Ex-Employee’s Threat to Bring Qui Tam Is Extortion, According to California Appeals Court

Posted by Jaime Jones and Nicole Brown

Recently, the California Court of Appeals held that an individual who threatens a whistleblower action in an attempt to drive a settlement of unrelated employment claims may be held liable for extortion. Stenehjem v. Sareen, No. H038324 (Cal. Ct. App. Jun. 13, 2014). The matter resolved a counterclaim against Jerry Stenehjem, who had sued his former employer, Akon, Inc., and Surya Sareen, Akon’s CEO, for defamation and wrongful termination. Prior to trial of those claims, Stenehjem and his attorney made several unsuccessful attempts to initiate settlement discussions with Akon and Sareen. The last of these attempts was an e-mail from Stenehjem to Sareen’s attorney, extending “one last opportunity to settle,” which Stenehjem suggested would trigger “the Qui Tam option,” if rejected.

In response to Stenehjem’s e-mail, which included several other inflammatory statements and accusations of fraudulent business practices, Sareen countersued Stenehjem for extortion. Stenehjem moved to strike Sareen’s counterclaim under California’s anti-SLAPP statute, a law permitting dismissal of lawsuits that seek to chill or punish a party’s constitutional free speech. The trial court granted Stenehjem’s motion to strike, and Sareen appealed, claiming that Stenehjem’s e-mail was not protected by the anti-SLAPP statute because it was extortion.

The Court of Appeals agreed that Stenehjem’s threat to alert federal authorities to the alleged fraud and FCA exposure met the legal definition of extortion. Notably, the court held that the veracity of the allegations in Stenehjem’s e-mail was irrelevant to deciding this question. More importantly, the court held that Stenehjem’s statements could not be considered pre-litigation communications, protected under the anti-SLAPP statute, because the “qui tam action was entirely unrelated to any alleged injury suffered by Stenehjem as alleged in his demotion and wrongful termination claims.” Thus, the court signaled that in the future similar statements may be treated differently if there is an established nexus between the pending litigation and threatened FCA suit. Nonetheless, FCA defendants will be sure to focus on the outcome in this case and consider such counterclaims where appropriate.

Decision Recognizes Expanded Implied Certification Theory Under California False Claims Act

Posted by Kimberly Dunne and Brent Nichols

A recent decision by the California Court of Appeal could significantly expand liability for government contactors under the California False Claims Act (“CFCA”). See San Francisco Unified School Dist. ex rel Contreras v. First Student, Inc., No. A136986, Cal. Court. App. (1st Dist. Mar. 11, 2014). In Contreras, the Court held that a “vendor impliedly certifies compliance with express contractual requirements when it bills a public agency for providing goods or services,” even when the vendor has not expressly represented that it is in contractual compliance. Under the rule articulated in Contreras, once a relator has established a false implied certification, he or she need only show that the false certification was “material” to the government’s payment decision and that the defendant acted with scienter (i.e., knowledge or reckless disregard). This decision represents a substantial departure from jurisprudence holding that a breach of contract in and of itself does not give rise to liability under the federal FCA.

In Contreras, a school district contracted with First Student to provide transportation services. The contract required First Student to use school buses that were in “excellent” condition and complied with federal and state safety regulations, and to conduct regular maintenance inspections in accordance with government regulations. Relators alleged that defendant violated these contractual terms by using buses with low tire treads and worn brake lines, and by failing to perform the required inspections. Over the course of several years, First Student submitted monthly invoices, but notably these invoices did not expressly certify compliance with contractual terms. The school district eventually became aware of some maintenance problems, but ultimately renewed its contract with First Student and the State did not intervene in the suit. The trial court granted First Student’s motion for summary judgment, finding that there was no triable issue as to materiality because the district was aware of the issues and still renewed its contract.

The Court of Appeal reversed. After making clear that CFCA should be given “the broadest possible construction,” the Court found that each of First Student’s invoices impliedly certified compliance with contractual terms and that the non-compliance was material because the “alleged falsities were material as a matter of common sense.” The Court rejected defendant’s argument that the invoices could not be material because the district renewed its contract with First Student after learning of the issues. Instead, the Court’s materiality analysis “focused on the potential effect of the false statement when made, not on the actual effect of the false statement when discovered.” Here, even though the district paid First Student’s invoices and renewed its contract, the Court found there was a factual dispute as to whether the implied false certifications—at the time they were made—would have had a “natural tendency” to influence the district’s payment decision.

Overall, this decision blurs the line between breach of contract and CFCA liability, and suggests that a mere knowing breach of a material contractual term may form the basis of a CFCA claim.