Loui Itoh

26 March 2014

Second Circuit Ruling Permits Refiling of World Trade Center Engineer’s Qui Tam Suit

Posted by Kristin Graham Koehler and Loui Itoh

The Second Circuit recently ruled that the Southern District of New York improperly dismissed without prejudice a False Claims Act lawsuit brought by Magdy M. Youssef, against his former employers Tishman Construction Corporation (“Tishman Corp.”) and Turner Corporation (“Turner Corp.”). The ruling clears the way for Youssef to pursue his claims against his former employers in the Eastern District of New York.

In 2010, Youssef, a structural engineer, brought a qui tam suit against Tishman Corp., and Turner Corp., in the Southern District of New York, alleging that they had perpetrated a “fraudulent billing scheme” on construction projects financed by the government, including construction at One World Trade Center. In December 2011, in light of the fact that both the New York Attorney General and the U.S. Attorney’s Office had decided not to intervene, Youssef sought voluntary dismissal of the lawsuit. Relying in large part on a statement in a letter from Youssef’s counsel that Youssef had “decided not to pursue this matter any further,” the Southern District dismissed the action with prejudice as to the claims brought by Youssef, but without prejudice as to the United States and the State of New York.

In August 2012, Youssef learned that the federal government was investigating similar claims against the defendants, and refiled his claim in the Eastern District of New York. He claimed that it was only after re-filing his lawsuit that he learned that the dismissal in the Southern District was with prejudice. Indeed, the dismissal was not entered on the docket until September 18, 2012. After the Southern District denied his request to modify its earlier order to reflect a dismissal without prejudice, Youssef appealed the dismissal order.

On appeal, the Second Circuit vacated the district court’s judgment and remanded the case with instructions to dismiss the action without prejudice. The panel reasoned that in the absence of any indication by the plaintiff, the Federal Rule governing voluntary dismissals presumes that the dismissal sought is without prejudice. The plain language of Federal Rule of Civil Procedure 41(a)(1) states, “[u]nless the notice [of voluntary dismissal] states otherwise, the dismissal is without prejudice.”

Reviewing the letter sent by Youssef’s counsel to the District Court in December 2011, the Second Circuit determined that there was no reason to conclude Youssef was requesting a dismissal with prejudice. Rather, the Second Circuit reasoned that the statement made by Youssef’s counsel that he had “decided not to pursue this matter any further” may “just as well have been indicating an intention simply to stop pressing the complaint . . . for any number of reasons having nothing to do with the merits of the claim.”

After the government declines to intervene in a qui tam action, relators oftentimes will voluntarily dismiss their complaints for pragmatic reasons, having nothing to do with the merits of their claims. This decision illustrates that those dismissals, indeed, are always going to be without prejudice, leaving open the possibility that the claims may be revived at a later date in the either the same or a different forum.

24 April 2013

First Circuit Rejects Potential for Manufactured Public Disclosure; Applies Public Disclosure Bar Based On Disclosures Made by Defendant in Prior Lawsuit

Posted by Gordon Todd and Loui Itoh

On April 12, 2013, the First Circuit in United States ex rel. Estate of Cunningham v. Millennium Labs., No. 12-1258 held that the FCA’s public disclosure bar applies even to disclosures made by the defendant in a prior lawsuit. The Court rejected relator’s contention that applying the bar under these circumstances would permit a defendant to manufacture a public disclosure defense by selectively placing a sanitized version of its story on a public docket.

Relator Estate of Robert Cunningham (“Relator”) filed an FCA suit against Millennium Laboratories of California (“Millennium”) and John Doe physicians (“physicians”) claiming that Millennium had engaged in a fraudulent scheme in which it encouraged physicians to (1) bill the government multiple times for single drug tests; (2) conduct excessive, medically unnecessary initial tests and (3) misrepresent the medical necessity of confirmation testing.

Five days prior to the filing of this suit, Millennium had filed its own complaint against Relator’s former employer, Calloway Laboratories (“Calloway”) in California state court, alleging, inter alia, defamation and intentional interference with contractual relations. Millennium asserted that Calloway employees had sent emails to third parties describing Millennium’s practice of billing insurance companies and the government twice for the same service, and attached these emails to its complaint. In defense of Cunningham’s subsequent suit, Millennium argued that the emails constituted a public disclosure under the FCA. The District Court agreed an dismissed Relator’s complaint for lack of subject matter jurisdiction.

The Court of Appeals reversed in part, remanding for a more parsed analysis of one of Relator’s claims. However, the Court of Appeals largely affirmed, concluding that Relator’s complaint and the disclosures made in the California suit were “substantially similar.” The court explained that, “[w]hile we share Relator’s concern that a person or entity committing fraud against the government could theoretically shield itself from a qui tam action through preemptively filing its own action, thus creating a sanitized public disclosure while barring a future whistleblower action, the Supreme Court has been clear that self-disclosure can bar such suit under the FCA, and it has further characterized concerns about insulation from FCA liability as unwarranted in most cases.” Cunningham at 26 (citing Schindler Elevator Corp. v. United States ex rel. Kirk, 131 S. Ct. 1885, 1895 (2011); Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280 (2010)).

13 March 2013

$5.5 Million New York State Settlement Marks First FCA Tax Recovery

Posted by HL Rogers and Loui Itoh

Although the federal FCA specifically exempts tax fraud, New York is one of over 30 states and four municipalities that have enacted separate FCA laws. These state FCA laws generally follow the federal FCA but vary in certain specifics. For instance, New York’s state FCA law specifically exempted tax fraud, similar to the federal FCA, when it was passed in 2007. However, it was expanded in 2010 by amendments that allowed, among other things, whistleblower claims related to tax fraud. This expanded provision had not been successfully used until this month when New York announced its first FCA tax recovery. The settlement marks the first time that an FCA has been used to penalize tax fraud. Critics and experts will be watching closely to see if this recent recovery will lead to a new national trend.

On March 5, 2013, New York Attorney General Eric T. Schneiderman announced that tailor Mohanbhai “Mohan” Ramchandani and his business corporation, Mohan’s Custom Tailors, Inc., pled guilty to a ten-year tax evasion scheme and agreed to pay a $5.5 million civil settlement for claims filed under New York State’s False Claims Act. The civil claims were first raised by a whistleblower who offered insider information and will receive a $1.1 million award under the New York FCA’s relator award provisions.

The Attorney General’s investigation concluded that since 2002, Mohan and his business had knowingly failed to pay at least $1.7 million in state and local sales taxes, and that Mohan himself owed at least $256,000 in state and local personal income taxes. Mohan confessed to these charges before the New York County Supreme Court, admitting that he and his business had knowingly failed to pay nearly $2 million in taxes. In addition to the civil settlement, Mohan faces up to three years in prison for the felony charges.

Although it specifically exempted tax fraud when it was passed in 2007, New York’s FCA was expanded in 2010 by amendments authored by Attorney General Schneiderman, who was then a state senator. Schneiderman called the newly expanded state FCA, a “False Claims Act on Steroids.” The revised FCA allows a whistleblower to bring a qui tam suit against an individual or business that makes more than $ 1 million net income and defrauds the state by more than $350,000 in taxes. The relator may keep up to 25 to 30 percent of the recovery, depending on whether the government joins the suit. The question remains whether this will become a national trend and another consistent tool in state governments’ arsenals to penalize tax fraud.

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