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

[9 ) Supreme Cotvi, US.

VY FILED

Nov

NO. 01-1572 GOGt 4 272

— CLERK

SUPREME COURT OF THE UNITED STATES

COOK COUNTY, ILLINOIS,

Petitioner,

v.

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 OF K & R LIMITED PARTNERSHIP,

ANTHONY J. DUNLEAVY, AND JOHN A. KING, D.O.,

AS AMICI CURIAE IN SUPPORT OF RESPONDENT

JANET CHANDLER, Ph.D.

CARL A. S. COAN, Ii REGINA D. POSERINA

Counsel of Record 7415 West Chester

Coan & Lyons Pike

1100 Connecticut Avenue, N.W. Upper Darby, PA 19082

Washington, DC 20036 Attorney for Anthony J.

(202) 728-1070 Dunleavy

Attorney for K&R

Limited Partnership

MIKE BOTHWELL

G. MARK SIMPSON

Bothwell /Simpson, P.C.

304 Macy Drive

Roswell, GA 30076

(770) 643-1606

Attorneys for John A. King, D.O.

BEST AVAILABLE COPY |-amams

TABLE OF CONTENTS

TABLE OF AUTHORITIEG..............:cssssssecssssessssesesesess ill

INTERESTS OF THE AMICI CURIAE..........::0ccccceceeeeseneees ]

SUMMARY OF ARGUMENT..............:00ceeeeeeeees socuvenanses 3

ARGUMENT

I. CONGRESS INTENDED THE FALSE

CLAIMS ACT TO BE USED AGAINST

LOCAL GOVERNMENTS, AS THE ACT

IS THE ONLY EFFECTIVE MEANS

AVAILABLE TO PURSUE FALSE

CLAIMS AND FRAUD BY

A. CONGRESS INTENDED THE

TERM ‘PERSON’ TO INCLUDE

MUNICIPAL CORPORATIONS. ...........2++ S

B. IN 1986, CONGRESS ALTERED THE

REMEDY OF THE FALSE CLAIMS

ACT WITHOUT EXCLUDING ANY

CLASS OF LIABLE “PERSONS.” ............. 7

C. THE FALSE CLAIMS ACT IS THE

ONLY EFFECTIVE MEANS FOR

DEALING WITH FRAUDS BY

MUNICIPAL CORPORATIONS UPON

THE FEDERAL GOVERNMENT........... 9

a. No Effective Alternate Means

b. Alternative Remedies Do Not

CONCLUSION

Provide Protections to

Whistleblowers.......................000

SEETHER EHH

TABLE OF AUTHORITIES

Cases:

Childree v. UAP/GA AG Chem., Inc.,

92 F.3d 1140 (11thCir. 1996)...................

Dixson v. United States

465 U.S. 482 (1984) ......ccccccccccceceeceeeseeee «

Dookeran v. Mercy Hospital of

Pittsburgh, et al.,

281 F.3d 105 (3d Cir. 2002)..................06008

Eberhardt v. Integrated Design & Constr.,Inc.,

167 F.3d 861(4th Cir. 1999)..................6068

Hutchins v. Wilentz,

253 F.3d 176 (3d Cir. 2001)........cccccccceeeees

McKenzie v. BellSouth Telecomm., Inc.,

219 F.3d 508 (6th Cir. 2000)............ccccc00e.

United States ex rel. Chandler v.

Cook County, Illinois,

277 F.3d 969 (7th Cir. 2002)................cc008

United States ex rel. Dunleavy v.

The County of Delaware, et al

wees 6

123 F.3d 734 (3d Cir. 1997)............cc.cceeeeeeees ~9, 16

United States ex rel. Dunleavy v.

The County of Delaware, et al.,

279 F.3d 219 (SdCir. 2002)..........cccccceeeeees

soneen 2

Cases: Page

United States ex rel. Giles v. Sardie,

2000 U.S. Dist. LEXIS 21068

C.D. Cal. Dualy Fi, BEBE. cccccccsccccvecccccsccccscscesesces 14

United States ex rel. Hickman County, Tennessee,

United States Court of Appeals

for the Sixth Circuit, No. 01-568.....................4. 14

United States ex rel. Honeywell v.

San Francisco Housing Auth et al

2001 U.S. Dist. LEXIS 9743

(N.D. Cal. July 12, 2001)..............ccccccceceeeeceeeees 14

United States ex rel. Hopper v. Anton,

91 F.3d 1261 (9th Cir. 1996)............... ccc cee eee es 19

United States ex rel. K&R Limited

Partnership v. Massachusetts

Housing Finance Agercy,

54 F. Supp. 2d 19 (D.D.C. 2001).................cceee 1

United States ex rel. Thomas E. Kalkhof

v. County Commissioners Association

of Pennsylvania, et al,

U.S. District Court for the W.D. of PA,

United States e rel. King v. Jackson

County Memorial Hospital,

2001 U.S. Dist. LEXIS 21706

(N.D. Fla., August 17, 2001)...................ccceesees 2

U.S. ex rel. LaValley v. First Nat.

Bank of Boston,

707 F. Supp. 1351 (D. Mass. 1988)........... .. ~§

Cases:

United States ex rel. Marcus v. Hess,

i

United States ex rel. Giles v. Sardie,

2000 U.S. Dist. LEXIS 21068

14 F.3d 645 (D.C.Cir. 1994)........ccccccccccceeeeceeeeene

United States ex rel Yesudian v. Howard Univ.,

153 F.3d 731 (D.C. Cir. 1998)..............cccceceeeees

United States v. Krizek,

111 F.3d 934 (D.C. Cir. 1997)......ccccccccceceeseeee

United States v. Neifert-White Co.,

Vermont Agency of Natural Resources

v. United States ex rel Stevens,

SP CE. BB BEI ceccsenscesssasssnsecccssscccssesesnssesesseses

Si UBC. § STSORD) ~2200000ccccccccccccsccccccccccsessscceeees

BE WI, BSG ccccssasscsscccstsersescecccesssssessscevecece

wee lB

14

19

16

u

Legislative History, Treatises and Other Sources:

Ss Sa SP Goi ccnessccccnspanscescesccncennsnsssensescant

S. Rep. No. 99-345, reprinted in

1986 U.S.C.C.A.N. 5266 (1986)..............00+00+-.--Passim

John T. Boese: Civil False Claims and

James B. Helmer, Jr., False Claims Act:

Office of Management and Budget, Budget for

Fiscal Year 2002, Historical Tables, Table 12.1......... 6

Office of Management and Budget, Budget for

Fiscal Year 2002, Historical Tables, Table 16.1.........11

l

K & R _ Limited Partnership (K&R) is a

Massachusetts limited partnership that is the relator in

a qui tam action filed in the United States District Court

for the District of Columbia against the Massachusetts

Housing Finance Agency (MHFA), a non-State, quasi-

governmental entity. This case is currently pending

before the United States Court of Appeals for the District

of Columbia Circuit on an interlocutory appeal by MHFA

pursuant to 28 U.S.C. § 1292(b).2

The primary issue on MHFA’s interlocutory appeal

is whether a non-State governmental entity is subject to

liability under the False Claims Act (FCA). Therefore, if

the decision below is sustained, MHFA’s interlocutory

appeal will necessarily be denied.

K&R, along with all other relators, seeks to protect

the public fisc by ensuring that, when non-State

governmental entities misuse a portion of the billions of

dollars they receive annually from the Federal

Government in violation of the FCA, such entities are

subject to the remedies imposed by the FCA.

Accordingly, K&R has a vital interest in seeking

affirmance of the decision below.

The parties have consented to the filing of this brief and the

consents were filed with the Clerk of the Court contemporaneously

with the filing of this brief. In accordance with Rule 37.6 of this

Court, amici curiae K&R, Dunleavy, and King state that their counsel

as specified herein authored this brief in whole and no person or

entity, other than K&R, Dunleavy, and King, made a monetary

contribution to the preparation or submission of the brief.

2 The district court decision is reported at 54 F. Supp. 2d 19

(D.D.C. 2001).

2

Anthony J. Dunleavy is an adult individual and

resident of the Commonwealth of Pennsylvania. Mr.

Dunleavy is a relator in a qui tamaction captioned United

States ex rel. Anthony J. Dunleavy v. The County of

Delaware, et al., currently before this Honorable Court on

Petition for Writ of Certiorari from the United States

Court of Appeals for the Third Circuit In Mr.

Dunleavy’s case, the Third Circuit improperly concluded

that Delaware County, a local county of the

Commonwealth of Pennsylvania and a municipal

corporation, was not subject to liability under the False

Claims Act, without ever conducting the requisite

statutory inquiry into whom Congress intended to

encompass within the statutory term “person” in the Act.

This Court’s affirmance of the decision below would

remand Mr. Dunleavy’s case against Delaware County to

the Third Circuit. Mr. Dunleavy’s interest lies in

ensuring that those who defraud the Federal

Government are subject to the remedies created by

Congress; and that whistleblowers are protected in their

efforts to defend the Federal Fisc.

John A. King, D.O., is an adult individual and a

resident of the State of Texas. Dr. King is the relator in a

qui tam case currently pending in the United States

Court of Appeals for the Eleventh Circuit, styled United

States ex rel. John A. King, D.O. v. Jackson County

Hospital Corporation* The district court dismissed Dr.

King’s complaint against Jackson County Hospital

Corporation, holding that local government entities, as

well as state agencies, are not “persons” subject to FCA

liability. The Eleventh Circuit has stayed the appeal

3 The Third Circuit’s Opinion is found at 2/9 F.3d 219

(3dCir. 2002).

* The district court's decision is found at 2001 U.S. Dist.

LEXIS 21706 (N.D. Fla., August 17, 2001).

3

pending this Court’s ruling in this case. An affirmance

in this case would require the Eleventh Circuit to

consider the hospital’s alternative argument - that it is

actually a “state agency” rather than a local government

entity - an issue that was not expressly decided by the

district court. As with the other relators, Dr. King has a

direct personal interest in the resolution of this case, as

well as an interest in ensuring that local government

entities are held accountable for defrauding Federal

taxpayers.

In 1863, Congress created the False Claims Act,

and made all “persons” subject to its provisions. In

1863, the term “person” included all local governmental

entities, such as municipal corporations ®

The lack of published opinions with local

governmental entities as defendants prior to the 1986

Amendments is inconsequential, as there were few

published opinions of any sort before these

Amendments were enacted. Congress amended the

False Claims Act in 1986 to encourage those with

knowledge of fraud upon the Federal government to

come forward. “Persons” liable under the FCA has

always included local governmental entities.

In 1986, Congress amended the False Claims Act.

These amendments strengthened the qui tam provisions

5The terms “municipal corporations” and “local governmental

entities” are used interchangeably in this brief to include all units of

local government.

4

Congress intended all “persons,” including local

governmental entities, to be subject to the Act and

liable for its remedy of treble damages.

The False Claims Act is the only effective means of

protecting the Federal Treasury from fraud by local

governmental entities. Congress determined that the

False Claims Act was the preferred method for policing

fraud upon the Federal Government. In 1986, Congress

increased the protections offered to whistleblowers in

order to encourage fraud reporting. Congress specifically

created employment protections for relators, and made

public sector employers liable for their actions against

their employees. This action is further evidence that

Congress intended local governments to be “persons”

under the FCA.

Audits, Inspector General reports, and common

law causes of action do not provide any incentives for

whistleblowers to come forward, and provide no

employment protections for relators. The only way to

police fraud, and assure enforcement, is to enforce an

effective False Claims Act against local governmental

entities.

5

ARGUMENT -

I. CONGRESS INTENDED THE FALSE CLAIMS

ACT TO BE USED AGAINST LOCAL

GOVERNMENTS, AS THE ACT IS THE ONLY

EFFECTIVE MEANS AVAILABLE TO PURSUE

FALSE CLAIMS AND FRAUD BY THESE

ENTITIES.

A. -~CONGRESS INTENDED THE TERM

‘PERSON’ TO INCLUDE MUNICIPAL

CORPORATIONS.

When Congress created the False Claims Act in

1863, it made all “persons” subject to the Act’s liability

provisions. In 1863, as is discussed more fully in

Respondent Janet Chandler’s brief, and in the brief of

amici Taxpayers Against Fraud, Congress clearly

understood municipal corporations to be “persons”

subject to liability under the Act. Although the primary

reason for adopting the FCA was a desire to stop massive

frauds against the Union Army, the Act was broadly

drafted so as to apply to all frauds against the Federal

Government. See John T. Boese: Civil False Claims and

Qui Tam Actions, 1-4, 1-11 (2d ed. 2002).

The argument that municipal corporations and

local governmental entities must not have been persons

under the FCA because there were no published opinions

before the 1960s is without support. Although there

were some cases under the FCA involving municipal

corporations as defendants before 1986, there were no

published opinions in these cases. In fact, there were

few published opinions at all before 1986, because the

FCA was not widely utilized before the 1986

Amendments. See Boese, supra, at 1-3; United States

ex rel. Springfield Terminal Rwy. v. Quinn, 14 F.3d 645,

649-51 (D.C.Cir. 1994), U.S. ex rel. LaValley v. First Nat.

6

Bank of Boston, 707 F. Supp. 1351, 1354 (D. Mass.

1988).

Moreover, the 1943 amendments to the FCA led to

decreased use of the FCA by providing that prior

knowledge by the Government of the allegations in a

complaint was an absolute bar to jurisdiction over qui

tam suits. This Government knowledge bar made it

extremely difficult to successfully prosecute an FCA

action, and consequently led to decreased use of the qui

tam provisions of the FCA. Boese, supra, at 1-14.

Indeed, it was primarily to counter the effects of the

1943 Amendments that Congress overhauled the FCA in

1986, in an attempt to encourage the filing of qui tam

suits. Thus, it is unsurprising that there are few

reported FCA cases prior to 1986. The argument that

municipal corporations are not persons under the FCA

because there are no published opinions before the

1960s is misplaced.

The 1960s saw increased Federal spending on a

variety of programs, much of it going to State and local

governments. This spending has continued to increase

in subsequent decades. See Dixson v. United States, 465

U.S. 482, 507 (1984) (O’Connor, J., dissenting) (noting

that grants to State and local governments were $7

billion, or 7% of the budget, in 1962, and that this figure

increased to $90 billion, or 10% of the budget, by 1984);

See also Office of Management and Budget, Budget for

Fiscal Year 2002, Historical Tables, Table 12.1

(projecting that grants to state and local governments

will exceed 18% of total federal outlays by 2003). This

increased spending expanded the pool of potential

defendants under the FCA, as the Government spent its

funds on a varied array of goods, services, and

assistance. The expanded role of Federal funding in

local governmental functions has produced an increased

need for the False Claims Act. The FCA is the only

7

effective tool for stopping fraud upon the Federal

Government by municipal corporations.

B. IN 1986, CONGRESS ALTERED THE

REMEDY OF THE FALSE CLAIMS ACT

WITHOUT EXCLUDING ANY CLASS OF

LIABLE “PERSONS.”

Both the House and Senate Reports on the bills

that became the 1986 Amendments note that the

purpose of the Amendments was “to enhance the

Government’s ability to recover losses sustained as a

result of fraud against the Government.” S.Rep. No. 99-

345, at 1 (1986) reprinted in 1986 U.S.C.C.A.N. 5266

(hereinafter “S. Rep.”); See alsoH.Rep. No. 99-660 at 16

(1986). Congress noted that, “in the face of

sophisticated and widespread fraud, the (Senate)

Committee believes only a coordinated effort of both the

Government and the citizenry will decrease this wave of

defrauding public funds.” S.Rep. at 2, reprintedin 1986

U.S.C.C.A.N. 5267.

The FCA is intended to reach “all fraudulent

attempts to cause the Government to pay out sums of

money or to deliver property or services.” S.Rep. at 9,

reprinted in 1986 U.S.C.C.A.N. 5274; See also United

States v. Neifert-White Co., 390 U.S. 228, 232 (1968) (“the

Act was intended to reach all types of fraud, without

qualification, that might result in financial loss to the

Government”). However, the drafters of the 1986

Amendments were aware that the Act’s remedy, double

damages plus a $2,000 penalty, had not been altered in

123 years. Therefore, in keeping with the need to

recover the Government’s losses, and to account for the

effects of inflation, the House and Senate adopted treble

damages plus a $5,000 to $10,000 penalty per false

claim. S.Rep. at 17, reprinted in 1986 U.S.C.C.A.N.

5282.

In enacting the 1986 Amendments, which were

designed to increase the effectiveness of the FCA,

Congress manifestly did not intend to remove any class

of potential defendants from the scope of the Act.

Indeed, this Court acknowledged in Vermont Agency of

Natural Resources v. United States ex rel. Stevens, 529

U.S. 765, 783 n. 12 (2000), that the term “person”

“remained in the statute unchanged since 1863.” All

“persons” - including municipal corporations - are,

therefore, now subject to the Act’s treble damages

remedy, including non-State governmental entities. This

is consistent with this Court’s finding in Stevens that ,

“the presumption with regard to corporations is just the

opposite of the one governing here: they are

presumptively covered by the term ‘person,’see 1 U.S.C.

§ 1.” Stevens, 529 U.S. at 782.

With the 1986 Amendments to the FCA, and the

expanded protections for qui tam whisileblowers, the

Gove:nment has seen an increase in the number of filed

cases, and increased recoveries for the Federal Treasury.

This is precisely the result intended by Congress.

S.Rep. at 23-24, reprintedin 1986 U.S.C.C.A.N. 5288-89

(“The Committee's overall intent in amending the qui tam

section of the False Claims Act is to encourage more

private enforcement suits.”). Clearly, Congress intended

all “persons” subject to the FCA, including local

governmental entities, to be liable for its remedy of

treble damages.

9

Cc. THE FALSE CLAIMS ACT IS THE ONLY

EFFECTIVE MEANS FOR DEALING

WITH FRAUDS BY MUNICIPAL

CORPORATIONS UPON THE FEDERAL

GOVERNMENT.

Congress and courts have long acknowledged that

the False Claims Act is the Federal Government’s most

effective means of policing fraud, since it provides unique

incentives for enlisting the aid of whistleblowers who

have knowledge of the fraud. As Congress recognized in

1986, “[djetecting fraud is usually very difficult without

the cooperation of individuals who are either close

observers or otherwise involved in the fraudulent

activity.” S.Rep. at 4, reprinted in 1986 U.S.C.C.A.N.

5269.

Non-State governmental entities receive billions of

dollars each year from the Federal Government. For

example, in its amicus brief in this case, the City of New

York acknowledged that it “annually receives billions of

dollars in federal funds either directly from the United

States or through the State for numerous essential

municipal services and programs.” Brief Amici Curiae,

City of New York, et al, filed September 9, 2002,2. In

addition, the City of Milwaukee, Wisconsin,

acknowledged that it received “approximately $50.6

million in federal dollars to either spend or administer

primarily for Community Development Block Grants and

for public health and law enforcement purposes.” Id. at

3.

The main argument cited by these non-State

governmental entities for not subjecting them to liability

under the FCA is that an award of treble damages will

“harm local taxpayers,” “harm the beneficiaries of

essential local services,” and subject them to “massive

punitive remedies of treble damages plus penalties.” Id.

10

at 2-3. © However, this argument ignores the adverse

effects that false claims by local governmental entities

have on Federal taxpayers. In addition, adopting this

argument essentially grants a license to non-State

governmental entities to commit fraud against the

Federal Government with impunity.

As Benjamin Franklin once stated, “[t/here is no

kind of dishonesty into which otherwise good people

more easily and frequently fall than that of defrauding

the Government.” James B. Helmer, Jr., False Claims

Act: Whistleblower Litigation (3% ed. 2002), p. xa. As

local governments and government-owned corporations

increasingly seek to participate in the growing market for

federal funds, it is to be expected that such entities will

succumb to the same temptations afflicting their private

counterparts. Although local government entities might

be subsidized by local taxes, a dollar received from the

Federal Government (and paid by taxpayers throughout

the country) is a dollar that does not have to be raised

through local taxation. In that the FCA is a federal

statute, seeking to protect federal taxpayers, it is

extremely unlikely that Congress, whether in 1863 or in

1986, would have intended to give local governments any

more leeway than private corporations to defraud federal

taxpayers.

© Delaware County also argues in its amicus brief that the

False Claims Act is punitive as applied to them because the Third

Circuit allowed Mr. Dunleavy to proceed with his cause of action

regardless of any audit resolutions with HUD. See Brief, at page 5.

However, the language cited by Delaware County from United States

ex rel. Dunleavy v. The County of Delaware, et al., 123 F.3d 734

(3dCir. 1997) (“Dunleavy I”), has been essentially overruled in

Stevens, where this Court ruled that a relator only has rights as a

partial assignee of the Government, and has no standing to assert

the injury in fact separate from the Government. Stevens, 529 U.S.

at 773.

1]

As is demonstrated by the increasing number of

qui tam cases being filed against local governmental

entities, fraud by these entities against the Federal

Government is on the rise, and becoming more

sophisticated. This is understandable, since local

governmental entities are increasingly providing the

types of services that might otherwise be provided by

traditional private corporations, and are competing with

such private corporations for federal tax dollars. For

instance, in Dr. King’s case, the defendant is a county

hospital corporation authorized by state statute to

provide hospital services to residents of the county. As

with private hospitals, the county hospital charges for its

services, and seeks reimbursement from Medicare and

Medicaid for eligible patients. Except for the fact that it

is created by legislative act, and is partially subsidized by

local public funds, the hospital differs little from a

private, non-profit corporation.

It should be noted that total federal spending on

health care alone, primarily consisting of Medicare and

Medicaid, amounted to $389 billion in 2000, or 21.7% of

total federal outlays, and that this amount is projected to

increase substantially. Office of Management and

Budget, Budget for Fiscal Year 2002, Historical Tables,

Table 16.1. Given that public hospitals like Jackson

County Hospital Corporation compete on an even basis

with private hospitals for this enormous amount of

federal funds, it defies imagination to suspect that

Congress intended to immunize such entities from FCA

liability.

Although it is difficult to quantify the exact

amount of fraud committed by local governmental

entities, a brief look at many of the cases involving such

entities is illustrative of the nature of the problem. In its

case, K& R Limited Partnership has alleged that when

MHFA, the non-State, quasi-governmental defendant

entity therein, refunded older, higher-interest-rate bonds

12

with new, lower-interest-rate bonds in 1993, the

assistance provided by HUD to MHFA pursuant to HUD’s

Section 236 Program should have been reduced.

However, MHFA has, in violation of the FCA, continued

to this day to request and receive the same amount of

assistance that MHFA was receiving prior to the

refunding of the aforementioned bonds at a lower

interest rate. The amount of the alleged false claims in

this case exceeds $20 million.

In Mr. Dunleavy’s case he alleges that Delaware

County failed to report to the Department of Housing

and Urban Development (“HUD”) its retention of HUD

Community Development Block Grant funds in the

amount of almost $6 million in principal and interest.”

Instead, Delaware County routinely used this account as

a slush fund, to cover general budgetary shortfalls,

depleting principal and interest funds that belonged to

the Federal Government. Instead of HUD funds going to

assist low- and moderate-income persons with jobs or

housing, they went to pay for Delaware County’s salary

overruns and miscellaneous overhead, an illegal use of

Federal funds.

In Dr. King’s case, he alleges that Jackson County

Hospital Corporation wrongly billed the Government for

medical costs in numerous ways. For instance, he

alleges that the defendant improperly billed for items of

durable medical equipment (DME) without a required

7Delaware County alleges in its amicus brief that it is being

unfairly punished, as it paid funds to the Federal Government in an

audit, and now is still liable under the FCA. See Brief, at 4-6. As

Delaware County is well aware, the audit resolution between the

County and HUD was judicially determined by the district court not

to be an “alternate remedy” under the FCA. Delaware County’s

argument that it will be liable for damages “calculated in the face of

a credit” is illogical, as the audit resolution was judicially determined

to be unrelated to the FCA action. Therefore, Delaware County’s

arguments are misleading and deceptive.

-

-

13

DME provider number; falsified time records in

connection with billing for operating nurse services;

submitted false billings in connection with anesthesia

services; and improperly provided discounts to Medicare

and Medicaid patients.

In United States ex rel. Thomas E. Kalkhof v.

County Commissioners Association of Pennsylvania, et al.,

U.S. District Court for the W.D. of PA., No. 01-93E, it is

alleged that each of twenty (20) Defendant counties in

Pennsylvania defrauded the Federal Government by

misappropriating federal Medicaid funds intended for

low-income nursing home patients. This fraud occurred

when the counties claimed, through deceptive and

fraudulent documentation they knew or should have

know would be utilized by the State for federal

submission, that they were receiving Stafe and federal

Medicaid money to be used for enhancing covered

medical services for low-income persons in order to

qualify for federal matching funds. In fact, these counties

were not enhancing covered medical services for low-

income persons with the money, and any such

certifications were false. In all cases, the lion's share of

the federal Medicaid funds were actually wire transferred

back to the State and used for non-Medicaid allowable

expenses, or uses entirely unrelated to the enhancement

of Medicaid health care for which they were to be limited.

Mr. Kalkhof’s efforts brought about an audit by both the

Office of the Inspector General and the General

Accounting Office, which concluded that similar fraud

schemes were occurring in fourteen other states .

Congress has subsequently mandated regulatory

changes through the Department of Health and Human

Services’ Centers for Medicare and Medicaid Services.

The total amount of Medicaid money obtained by

Pennsylvania and its counties alone for just the past 3

years through use of the fraudulent and deceptive claims

is in excess of $ 968.6 million. This federal money was

14

either used for non-Medicaid health and welfare

programs or remains unbudgeted for other uses.

In United States ex rel. Hickman County,

Tennessee, currently on appeal in the Sixth Circuit (No.

01-5680), Hickman County was declared eligible for

Federal Emergency Management Agency (FEMA) funds

after severe flooding in 1991. In order to qualify for

sufficient funds to rebuild every bridge in its county,

Hickman County intentionally destroyed at least six

bridges which were less than 50% damaged by flood in

order to qualify to rebuild, instead of repair, all bridges

in the county.

In United States ex rel. Giles v. Sardie, 2000 U.S.

Dist. LEXIS 21068 (C.D.Cal. July 27, 2000), the relator

has alleged that the City of Los Angeles misstated and

overinflated costs related to highway repairs to FEMA

after the Northridge earthquake. In United States ex rel.

Honeywell v. San Francisco Housing Auth, et al., 2001

U.S. Dist. LEXIS 9743 (N.D. Cal. July 12, 2001),

Honeywell Corporation has alleged that the San

Francisco Housing Authority retained savings in energy

consumputon from HUD, and failed to pass some of these

savings through to Honeywell, as Federal regulations

required.

There are more cases reported, unreported, or still

under seal. But whether there are ten, or one hundred,

the reality is the same: non-State governmental entities

are capable of, and are in fact, perpetrating fraud upon

Federal programs in increasing numbers. When

Congress provides funds to local governmental entities

(e.g., through block grants), or allows such entities to

compete on an equal basis with private corporations for

such funds (e.g., through Medicare reimbursement), it

does so with the expectation that the funds provided will

be used for proper purposes. The Federal funds received

by such entities are not raised from the local taxpayers,

15

but are instead raised from taxpayers throughout the

nation.

Without the FCA, there is no mechanism in place

to stop this sophisticated fraud, and return stolen

Federal funds to the Federal Government. Without the

FCA, these non-State governmental entities are given

free license to steal from the Federal Treasury.

Nothing in the FCA suggests that Congress

intended its provisions to apply only when the

Government lacks alternate means to combat fraud. To

the contrary, the FCA explicitly provides that “the

Government may elect to pursue its claim through any

alternate remedy available to the Government, including

any administrative proceeding to determine a civil money

penalty,” and provides that a relator retains his rights in

any such proceeding. 31 U.S.C. § 3730(b)(5). Thus, it is

plain that Congress intended for the FCA to be a remedy

available to the Government, regardless of the

availability of any other remedies. The assertions by

amici that alternate remedies are available to deal with

fraud by local governments is completely irrelevant to a

determination of whether such entities are persons

subject to FCA liability.

Moreover, alternate means for dealing with frauds

against the Federal Goverr:ment lack the effectiveness

and protections of the FCA. For those reasons,

Congress, in its wisdom, chose the FCA as its primary

means of fighting fraud against the Federal Government.

While Delaware County, the Petitioner, and its amici, are

entitled to their opinion that alternate means exist to

police fraud by local governments, that opinion is

16

entitled to no weight. Congress itself has declared the

FCA as the preferred, and most effective, means of

policing fraud by local governmental! entities.

The Single Audit Act audit, mentioned by

Delaware County in its brief, is an audit performed by

the grantee of its use of Federal funds. See Brief of

Delaware County, 9. As the Third Circuit noted in

Dunleavy I, such reports or audits lack trustworthiness

when

the party accused of defrauding the federal

government is in control of most of the sources of

information that would effectively reveal the

wrongdoing. This information dynamic was, in

large part, a motivating factor behind the 1986

Amendments. Congress emphasized its belief

that ‘detecting fraud is usually very difficult

without the cooperation of individuals who are

either close observers or otherwise involved in the

fraudulent activity.’ S.Rep. 99-345, 99th Cong.

2d Sess. 4, reprinted in 1986 U.S.C.C.A.N. 5269.

Additionally, the Reporting Committee perceived

the existence of ‘a conspiracy of silence’ to

defraud the federal government. id. At 6,

reprinted in 1986 U.S.C.C.A.N. at 5271.

Id. at 745. Accordingly, audits or other reports prepared

solely by the local governmental entity accused of fraud

have no guarantee of accuracy or trustworthiness, and

therefore cannot replace an effective False Claims Act.

Common law causes of action, such as fraud, are

no substitute for an FCA claim. Among other things, the

elements of the claims are different, since fraud requires

a showing of intent, and an FCA claim only requires a

showing of a reckless indifference. See United States v.

Krizek, 111 F.3d 934, 942 (D.C. Cir. 1997) (noting that

“reckless disregard in [the FCA] context is not a lesser

17

form of intent,’ but an extreme version of ordinary

negligence”). Moreover, relators have no standing to

bring common law claims for fraud on behalf of the

Federal Government, or against the local government,

although they do have Article III standing under the FCA.

The qui tam section of the FCA allows private attorneys

general to pursue false claims even if the Government

cannot adequately investigate them due to its limited

resources. No common law cause of action provides this

benefit.

While each Federal agency has its own Office of

Inspector General, the IG alone cannot discover fraud

when it is hidden by sophisticated means. None of the

cases cited above was found first by an IG, although the

IG may have subsequently been involved. The IG cannot

detect frauds that are known to whistleblowers, without

the relator’s assistance and support. While IG offices

play an important role in monitoring federal agencies to

ensure that federal funds are spent properly, they do not

have the resources needed to detect the ever increasing

fraud perpetrated on the Federal Government by local

governments. Without whistleblowers, as contemplated

by the FCA, IG offices cannot hope to detect all the fraud

committed by local governments. See S.Rep. at 4,

reprinted in 1986 U.S.C.C.A.N. 5269 (“With the inception

of Inspectors General, an increased number of fraud

allegations are being addressed. However, available

Department of Justice records show most fraud referrals

remain unprosecuted and lost public funds, therefore,

remain uncollected.”)

The Senate Report on the 1986 Amendments

noted that audits alone are insufficient to weed out

fraud. One relator told the Committee that “notice of an

impending audit normally travels through the contractor

plant ‘like wildfire’ and ‘everyone straightens up their

act’.... all departments were put on fed alert’ when

auditors came through.” S.Rep. at 6, reprinted in 1986

18

U.S.C.C.A.N. 5271. Without whistleblowers, IG offices

cannot alone find all the fraud hidden by local

governments. While IG offices play an important role in

monitoring federal agencies, they cannot replace an

effective False Claims Act.

b. Alternative Remedies Do Not

Provide Protections to

Whistleblowers

The beauty of the FCA is its ability to protect

whistleblowers while encouraging them to come forward

with their knowledge of frauds. Common law claims,

audits, IG investigations, or other alternatives provide no

protections to a whistleblower, and offer no incentives for

potential whistleblowers to reveal their knowledge of

fraud, which was the single most important goal of

Congress in enacting the 1986 Amendments. See S.

Rep. at 2, reprintedin 1986 U.S.C.C.A.N. 5267. (“In the

face of sophisticated and widespread fraud, the

Committee believes only a coordinated effort of both the

Government and the citizenry will decrease this wave of

defrauding public funds.”); id. at 23-24, reprinted in

1986 U.S.C.C.A.N. 5288-89 (“The Committee’s overall

intent in amending the qui tam section of the False

Claims Act is to encourage more private enforcement

suits.”). As this Court noted, “one of the least expensive

and most effective means of preventing frauds on the

Treasury is to make the perpetrators of them liable to

actions by private persons acting...under the strong

stimulus of personal ill will or the hope of gain.” United

States ex rel. Marcus v. Hess, 317 U.S. 537, 541 n. 5

(1943).

The FCA also provides employment protection to

relators:

Any employee who is discharged, demoted,

suspended, threatened, harassed, or in any other

19

manner discriminated against in the terms and

conditions of employment by his employer

because of lawful acts done by the employee on

behalf of the employee or others in furtherance of

an action under this. section, including

investigation for, initiation of, testimony for, or

assistance in an action filed or to be filed under

this section, shall be entitled to all relief

necessary to make the employee whole.

31 U.S.C. §3730(h). No audit, common law cause of

action, or IG review provides the protections afforded a

whistleblower by the FCA. These protections were

enacted by Congress to encourage those with knowledge

of fraud to come forward.

To receive protection under §3730(h), a plaintiff

must show that there is a distinct possibility that a

viable False Claims Act cause of action would be filed.

See Dookeran v. Mercy Hospital of Pittsburgh, et al., 281

F.3d 105, 108 (3d Cir. 2002); accord McKenzie v.

BellSouth Telecomm. Inc., 219 F.3d 508, 516 (6th Cir.

2000); Eberhardt v. Integrated Design & Constr.,Inc, 167

F.3d 861, 867 (4th Cir. 1999); United States ex rel.

Yesudian v. Howard Univ., 153 F.3d 731, 741 (D.C. Cir.

1998); United States ex rel. Hopper v. Anton, 91 F.3d

1261, 1269 (9th Cir.1996); Childree v. UAP/GA AG

Chem., Inc., 92 F.3d 1140, 1146 (llth Cir. 1996).

Without a viable FCA cause of action, potential

whistleblowers would receive no employment

protections. Without employment protections, local

government employee whistleblowers will not come

forward to reveal fraud. Congress created these

protections to encourage fraud reporting. These

protections are necessary to reveal fraud by local

governmental entities.

As the Seventh Circuit noted in United States ex

rel. Chandler v. Cook County, Illinois,277 F.3d 969, 975

20

(7thCir. 2002, the § 3730(h) protections extend to public

sector employees, indicating that Congress intended

public sector employers to be potential defendants under

the Act:

Unless municipalities are subject to suit under

the FCA, Congress would have no reason to be

concerned that municipalities might retaliate

against their employees for bringing FCA claims.

Given that states are excluded from the definition

of ‘person’ within the FCA, the only public entities

remaining are municipal corporations and other

political subdivisions of states which are not arms

or agencies of state government.

Section 3730(h) even protects employees who are

investigating a potential fraud, indicating “Congress'

intent to protect employees while they are collecting

information abor't a possible fraud, before they have put

all the pieces 0’ ne puzzle together.” Yesudian, supra,

at 740. The combined safeguards afforded whistleblowers

under §3730(h) offer protections to local governmental

employees that audits, IG reports, or common law

remedies cannot provide.

Congress created the False Claims Act with a

purpose "to encourage any individuals knowing of

Government fraud to bring that information forward." S.

Rep. at 4, reprinted in 1986 U.S.C.C.A.N. 5266-67.

"Few individuals will expose fraud if they fear their

disclosures will lead to harassment, demotion, loss of

employment or any cther form of retaliation.” Hutchins

uv. Wilentz, 253 F.3d 176, 186 (3dCir. 2001), citing S.Rep.

No. 99-345. No alternate means exists to protect

whistleblowers while pursuing fraud. Accordingly, the

whistleblower protections accorded to employees of local

governments by the FCA is a further indication that

Congress intended that local governmental entities be

subject to liability under the FCA.

21

CONCLUSION

Local governmental entities are increasingly

perpetrating sophisticated frauds upon the Federal

Government. The False Claims Act was created by

Congress, and amended in 1986, to encourage those

with knowledge of fraud upon the Government to come

forward. Congress intended municipal corporations to

be “persons” subject to the FCA and to be liable for its

remedy of treble damages.

No other remedy exists to discover and prosecute

fraud and false claims by local governmental entities. No

other remedy offers the protections to whistleblowers

contained in the False Claims Act. The False Claims Act

is the only effective means of recouping funds wrongfully

obtained by local governmental entities from the Federal

Government.

Relators K&R Limited Partnership, Anthony J.

Dunleavy, and John King, D.O., respectfully request that

this Honorable Court uphold the decision of the Seventh

Circuit in Chandler.

22

Respectfully submitted,

CARL A. S. COAN, III

Counsel of Record

Coan & Lyons

1100 Connecticut Avenue, N.W.

Suite 1000

Washington, DC 20036

(202) 728-1070

Attorney foi K&R

Limited Partnership

MIKE BOTHWELL

G. MARK SIMPSON <

Bothwell/Simpson, P.C.

304 Macy Drive

Roswell, GA 30076

(770) 643-1606

Attorneys for John A. King, D.O.

November 4, 2002

REGINA D. POSERINA

7415 West Chester

Pike

Upper Darby, PA 19082

(610) 352-0760

Attorney for Anthony J.

Dunleavy