Amicus Curiae Brief — Cook County v. United States Ex Rel. Chandler

(| ws w

NO. 01-1572

IN THE

Supreme Court of the United States

Cook COUNTY, ILLINOIS,

Petitioner,

UNITED STATES ex rel. JANET CHANDLER, Ph.D.,

Respondent.

On Writ of Certiorari to the United States

Court of Appeals for the Seventh Circuit

BRIEF FOR COUNTY OF DELAWARE,

PENNYSLVANIA AS AMICUS CURIAE

2 IN SUPPORT OF PETITIONER

Michael P. Dignazio

Assistant Solicitor

Government Center Building

Media, PA 19063

(610) 891-4072

Counsel of Record

Francis X. Crowley

Michael L. Maddren

Blank Rome Comisky &

McCauley, LLP

Rose Tree Corporate Center,

Building No. 1

1400 N. Providence Road,

Suite 301

Post Office Box 1210

Media, PA 19063

(610) 891-7800

SL aE

ST IVES BURRUPS/APPELLATE DIVISION, 1617 JFK BOULEVARD, PHILA, PA 19103 (215) 563-9000

15

A

TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTEREST OF THE COUNTY OF DELAWARE,

PENNSYLVANIA

SUMMARY OF ARGUMENT

ARGUMENT

I. THE FALSE CLAIMS ACT PROVIDES FOR

PUNITIVE DAMAGES

II. THE FALSE CLAIMS ACT IS PUNITIVE IN

NATURE BECAUSE THE UNITED STATES

HAS ALTERNATIVE MEANS TO DETECT AND

RECOUP LOSSES

CONCLUSION

TABLE OF AUTHORITIES

Cases: Page

BMY-Combat Sys. Div. of Harsco Corp. v. U.S., 44 Fed.

Gm.. ee 7

City of Newport v. Fact Concerto, Inc., 453 U.S. 247,

.. „ „%/ U 16

Texas Industries, Inc. v. Radcliffe Materials, Inc., 451

Wa GOR, % h.. ᷑ 3

United States v. Bornstein, 423 U.S. 303 (1976) 6-7, 9

United States v. Cabreru- Diaz, 106 F. Supp. 2d 234

nee. nent 7

United States v. Entin, 750 F. Supp. 512 (S. D. Fla.

i ＋9 Lb. „6„%„ é 7

United States v. Hickman County, No. 1:97-0086 (M.D.

venm. Basch GB, BOGE)... + cccsescteeueeeue 13

United States v. Pani, 717 F. Supp. 1013 (S. D. N. V.

191. 7

United States ex rel. Chandler v. Hektoen Institute for

Med. Res., 35 F.Supp. 2d 1078 (N.D. III. 1999).. 12

United States ex rel. Dunleavy v. County of Delaware,

123 F.3d 734 (3d. Cir. 1997)................ 4-6

United States ex rel. Dunleavy v. County of Delaware,

279 F. ad 219 (3d. Cir. 200 2))))) 1

United States ex rel. Graber v. City of New York, 8

F.Supp. 2d 343 (S.D.N.Y. 1998) ............ 8-9, 14

United States ex rel. Honeywell v. San Francisco

Housing Authority, 2002 W.L. 793300 (N.D. Cal.

ph. 15

United States ex rel. King v. Jackson County Hospital

Corporation, 2001 U.S. Dist. Lexis 21708 14

ll

TABLE OF AUTHORITIES — (Continued)

Cases: Page

United States ex rel. Kinney v. Hennepin County

Med. Cent., 2001 WL 930780 (D. Minn. Jan. 22,

eee ̃è ..... ee eee 14

Vermont Agency of Natural Resources v. United States

ex rel. Stevens, 529 U.S. 765 (2000) .......... 3, 7, 9

Statutes and Other Authorities:

5 U.S.C. App 3 581-12 (2002 . 10-11

CC a 1, 3,7

„„ „„ 6

31 U.S.C. 7801-7560ꝶ/· cece 9

, . 9, 10

31 U.S.C. 87504%hĩG ůũryr ee ee error tery 10

, cceeees 13

D 14

D ͥ 15

, 12. 15

D 15

24 C. F. R. $570.900-906 ů . „„ 12

24 C.F-R. 6870. 910-91ũ ss cee ee eee 12

24 CFR. 8068.806233 eee eee 15

, O . 14

D . 14

„„ „„ 14

,, 14

, ˙⁰ eccecens 13

ll

TABLE OF AUTHORITIES — (Continued)

Statutes and Other Authorities: Page

. . 13

r . 13

ene ee eee 12, 14

1 cdacceenaencosbans 12

ITN 6 6 0 800086066 6045600040600 12-13

Legislative History:

Act of October 12, 1978, Pub. L. No. 95-452 1978

U.S.C.C.A.N. (92 Stat. 110177). 11

iv

INTEREST OF THE COUNTY OF DELAWARE

PENNSYLVANIA

The issue before this Honorable Court is whether local

governmental entities are immune from liability under the

False Claims Act, 31 U.S.C. § 3729 et seg. (the “Act”), since

the Act is punitive. The same issue was seminal in United

States ex rel. Dunleavy v. County of Delaware, 279 F.3d 219

(3rd Cir. 2002) (“Dunleavy 2”), in which the Third Circuit

ruled that local governments are immune from damages

under the Act. Relator in that matter has petitioned this

Honorable Court for a writ of certiorari to the Third Circuit

Even absent the propinquity because of the Dunleavy

matter, however, the County of Delaware (the “County”)

would nonetheless have a significant interest in the matter

sub judice, as it is a local government entity that receives

funds from the federal government under various federal

programs and, as such, periodically issues requests for

payment and makes reports to federal government agencies

that may constitute claims as defined by the Act.

2

SUMMARY OF ARGUMENT

The County respectfully submits this brief in support of

Cook County’s argument that because the Act is punitive,

local government entities are immune from liability there-

under, as it contains no clear expression of Congressional

intent to impose liability thereupon.

a. As demonstrated in the Dunleavy case, a relator may

maintain a case under the Act in which the federal

government declines to intervene, but then resolves the

underlying issue with the defendant. Thus, in spite of the

fact that the federal government has resolved to its

satisfaction the issue giving rise to the alleged false claim

by accepting from the grantee what the government

considers to be payment in full, the relator may continue

to prosecute the action. This is particularly punitive in light

of rulings that when determining damages under the Act,

the amount of the alleged claim is trebled before any credit

is assessed for amounts paid as the result of such a

settlement. Since the government is compensated for any

harm resulting from the alleged false claim by way of the

settlement, any additional damages against the alleged

claimant are punitive in nature.

b. Application of the False Claims Act against local

governmental agencies is not necessary to protect the

federal government from alleged fraud by local govern-

mental entities. Rather, there are many alternative means

by which the federal government can protect the public

treasury from fraud by local governments that do not

include the in terrorem threat of punitive damages,

including but not limited to, a panoply of common law

remedies, audits of grantees under various regulatory

previous, and independent audits required under the Single

Audit Act (the “Audit Act”). Regulatory audit provisions are

generally coupled with a wide array of remedies and

sanctions. There has been no showing that fraud by local

governments is rampant or that the alternative means for

3

discovering and remedying any fraud that occurs are

ineffective. As alternative means exist which permit

discovery and recovery of fraudulently usurped federal

funds, the Act, which permits damages up to three times

that amount, plus a civil money penalty, is punitive.

ARGUMENT

I. THE FALSE CLAIMS ACT PROVIDES FOR

PUNITIVE DAMAGES

There can be no doubt that the treble damages imposed

by the Act are punitive. This Court already has so held. See

Vermont Agency of Natural Resources v. United States ex rel.

Stevens, 529 U.S. 765, 784-785 (2000). The holding in

Stevens was consistent with prior decisions of this Court

addressing treble damage provisions. See, eg., Texas

Industries, Inc. v, Radcliffe Materials, Inc., 451 U.S. 630,

639 (1981) (holding that treble damage provision of Clayton

Act is punitive). Delaware County’s experience demon-

strates vividly the punitive nature of the Act.

Under the False Claims Act, “any person who...

knowingly makes, uses or causes to be made or used, a false

record or statement to get a false or fraudulent claim or

approved by the Government is liable to the United

States Government for a civil penalty of not less than $5,000

and not more than $10,000, plus three times the amount of

damages which the Government sustains because of the act

of that person ... 31 U.S.C. S 3729(a) (emphasis added). In

Dunleavy, the federal government and Delaware County

came to a negotiated resolution, allowing the government to

get a full recovery of the amount the County errantly

usurped. Nonetheless, the Third Circuit ruled that

Dunleavy could proceed with his false claims action against

the County.

Dunleavy attempted to state a cause of action under the

Act in connection with the County’s peripheral involvement

in the Pennsylvania Department of Transportation’s

4

(“PennDOT’s”) construction of Route 476 around the

western perimeter of Philadelphia. In the late 1970's, the

County acquired, via condemnation, a 56.6 acre tract of land

adjacent to Smedley Park in Nether Providence Township,

Pennsylvania (the “Penza Tract”). U.S. ex rel. Dunleavy v.

County of Delaware, 123 F.3d 734, 736 (3rd Cir. 1997)

(“Dunleavy 1”). To acquire the Penza Tract, the County

appropriated approximately $1,839,500 in funds it had

received under the Community Development Block Grant

(“CDBG”) program from the United States Department of

Housing and Urban Development (“HUD”), and approxi-

mately $685,000 of its own funds. Id.

The County originally planned to use the Penza Tract

to expand Smedley Park. However, on January 26, 1979, it

sold 26.3 acres of the Tract to PennDOT for $1,988,550, for

the construction of Route 476. Id. The County later sold an

additional 1.9 acre portion of the Penza Tract to PennDOT

for $103,950. Id. Because the County retained certain rights

to repurchase the properties if the construction of Route 476

-was prevented by pending litigation or community opposi-

tion, the proceeds of both sales were held by the County in a

segregated account. Id. In 1988, the County transferred a

final portion of the Penza Tract to PennDOT for $1,000,000.

Id. The litigation blocking construction was resolved and

Route 476 was then constructed, opening in 1991. Id.

Dunleavy, who was the County’s consultant for HUD

grant programs during the years in question, (but whose

contract was terminated by the County in 1992), filed suit

under the Act on November 18, 1994. Dunleavy alleged that

the County failed to report the proceeds from sales of the

portions of the Penza Tract to HUD as program income, and

to use the proceeds for CDBG purposes allegedly as required

by the contractual agreement and grant program through

which the funds were acquired from HUD. Id. at 137.

HUD made an independent investigation of the Penza

Tract Fund in 1996. Id. As a result, it demanded repayment

of approximately $1,900,000 by the County. Id. After

5

negotiation, and over Dunleavy’s protest, HUD settled the

matter with the County for $1,921,699. Jd. HUD then

returned the money to the County’s line-of-credit, making it

available for eligible uses. Id.

In spite of the settlement between the County and

HUD, and although it was not an issue raised on appeal

by the parties, the Third Circuit held that the relator

could proceed with his False Claims action against the

County. Id. at 739. After discussing whether the federal

government intended its settlement with the County to

satisfy the underlying claim or to address an entirely

separate transgression, the Third Circuit went on to state as

follows:

we need not decide whether the settlement terminated

the government’s rights against Delaware County

under the Act, because Dunleavy’s right to proceed

with his qui tam action remains unimpaired. Subsection

(5) preserves a relator’s right to a percentage of the

recovery even when the government chooses to pursue

its claim administratively. Because the government

never exercised its rights to intervene, the settlement

between HUD and Delaware County does not negate

Dunleavy’s ability, as the relator, to proceed indepen-

dently with his qui tam action.

6

Id.“ Thus, in spite of the federal government’s recovery of its

loss, and its satisfaction with that recovery, the Third

Circuit’s decision allows the relator to continue to prosecute

his action under the Act, and to obtain damages as provided

therein.

The method in which damages are calculated in the face

of a credit there against being due to the defendant

emphasizes the punitive nature of the Act. The issue of

how to apply credits against false claims damages was

addressed by the Court in U.S. v. Bornstein, 423 U.S. 303

(1976). In that case, a subcontractor shipped falsely labeled

electron tubes to the prime contractor that did not meet the

specifications for the project in question. Id. at 307. The

prime contractor then incorporated the tubes into radios

produced for the federal government, and requested

payment as though it employed the proper tubes. See Id.

After the fraud was discovered, the federal government

recovered a portion of the costs of the radios from the prime

contractor. Id. The government then brought suit under the

Act against the subcontractor. Jd. at 308. One issue in that

suit was whether the credit against the government’s

damages resulting from its recovery from the prime

1. “Subsection (c)(5)” refers to 31 U.S.C. 3730(c)(5), which reads as

follows:

|Nlotwithstanding subsection (b), the Government may elect to

pursue its claim through any alternative remedy available to the

Government, including any administrative proceeding to determine a

civil money penalty. If any such alternate remedy is pursued in

another proceeding, the person initiating the action shall have the

same rights in such proceeding as such person would have had if the

action had continued under this section. Any finding of fact or

conclusion of law made in such other proceeding that has become

final shall be conclusive on all parties to an action under this section.

For purposes of the preceding sentence, a finding or conclusion is

final if it has been finally determined on appeal to the appropriate

court of the United States, if all time for filing such an appeal with

respect to the finding or conclusion has expired, or if the finding or

conclusion is not subject to judicial review.

7

contractor should be applied before or after the damages

were doubled.” The Court concluded that the purpose of the

Act was best served if the damages were doubled before the

credit was applied for several reasons. Jd. at 311-12. First,

double damages were necessary to completely compensate

the Government for the costs, delays and incenvenience

caused by the fraudulent claims. Id. at 312. That statement

rang particularly true under the version of the Act then in

existence, as the relator was at that time entitled to up to

fifty percent (50%) of the recovery; now, with treble

damages, and the Relator entitled to no more than thirty

percent (30%) of the proceeds, that rationale no longer

applies. Second, the Court feared that fixing damages

against a defendant based upon the actions of a third party

would cause disparate results across cases. Jd. For example,

one subcontractor should not be entitled to a windfall as

compared to another simply because the first prime

contractor was willing to compensate the government for

its loss and the second prime contractor was not. Id. Finally,

the Court did not want to provide a defendant with a way to

avoid double damages by simply tendering the amount of

actual damage before judgment. /d.

Courts have applied Bornstein mechanically, in spite of

the increase in the False Claims multiplier as a result of the

1986 amendment te the Act. See e.g., U.S. v. Cabrera-Diaz,

106 F. Supp. 2d 234, 241 (D.P.R. 2000); BMY-Combat Sys.

Div. of Harsco Corp. v. U.S., 44 Fed. Cl. 141, 150 (1999); U.S.

v. Entin, 750 F. Supp. 512, 519-20 (S.D. Fla. 1990); U.S. v.

Pani, 717 F. Supp. 1013, 1017, 1019 (S.D.N.Y. 1989). This

Court has recognized that the increase from double to treble

damages rendered invalid this Court’s prior suggestion in

Bornstein that the Act was compensatory, and has declared

the treble damage provision of the Act to thus be punitive

rather than compensatory in nature. See Vermont Agency of

Natural Resources v. U.S., 529 U.S. at 785-86. The trebling

2. Prior to the 1986 amendment, the Act provided for double, rather

than treble damages. See 31 U.S.C. § 3729(a).

8

of damages in the original amount in spite of a settlement

between the government and the claimant, provides further

evidence of the Act’s punitive nature.

Moreover, the Court’s concern in Bornstein that a guilty

defendant could avoid liability simply by tendering an

amount prior to trial is not applicable to Dunleavy. In the

case of Delaware County, the United States conducted an

audit and determined the amount it believed was owed by

the County. After further communication, the United States

and the County determined the amount which they

respectively agreed would make the government whole,

and the government accepted that payment in full

satisfaction of its audit findings. The concern raised in

Bornstein ignored the fact that a settlement would not be

effective unless the government exercised its discretion to

accept payment from the defendant in resolution of the

issue. Unlike the defendant in Bornstein, the County was

not receiving the benefit of a payment made by a third party.

Allowing the relator to proceed for treble damages when the

Government already has accepted and received what it

considers itself to be due, only highlights and exacerbates

the punitive nature of the Act.

II. THE FALSE CLAIMS ACT IS PUNITIVE IN

NATURE BECAUSE THE UNITED STATES HAS

ALTERNATIVE MEANS TO DETECT AND

RECOUP LOSSES.

The Act does not provide the exclusive, or even a

necessary, means for the federal government to recoup

losses incurred because of allegedly fraudulent claims by

municipal entities. There has been no showing that fraud by

local governmental entities is rampant or that alternative

means of discovering such alleged fraud are insufficient or

ineffective. Indeed, although tue Act was passed in 1863,

there were no reported decisions attempting to impose

liability on local governmental entities until the decision in

United States ex rel. Graber v. City of New York, 8 F. Supp.

—=> x

9

2d 343 (S.D.N.Y. 1998). Although Dunleavy and other cases

were filed in the mid-1990’s, the County is not aware of any

False Claims Act cases being filed against local govern-

mental agencies substantially before that time. Moreover,

the number of cases alleging local governmental false claims

is miniscule compared with the overall number of False

Claims Act cases filed and in light of the billions of dollars

disbursed by the federal government to thousands of

municipalities and other local governments annually.

As the Court has stated, the Act “was enacted in 1863

with the principal goal of stopping the massive frauds

perpetrated by large [private] contractors during the Civil

War.” Stevens, 529 U.S. at 781, citing, United States v.

Bornstein, 423 U.S. at 309. However, when addressing the

ability of the federal government to detect fraud in grant

programs by local governments, it is important to note that

in addition to the other investigative tools available to the

federal government for all grantees, local governments are

also subject to an additional layer of scrutiny that does not

apply in the governmental contractor context. All state

governments, local governments and non-profit organiza-

tions (“Non-federal Entities”) that receive $300,000 in

awards from the federal government in a fiscal year are

also subject to the Audit Act. See generally 31 U.S.C.

§$§ 7501-7507. Pursuant to the Audit Act, each such entity

must undergo either a single audit, as set forth in the Audit

Act, or a program specific audit, each fiscal year. 31 U.S.C.

§ 7502(a)(1)(A).* Auditors are required to report the results

of audits made pursuant to the Audit Act, and any federal

agency which provides an award to a Non-federal Entity is

required to review that entity’s audit. 31 U.S.C.

§ 7502(f)(1)(B), (g)(1). The reports generated by the auditors

are submitted to a clearinghouse and made available to the

3. Non-federal entities that receive awards under multiple programs

must undergo a single audit. 31 U.S.C. § 7502(a)1)(B). Non-federal

entities that receive awards under a single program may elect either a

program-specific audit or a single audit.

10

public. 31 U.S.C. § 7502(h). The Director of the Office of

Management and Budget and the clearinghouse are also

responsible for reviewing audits submitted by Non-federal

Entities that receive awards from multiple federal agencies.

See 31 U.S.C. § 7504(b).

In those instances where there may be fraudulent or

false claims, common law remedies are available to the

federal government to recover usurped amounts. The most

obvious action would be for breach of contract resulting

from the grantee’s failure to abide by the terms of the grant

agreement. Actions for fraud or unjust enrichment, among

others, also would be available to the federal government,

depending upon the specific facts, or other contract (such as

the Annual Contributions Contract between HUD and each

public housing authority) governing the receipt, use of and

reporting for federal grants.

In addition to the common law remedies, there is an

entire regulatory scheme that has been established to

govern the policing of federal grants to grantees. The

Inspector General Act of 1978, 5 U.S.C. App. 3 §§ 1-12

(2002) (the “IGA”) and the regulations of the various

executive departments and agencies, each provide sufficient

means for the discovery and recovery of funds fraudulently

usurped from the government. The discrepancy between the

amount recoverable via the Act and that recoverable via the

IGA and the various administrative audit provisions further

evidences the punitive intent of the Act.

In enacting the IGA, Congress stated that among the

purposes of the Offices of Inspector General is prevention

and detection of fraud and abuse in the programs and

operations of the various executive agencies. See 5 U.S.C.

App. 3 § 2(2) (2002). The Inspectors General are to conduct

audits and reviews to prevent fraud in federal programs. See

5 U.S.C. App. 3 § 2(1) (2002). To the extent any program

regulations are insufficient for the discovery and prevention

of fraud, the Inspectors General have a duty to inform the

heads of their respective agencies and Congress, and to

11

make recommendations for corrections. See 5 U.S.C. App. 3

$$ 2(3), 4(a)(5) (2002). The legislative history of the IGA

recognizes the effective role Inspectors General and similar

auditors have played in uncovering grantee problems and

makes it clear that Congress desired that the position

created thereunder be charged with discovery and recovery

of grantee fraud:

In testimony supporting H.R. 8588 and an appropriate

balance between audit and investigative responsibil-

ities, the General Accounting Office endorsed each of

the auditing provisions proposed by the committee, and

recommended that the title of Inspector General be

_amplified to reflect the importance of the audit

function. The Comptroller General testified that ‘the

name of the organizations established by the bill will set

the tone for how they operate,’ and suggested a title

such as inspector and auditor general. The GAO also

stated its finding that ‘internal auditors nearly always

pay their own way many times over by performing audit

work that leads to: recovery of overpayments from

grantees and contractors, adoption of more efficient and

economical ways of conducting agency operations, and

tightening of controls over cash and other assets to

make fraud and abuse more difficult.’ The irony of

inadequate attention to proper auditing by many

program officials is underscored by GAO’s estimate

that audit-related savings run into many billions even

though agencies do not always take full advantage of

internal auditors’ work.

Act of October 12, 1978, Pub. L. No. 95-452, 1978

U.S.C.C.A.N. (92 Stat. 1101) 2676, 2685-86.

Agencies that are susceptible to False Claims also have

promulgated audit and reporting regulations that provide

sufficient means to discover and prevent fraud in their

réspective programs. As stated above, in the Dunleavy

matter HUD actually exercised its audit prerogative, and as

a result was able to obtain a $1,921,699 settlement with the

12

County. Among the provisions available to HUD to audit

and recover funds dispersed under the Community Block

Development Grant program are 24 C.F.R. § 85.42

(requiring grant recipients to provide access to records to

the Comptroller General and HUD representatives),

§§ 570.900-.906 (requiring HUD to conduct reviews of

grantee performance on an annual or more frequent basis)

and §§ 570.910-.913 (governing the sanctions available to

HUD to remedy grantee non-compliance).

A survey of some of the cases filed against local

governments under the False Claims Act shows that for

each program under which false claims were allegedly made,

federal regulations similarly provide adequate provisions for

the detection and recovery of fraudulently usurped funds,

which regulatory audits and investigations would have been

available to the government had it chosen to utilize these

methods in those cases.

In the matter sub judice, Relator attempts to state a

cause of action under the Act for fraud in connection with a

grant from the National Institute of Drug Abuse (“NIDA”).

See U.S. ex rel Chandler v. Hektoen Institute for Med. Res.,

35 F. Supp. 2d 1078, 1079-80 (N. D. Ill. 1999) (“Chandler 1”).

Part 92 of Title 45 of the C.F.R. sets forth uniform

administrative requirements for HHS grants to local

governments. See 45 C. F. R. § 92.1.

Cook County and Cook County Memorial Hospital, the

latter of which was the recipient of the NIDA grant, are local

governments as defined under Part 92. See 45 C.F.R. § 92.3.

See also Chandler 1 at 1086 (stating that Cook County

Hospital does not have a separate legal existence from Cook

County). The regulations in Sections 92.40 through 92.44

set forth a series of reporting requirements imposed upon

local government grantees, including but not limited to,

annual (and, in some instances, quarterly) performance

reports and periodic financial statements, whose frequency

is to be determined by HHS depending on the program. See,

e. g., 45 C. F. R. § 92.40, § 92.41. Section 92.42 requires

13

grantees to retain records and provide access to same to

HHS and the Comptroller General. See 45 C.F.R. § 92.42.

Finally, section 92.43 sets forth remedies to the federal

government if a grantee fails to comply with any term of an

award. See 45 C.F.R. § 92.43. Those remedies include

withholding payment to a grantee, disallowing credit for the

cost of a non-complying activity, terminating the grantee’s

award, withholding further awards, suspension and debar-

ment from participation in federal programs, and any other

remedies available at law. Id.

U.S. v. Hickman County arose from the federal

government’s allegation that Hickman County received

disaster funds under the 42 U.S.C. § 5121, et seq. (the

“Stafford Act”), to repair flood damaged bridges from the

Federal Emergency Management Agency, but did not spend

the funds on any of the bridges for which relief was sought.

U.S. v. Hickman County, no. 1:97-0086 at 3 (M.D. Tenn.

March 29, 2001). Hickman County was declared a disaster

area by President Clinton. Id.

Pursuant to 44 C.F.R. § 206.16(a)*, the Associate

Director or Regional Director of FEMA:

shall conduct audits and investigations as necessary to

assure compliance with the Stafford Act, and in

connection therewith may question such persons as

may be necessary to carry out such audits and

investigations.

Under section 206.16(b), auditors may also access books and

records of any person relating to any activity undertaken or

funded pursuant to the Stafford Act. 44 C.F.R. § 206.16(b).

Section 206.14 provides for a fine for misuse of Stafford Act

funds equal to one and one-half times the misapplied

amount, plus a civil penalty of up to $5,000 for each

violation of the Stafford Act. See 44 C. F. R. § 206. 1400 and

4. Title 44, Part 206, subpart A of the Code of Federal Regulations

governs grants made pursuant to a declaration by the President of a

major disaster or emergency. See 44 C.F.R. § 206.1.

14

(d). That section also preserves the federal government’s

right to initiate a civil action for violations of the Stafford

Act. See 44 C.F.R. § 206.14(b).

In U.S. ex rel. Kinney v. Hennepin County Med. Cent.,

2001 WL 930780 (D. Minn. Jan. 22, 2001) the relator alleged

that the medical center submitted false statements seeking

reimbursement related to ambulance transportation from

Medicare and Medicaid. Jd. at *1. Similarly, in U.S. ex rel.

King v. Jackson County Hospital Corporation, 2001 U.S.

Dist. Lexis 21706, the relator alleged that defendants

submitted or conspired to submit false Medicare and

Medicaid claims, submitted duplicate claims and altered

claim documents. Id. at 4.

Title 42 of the C.F.R. sets forth several provisions for

the detection of such alleged violations of the Medicare and

Medicaid programs. See 42 C.F.R. § 1004.30 (requiring that

Peer Review Organizations report violators to the HHS

Office of Inspector General). See also 42 C.F.R. § 447.202

(requiring state Medicaid agencies to assure appropriate

audits of provider records for payments based on costs of

services or fee plus cost of materials bases). Additionally,

Parts 1003 and 402 provide for civil money penalties,

assessments and exclusions from federal programs for

violations of the Medicaid and Medicare provisions of the

Social Security Act. See 42 C.F.R. §§ 402.1, et seq., 1003.100,

et seq.

In U.S. ex rel. Graber v. City of New York, 8 F. Supp. 2d

343 (S.D.N.Y. 1998), relator alleged that the City submitted

false statements to obtain federal incentive funding and

reimbursement for foster care expenditures. Id. at 344. As

set forth above, Part 92 of Title 45 of the C.F.R. sets forth

uniform administrative requirements for HHS grants to

local governments. See 45 C.F.R. § 92.1. Foster care

reimbursement is made through grants, in this case grants

to the City. See 42 U.S.C. § 670, et seq. Therefore, the same

requirements and remedies described in the above discus-

15

sion of the matter sub judice are applicable in the New York

City matter as well.

In U.S. ex rel. Honeywell v. San Francisco Housing

Authority, 2001 WL 793300 (N.D. Cal. July 12, 2001), arose

out of a contract dispute between Honeywell, Inc.

(“Honeywell”) and the San Francisco Housing Authority

(“SFHA”). Id. at *1. SFHA received funds from HUD for

utility consumption. Id. To encourage energy conservation,

SFHA and other public housing authorities (“PHAs”) were

permitted to freeze their consumption funding for a period

of time. Jd. Under HUD regulations, PHAs were permitted

to retain fifty percent (50%) of the savings achieved through

energy saving improvements, and were required to remit

the remainder to the contractor making the improvements.

Id.

PHA grantees are subject to both energy and financial

audits. Energy audits must be completed at least once every

five years, and must list all conservation measures and

indicate the payback period for such measures. 24 C.F.R.

§ 965.302. 24 C.F.R. § 85.26. Grantees are required to retain

records for a period of at least three years for the purpose of

audits and litigation. 24 C. F. R. § 85.42. The regulations set

forth remedies for failure to comply with the terms of an

award, statute or regulation which include: withhold of cash

payments pending remedy of a violation; disallowance of a

non-complying activity; suspension or termination from the

program; withholding of future awards from the program;

debarment or suspension; or any other remedy available at

law. 24 C.F.R. § 85.43.

As each of the above cases illustrates, administrative

regulations provide federal agencies with the ability to audit

grantees and recover any improperly usurped funds.

However, none of the remedies set forth in such regulations

are as drastic as the treble damage provisions of the Act.

Because the administrative agencies have deemed the

regulatory provisions to be sufficient means to recoup losses

of program funds, more drastic False Claim remedies extend

16

beyond mere compensation and are punitive. While punitive

sanctions against private entities may be permissible, the

longstanding precedents of this Court prohibit such

sanctions against local governmental entities absent the

express intent of Congress to the contrary. See City of

Newport v. Fact Concerts, Inc., 453 U.S. 247, 262-263 (1981).

17

CONCLUSION

The treble damage provision of the Act, coupled with

the availability to federal entities of less harsh remedies,

provide clear evidence of the Act’s punitive intent. Relators

are permitted to proceed with qui tam actions in spite of

settlement of the underlying dispute between the federal

government and the defendant. The punitive effect of the

Act is emphasized by the fact that damages under the Act

are trebled before any credit for such a settlement is

calculated.

Moreover, subjecting local government entities to False

Claims Act liability, in addition to contravening the common

law immunity against punitive damages, is not necessary to

enable the United States to discover and rectify false claims

by local governmental agencies. Rather, there are well

developed statutory, regulatory and common law remedies

available to insure that the government has the means to

protect the federal treasury from any alleged false claims by

local governmental entities.

Respectfully submitted,

MICHAEL P. DIGNAZIO FRANCIS X. CROWLEY

Counsel of Record MICHAEL L. MADDREN

Assistant Solicitor Blank Rome Comisky &

County of Delaware McCauley, LLP

Government Center Building 1400 North Providence Road,

Media, PA 19063 Suite 301

(610) 891-4072 Post Office Box 1210

Media, PA 19063

(610) 891-7800