On July 1, the Supreme Court granted the petition for a writ of certiorari in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, a case which will have significant implications for two key issues under the False Claims Act: statute of limitations and the first-to-file bar. The petition raises two questions. The first is “[w]hether the Wartime Suspension of Limitations Act – a criminal code provision that tolls the statute of limitations for “any offense” involving fraud against the government “[w]hen the United States is at war,” 18 U.S.C. § 3287, and which this Court has instructed must be “narrowly construed” in favor of repose – applies to claims of civil fraud brought by private relators, and is triggered without a formal declaration of war, in a manner that leads to indefinite tolling.” As we have previously written, courts are divided on whether the Wartime Suspension of Limitations Act in effect permanently tolls the statute of limitations on civil FCA claims. Notably, the Supreme Court has agreed to address this question notwithstanding the fact that the Solicitor General opposed the request.
The second, equally important issue raised by the petition is “whether, contrary to the conclusion of numerous courts, the False Claims Act’s so-called “first-to-file” bar, 31 U.S.C. § 3730(b)(5) – which creates a race to the courthouse to reward relators who promptly disclose fraud against the government, while prohibiting repetitive, parasitic claims – functions as a “one case- at-a-time” rule allowing an infinite series of duplicative claims so long as no prior claim is pending at the time of filing.” As we have discussed in previous posts, there is a split among the circuits on this issue, which the Court has now apparently agreed to resolve – again, over the government’s objection.
The case will not be heard until the Court’s 2015 term (starting in October 2014), meaning a decision is unlikely before next year. We will be following the case closely and provide updates on key developments.
Posted by Jonathan Cohn and Brian Morrissey
Last week, the Solicitor General filed an amicus brief urging the Supreme Court to deny certiorari on a case that presents two questions of critical importance to FCA defendants. As previously reported gt;on this blog, the Fourth Circuit in United States ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013), held that the Wartime Suspension of Limitations Act (WLSA), 18 U.S.C. § 3287, tolls the FCA’s statute of limitations for frauds committed against the Federal Government at any time since the Iraq conflict began in 2002 until the Government declares a formal end to that conflict. Separately, the Fourth Circuit held that the FCA’s “first-to-file” rule, 31 U.S.C. § 3730(b)(5), bars a duplicative qui tam suit only while the related, previously-filed suit remains ongoing. Once the first suit is resolved, the new suit may be re-filed, despite its overlap with the first.
Benjamin Carter, a former employee of Kellogg Brown & Root Services (KBR) filed a qui tam action against Halliburton and its subsidiaries, including KBR, alleging that the company submitted false claims for services provided to the U.S. military in Iraq during early 2005. After prior versions were dismissed without prejudice, Carter filed his operative complaint in June 2011. The district court held that Carter’s 2011 complaint was barred by the FCA’s six-year statute of limitations, 31 U.S.C. § 3731(b), and, alternatively, that the complaint was barred by the FCA’s first-to-file rule because Carter’s allegations substantially overlapped with a previously-filed qui tam suit that was pending when Carter filed his 2011 complaint, but dismissed shortly thereafter. The Fourth Circuit reversed on both grounds, concluding that the WLSA tolled the FCA’s statute of limitations on Carter’s claims, and that Carter should have been allowed to proceed on his claims once the prior action had been dismissed. The Halliburton parties now seek certiorari.
The WLSA tolls the statute of limitations for “any offense” involving “fraud” on the Federal Government while the Nation is “at war.” 18 U.S.C. § 3287. The Fourth Circuit held that (1) the Iraq conflict constitutes a “war” under the WLSA; (2) that the WLSA tolls the statute of limitations for civil FCA claims, not just criminal “offenses”; and (3) that the WLSA applies to qui tam actions, even if the Government does not intervene. The Solicitor General argues that all three conclusions are correct. Importantly, the text of the WLSA is not limited to acts of fraud committed by military contractors. Thus, under the Fourth Circuit’s and the Solicitor General’s position, the WLSA arguably tolls the statute of limitations for all FCA claims based on conduct that occurred after 2002, even if the alleged conduct is entirely unrelated to military action (e.g., healthcare or mortgage fraud). As Petitioners argue, if this expansive reading is upheld, the FCA’s “statute of limitations has not even begun to run” on any claim based on conduct occurring after the hostilities in Iraq and Afghanistan began. Pet. for Certiorari at 3.
The Fourth Circuit also held that the FCA’s first-to-file rule bars duplicative qui tam suits only during the period that a related, previously-filed suit remains “pending,” and permits the duplicative suit to go forward once the prior action has been resolved. This deepens a circuit split on this important question: the Seventh and Tenth Circuits join the Fourth; the D.C. Circuit takes the contrary position, holding that the first-to-file rule bars new suits “even if the initial action is no longer pending.” United States ex rel. Shea v. Cellco Partnership, No. 12-7133, 2014 WL 1394687 (D.C. Cir. Apr. 11, 2014). Petitioners count the First, Fifth, and Ninth Circuits as joining the D.C. Circuit, a point the Solicitor General disputes. The Solicitor General strongly endorses the Fourth Circuit’s view, which Petitioners argue will transform the first-to-file rule from a “crucial limitation” on “parasitic” FCA suits into a mere “one-case-at-a-time rule.” Pet. for Certiorari at 24-25.
Petitioners will have the opportunity to reply to the Solicitor General’s brief before the Supreme Court acts on the petition. The Chamber of Commerce and the National Defense Industrial Association previously filed amicus briefs urging the Court to grant certiorari.
Posted by Jaime Jones and Nirav Shah
Today, the Supreme Court denied certiorari in U.S., ex rel. Nathan v. Takeda Pharmaceuticals, et al. As we previously reported, this case involved the pleading requirements for qui tam cases brought under the FCA. Earlier this month, the Solicitor General filed a brief urging the Court not to grant certiorari.
At issue is whether Rule 9(b) requires a complaint to “allege with particularity” that certain claims false claims were submitted for payment. Circuits are split on the issue, with the Fourth, Sixth, Eight, and Eleventh Circuits requiring stricter pleading while the First, Fifth, Seven, and Ninth adopting a more permissive approach. The Court’s denial of certiorari means that the Fourth Circuit’s ruling that the relator’s complaint “failed to plausibly allege that any false claims had been presented to the government for payment” will stand.
Posted by Kristin Graham Koehler and Kristen Mann
In Lawson v. FMR LLC, 571 U.S. ___ (2014), the Supreme Court held that the whistleblower protections in the Sarbanes-Oxley Act of 2002 extend to the employees of a public company’s private contractors and subcontractors. SOX provides that “[n]o [public] company … , or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment” because of whistleblowing activity. 18 U.S.C. § 1514A(a).
The plaintiffs, two former employees of FMR LLC (“FMR”) subsidiaries that provided management and advisory services to publicly traded Fidelity mutual funds, brought suit respectively alleging that their employers retaliated against them for raising concerns about cost accounting methodologies and inaccuracies in a draft SEC registration statement. FMR moved to dismiss the complaints, contending that the plaintiffs were not “employees” within the meaning of § 1514A(a). The district court denied FMR’s motions, concluding in each case that SOX’s whistleblower protections extend to the employees of a public company’s private contractors. On interlocutory appeal, a divided panel of the First Circuit reversed, holding that the retaliation provision’s protections extend only to employees of public companies, but not to the employees of a contractor of a public company.
The Supreme Court reversed the First Circuit’s decision. The Court looked first to the text’s ordinary meaning. It concluded that the operative language of § 1514A “means what it appears to mean”—that a contractor to a public company may not retaliate against its own employee for whistleblowing activity (slip op. 10). The Court found that the provision as a whole confirmed this reading. The Court further concluded that interpreting SOX’s whistleblower protections to apply to the employees of a public company’s private contractors was consistent with the Act’s aim to prevent another Enron scandal. The Court found that the legislative history demonstrated that Congress understood, and was motivated by concern about, the significant role outside professionals (such as accountants) play in reporting fraud by the public companies with whom they contract. In addition, Congress had modeled SOX’s retaliation provision on a retaliation provision from an earlier act that had been interpreted to cover employees of contractors and subcontractors.
The Court’s reading of “employee” potentially exposes public companies to suits brought by their employees’ personal employees (for example, a public company employee’s nanny or a gardener). Although the Court acknowledges that this is a “curious” result (slip op. 15), it dismissed concerns that its decision would open the floodgates for whistleblowing suits. It pointed to the Department of Labor’s longstanding interpretation that § 1514A applies to contracting employees and further noted that FMR could not identify a single case in which a contracting employee had asserted a claim based on allegations unrelated to shareholder fraud. The Court declined, however, to explicitly adopt limiting principles suggested by the plaintiffs and the Solicitor General, leaving the bounds of § 1514A to be determined in a future case.
The opinion can be accessed here. This decision is consistent with how agents and contractors are treated under the False Claims Act, which affords such individuals protection against retaliation. (31 U.S.C. 3730(h)(1) “any employee, contractor, or agent shall be entitled to all relief necessary … if that employee, contractor, or agent is discharged.”)
We previously reported on the Supreme Court’s invitation to the Solicitor General to weigh in on whether the Court should grant certiorari in an important case involving the pleading standards in FCA cases. U.S. ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., et al., Dkt. No. 12-1349 (Oct. 7, 2013). In a recent brief, the Solicitor General argued that since the issue of whether a relator must identify specific false claims in order to meet the pleading requirements of 9(b) is still being considered by various lower courts, the Court should decline to grant certiorari at this time.
The brief sheds light on the government’s view of the overarching role of 9(b) and the FCA. The government’s central position is that adoption of a per se rule that a relator must plead the details of particular false claims—rather than plead allegations supporting a “plausible inference” that false claims were submitted—could undercut the FCA’s role as a fraud-fighting tool. The Solicitor General argued that asking relators to identify specific claims is neither plausible or useful, conceding that many relators may not be aware of specific claims. Rather, the Solicitor General argued, the role of a relator is properly to “bring to light other information that shows those claims to be false.”
Thus, the government’s position appears to be 9(b) should be construed so as to aid the government’s fraud-fighting efforts. This approach is difficult to square with the longstanding view of 9(b) as a means to provide notice to defendants of potential fraud claims and prevent frivolous or vexatious litigation. We will continue to monitor this important case.
Posted by Jaime Jones and Nirav Shah
This week, the Supreme Court invited the Solicitor General to file a brief expressing the views of the United States on the pleading standards in FCA cases. U.S. ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., et al., Dkt. No. 12-1349 (Oct. 7, 2013). This move signals that the Court may soon decide whether to grant certiorari and hear a case that has significant implications for the efforts of the whistleblower bar and federal government to leverage the FCA for billions of dollars in recoveries each year.
In the decision at issue, the Fourth Circuit dismissed a complaint by the qui tam plaintiff for his failure to “allege with particularity that specific false claims were presented to the government for payment,” which the court held was necessary to satisfying the heightened pleading requirements of Rule 9(b). Circuits are split on this issue, with the Sixth, Eight, and Eleventh Circuits adopting the standard articulated by the Fourth Circuit, while the First, Fifth, Seventh, and Ninth Circuits have allowed qui tam claims to survive based only on “reliable indicia that lead to a strong inference that claims were actually submitted.” See, e.g., U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009).
It is unclear for which approach the Solicitor General may advocate. In a case involving similar issues three year ago, the Solicitor General merely noted that the First Circuit’s more-relaxed pleading requirement “deepens an existing circuit conflict.” There, the Solicitor General recommended that the Court answer the fundamental pleading question raised by the Circuit split—albeit not in that particular case. See Ortho Biotech Prods., L.P. v. U.S. ex rel. Duxbury, Dkt. No. 09-654.
Posted by Jonathan Cohn and Benjamin Mundel
On Monday, the United States Supreme Court granted certiorari in Lawson v. FMR LLC, No. 12-3 (certiorari granted May 20, 2013). The issue presented is whether an employee of a privately held contractor or subcontractor of a public company is protected from retaliation by Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A. The statute prohibits retaliation by a public company—or an officer, employee, contractor, subcontractor, or agent of a public company—against “an employee” who reports fraud or a violation of securities regulations. This is an important case that may interpret the scope of Sarbanes-Oxley’s whistleblower protection provisions.
The two plaintiffs, former employees of subsidiaries of publicly traded Fidelity mutual funds, brought suit in federal district court after allegedly suffering adverse employment action as a result of their whistleblowing. The first plaintiff allegedly blew the whistle on the fund for improperly attributing expenses to increase fees. The second plaintiff raised an issue regarding the categorization of a particular fund which he alleged led to the fund improperly charging a management fee. Fidelity filed a motion to dismiss on the grounds that the plaintiffs, who were not employees of a publicly traded company, were not “employees” within the meaning of statute. The district court denied Fidelity’s motion to dismiss. Relying on legislative history, the district court held that the statute protected employees of contractors. Fidelity filed an interlocutory appeal.
The First Circuit reversed in a 2-1 decision, holding that the term “employee” in the statute covers only those at publicly traded companies. The panel refused to grant any deference to the Department of Labor and SEC’s position and instead relied on the title of the statute and caption that reads: “employees of publicly traded companies.”
Before granting certiorari, the Supreme Court first called for the views of the Solicitor General. On behalf of the United States, the Solicitor General asked the court to deny certiorari even though he believed that the First Circuit’s interpretation was erroneous. As to the merits, the Solicitor General argued that the plaintiffs were covered under the plain terms of the act and the legislative history supported a broad reading. Furthermore, the Solicitor General argued that, if the statute were vague, the Department of Labor’s decision in Spinner v. David Landau & Assocs., LLC, ARB Case NOS. 10-111; 10-115 was entitled to Chevron deference. Regardless, the Solicitor General concluded that certiorari was not appropriate at this time because there was no disagreement in the circuits on the question, the issue has arisen infrequently, and no circuit had the opportunity to consider the Department of Labor’s recent Spinner decision.
Nevertheless the Supreme Court granted certiorari and will hear the case next term. This case will likely resolve the disagreement between the First Circuit and the Department of Labor regarding the scope of the term “employee” under Section 806 of the Sarbanes-Oxley Act. If the Supreme Court reverses the First Circuit, there may be increased exposure for companies because employees of privately held companies that contract with public companies will be entitled to whistleblower protections under SOX.
On June 18, the Supreme Court ruled for GlaxoSmithKline that the Fair Labor Standard Act’s outside sales exemption applies to pharmaceutical sales representatives, who are therefore not entitled to overtime wages. Christopher v. SmithKlineBeecham Corp., No. 11-204. In analyzing the issue, both the majority and the dissenting justices determined that the deference generally granted by courts to agency interpretations of ambiguous regulations was not warranted with respect to the Department of Labor’s position set forth in its Amicus Curiae brief. The Court held that the position adopted by the Department in its brief – that a “sale” for purposes of the “outside sales” exemption is only made if the salesman transfers title to the property at issue – was not clearly set forth in the statute or regulations, and had not been previously articulated by the Department. In this connection, the Court noted as conspicuous the absence of any enforcement activity premised on the Department’s reading of the outside sales exemption, and characterized the agency’s position as creating an “unfair surprise” for the industry. The Court recognized that extending deference to agency interpretations of ambiguous regulations “creates a risk that agencies will promulgate vague and open-ended regulations that they can later interpret as they see fit, thereby ‘frustrating the notice and predictability purposes of rulemaking.'”
The Christopher decision thus suggests that courts should decline to extend deference to agency interpretations of vague regulations that may result in significant liability, such as under the FCA, absent evidence that the agency has provided clear guidance consistent with those interpretations in advance of the litigation. Courts frequently are confronted with this issue in FCA cases premised on alleged regulatory violations by defendants in highly regulated industries such as the healthcare industry, and we expect defendants in those cases to rely on the decision to push back on attempts by the government to advance for the first time in litigation interpretations of ambiguous regulations.