-

tions defraud the government when they cause no harm to the

public fisc. Amici strongly urge this Court to state -- yet

again, as it has repeatedly since the adoption of the Act -- that

the civil False Claims Act serves the remedial function of re-

couping the government’s actual pecuniary and proprietary

losses caused by fraud, and does not serve as an enforcement

mechanism for other statutes, or as a means of punishing all

false statements somehow connected to the government’s pro-

curement of goods and services. To impose such civil penal-

ties when there has been no loss to the Federal treasury is not

remedial and is not justified by the language or the purpose of

the FCA. However, such is the effect of the Ninth Circuit’s

ruling below. Accordingly, the Ninth Circuit’s opinion below

should be reversed.

CONCLUSION

For the foregoing reasons, the judgment of the Court of

Appeals should be reversed.

Fredric J. Entin

John E. Steiner, Jr.

American Hospital

Association

1 North Franklin, Suite 3400

Chicago, Illinois 60606

(312) 422-3000

Joseph A. Keyes, Jr.

Ivy Baer

Association of American

Medical Colleges

2450 N Street, N.W.

Washington, D.C. 20037

(202) 828-0400

Respectfully submitted,

John T. Boese

Counsel of Record

Richard A. Sauber

Anthony S. Yoo

J. Todd Hutchins

Fried, Frank, Harris,

Shriver & Jacobson

1001 Pennsylvania Avenue,

N.W., Suite 800

Washington, D.C. 20004

(202) 639-7000

Kirk B. Johnson

Michael L. Ile

American Medical

Association

515 N. State Street

Chicago, Illinois 60610

(312) 464-5000

APPENDICES

ot

la

U.S. DEPARTMENT OF JUSTICE

FOR IMMEDIATE RELEASE

WEDNESDAY, OCTOBER 18, 1995

CIV

(202) 616-2765

TDD (202) 514-1888

JUSTICE DEPARTMENT

RECOVERS OVER $1 BILLION

IN QUI TAM AWARDS AND SETTLEMENTS

WASHINGTON, D.C. — The Department of Justice has

recovered more than $1 billion in civil fraud cases brought

under the whistleblower provisions of the False Claims Act

since they were amended in 1986.

Frank W. Hunger, Assistant Attorney General for the

Civil Division, praised the work of Senator Charles Grassley

of lowa and Representative Howard L. Berman of California

in announcing the figure today. Grassley and Berman spon-

sored the 1986 whistleblower provision, also know as the qui

tam amendments to the False Claims Act, which significantly

strengthened the statute.

The statute allows a citizen, also known as a “relator,” to

file suit on behalf of the United States alleging that a person

has submitted false or fraudulent claims on the United States.

The government has a period of time to investigate the alle-

gations to determine whether to take over the suit or allow the

private citizen to pursue it alone. The private citizen may re-

cover from 15 percent to 25 percent of the settlement or

judgment if the government takes over the case and prose-

cutes it successfully and the same amount if the whistleblower

litigates the case.

“This is a remarkable achievement for the taxpayers of

this country,” said Hunger. “Senator Grassley and Represen-

tative Berman must be commended for their leadership and

2a

vision in sponsoring the legislation that has been used so ef-

fectively in the nine years since its enactment.

“The recovery of over $1 billion demonstrates that the

public-private partnership encouraged by the statute works

and is an effective tool in our continuing fight against

fraudulent use of public funds.”

Of the total amount recovered since 1986, the Depart-

ment intervened in or settled cases resulting in recoveries of

$1,058,177,552. Relators, or “whistleblowers,” have been

awarded $184,470,378 or 17.87 percent of the government’s

proceeds where shares have been determined.

In cases declined by the government, private citizens

obtained settlements or judgments of $15,597,141. Their

shars have averaged 28 percent of the proceeds where shares

have been determined, or $3,412,661.

“The qui tam amendments were intended to encourage

private citizens to come forward with information about fraud

against the federal government,” said Hunger. “Obviously

they are working very well.

“These recoveries could not have been achieved without

the outstanding and tireless efforts of the attorneys in the Civil

Division and the U.S. Attorneys’ offices throughout the

country working in cooperation with agency investigators,”

Hunger stressed.

The largest qui tam recovery to date was a $150 million

agreement with United Technologies Corporation to settle a

lawsuit filed by a former vice president of finance alleging

that the company overstated progress payments submitted by

its Sikorsky Aircraft Division and misrepresented the facts in

reporting the fraud to the government through the Department

of Defense’s Voluntary Disclosure Program. The relator re-

ceived $22.5 million, the largest recovery by a whistleblower

to date.

Other significant cases include a $112.5 million agree-

ment with Teledyne Inc. to settle two qui tam cases involving

3a

Teledyne’s former Relays Division and Teledyne Systems

Company. The government charged the company with fraud

in testing military components and in its costs accounting

practices.

An $88 million settlement on September 30 with Lucas

Industries pushed qui tam recoveries over $1 billion. That

settlement resolved a qui tam lawsuit filed in Utah that al-

leged that Lucas defrauded the government by providing de-

fective military parts and falsifying testing and quality control

reports.

Attached are qui tam statistics through fiscal 1995.

QUI TAM STATISTICS

Number of qui tam cases filed at end of fiscal 1995: 1,105

Number where a recovery has been obtained under the False

Claims Act: 153

Qui Tam Filings By Fiscal Year:

FY 87 -33 cases

FY 88 -60 cases

FY 89 -95 cases

FY 90 -82 cases

FY 91 -90 cases

FY 92 -119 cases

FY 93 -131 cases

FY 94 -221 cases

FY 95 -274 cases

Qui Tam Recoveries (approximate):

FY 88 -$ 2 million

FY 89 -$32 million

FY 90 -$40 million

FY 91 -$36 million

FY 92 -$124 million

FY 93 -$193 million

FY 94 -$379 million

FY 95 -$243 million

Total fraud recovery from FY 87 through FY 95: $3, 342,

390, 684

(qui tam recoveries are about one-third of total)

Defense fraud and health care fraud recoveries, as percentages

of total recoveries:

FY 87-37% defense fraud, 16% health care fraud

FY 88-85% defense fraud, 1% health care fraud

FY 89- 79% defense fraud, 8% health care fraud

FY 90-65% defense fraud, 3% health care fraud

FY 91-83% defense fraud, 4% health care fraud

FY 92-70% defense fraud, 5% health care fraud

FY 93-29% defense fraud, 46% health care fraud

FY 94-53% defense fraud, 38% health care fraud

FY 95-48% defense fraud, 36% health care fraud

HRB

95-542

Sa

DEPARTMENT OF HEALTH & HUMAN SERVICES

Office of Inspector General

Washington, D.C. 20201

June 21, 1996

Jordan J. Cohen, M.D.

President Association of American Medical Colleges

2450 N. Street, N.W.

Washington, D.C. 20037

Dear Dr. Cohen:

The purpose of this letter is to apprise you of activities in my

office that may be of interest and concern to members of your

organization. Specifically, the Department of Health and

Human Services, Office of Inspector General (OIG), has initi-

ated a series of nationwide reviews of compliance with rules

governing physicians at teaching hospitals (PATH) and other

Medicare payment rules. This initiative grows out of the ex-

tensive work performed by the OIG at a major east coast uni-

versity. The focus of the review was compliance with Inter-

mediary Letter 372 (IL 372), the Medicare rule affecting

payment for physician services provided by residents. We

found that the institution was not complying with this rule.

We also found that teaching physicians were improperly

“upcoding” the level of service provided in order to maximize

Medicare reimbursement. This review resulted in the Gov-

ernment’s recovery of more than $30 million, including dam-

ages under the Federal Civil False Claims Act. As part of the

negotiated settlement, the responsible parties also avoided

program exclusion under the OIG’s authorities.

6a

The OIG has initiated the PATH project in order to determine

whether, and to what extent, similar problems are present at

other teaching institutions throughout the country. The na-

tionwide PATH reviews will focus on compliance with IL 372

and the appropriateness of service codes. In addition, the OIG

encourages physician group practices affiliated with teaching

hospitals to examine their own practices under these Medicare

requirements. Interested group practices that choose to par-

ticipate actively in such a process, under a protocol estab-

lished by the OIG, may potentially reduce their legal expo-

sure, if any, under the OIG’s exclusion authorities.

Active participation includes arrangement, at the party’s ex-

pense, for an independent review conducted by a third party,

using the OIG’s review protocol. A prospective party must be

an institution that receives graduate medical education pay-

ments under Medicare Part A. To receive the benefits of ac-

tive participation in a PATH review, a party must adhere to

principles set out in the review protocol, such as the follow-

ing:

* The party will not engage, for the purposes of the

independent review, any individual or entity that

has previously provided advice or consultation to

the party with respect to the matter under review.

* The party will waive any privileges or other rights

to withhold any documents, as requested by the

Government and relating to the review, including

documents otherwise protected by the attorney-

client privilege and the work product doctrine.

* The Government will receive all draft reports of the

independent review concurrently with the party, and

the party will afford the Government the opportu-

nity to be present for any discussions with the re-

viewer relating to the review.

7a

* The party understands that the Government reserves

the right to conduct its own review, of any scope,

during the pendency of the review process, and to

refer matters when appropriate to other Federal

authorities such as the Depa: tment of Justice.

The OIG will give favorable treatment, to the degree permit-

ted by law, to the party’s bona fide participation and coopera-

tion under the protocol. Favorable treatment may include:

* generally crediting the independent reviewer’s rea-

sonable and verifiable damages estimate for the

purposes of determining overpayment,

* according substantial weight to the level of partici-

pation and cooperation in determining whether to

exclude the party under the OIG’s exclusion

* making the party’s level of participation and coop-

eration known to other Federal officials in the event

that the OIG’s statutory obligations require referral

to the matter under review.

We are writing to inform you about our activities under

PATH because some of your members may be interested in

participating and working with us to resolve any issues that

may arise under a PATH review.

The OIG is committed to working with responsible parties to

resolve their liabilities relating to the matters under review, if

any, and to assure future compliance with Medicare laws,

8a

regulations and payment rules. Parties interested in actively

participating in the PATH reviews should contact:

Ms. Ellen Bechkes, Audit Manager

Department of Health and

Human Services

Office of Inspector General

Office of Audit Services

N2-25-26

7500 Security Boulevard

Baltimore, MD 21244-1850

(410) 786-7104

Thank you for your assistance in notifying your members

of our work in this area.

Sincerely,

/s/

June Gibbs Brown

Inspector General

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