05 July 2016

D.C. Circuit Affirms Expansive Reading Of Public Disclosure Bar

In a recent opinion by Judge Wilkins, the D.C. Circuit affirmed the dismissal of a qui tam action against Phillip Morris, United States ex rel Oliver v. Phillip Morris USA, Inc., No. 15-7049 (D.C. Cir. June 21, 2016), with two key holdings that will help FCA defendants in future cases.  Specifically, the Court adopted an expansive reading of the FCA’s public disclosure bar and a stringent “original source” requirement.

Relator Anthony Oliver filed a qui tam suit against Phillip Morris USA alleging that the company violated “most favored customer” provisions with the government, when the company sold cigarettes to U.S. Military Exchanges at prices higher than that which Phillip Morris sold cigarettes to other customers.  Oliver alleged that this conduct violated the False Claims Act when Phillip Morris falsely certified compliance with the most favored customer provisions.  The district court granted the company’s motion to dismiss on public disclosure grounds and the D.C. Circuit affirmed for three noteworthy reasons.

First, the court held that although the fraud itself was not publicly disclosed, the “transactions” or “elements” that “when considered together, give rise to an inference that fraud has taken place” were disclosed.   Here, there were two separate elements of the disclosure:

  • A document entitled the “Iceland Memo” disclosed that Phillip Morris charged U.S. Military Exchanges higher prices for cigarettes than it charged other customers.
  • The contracts with the Military Exchanges separately disclosed the most favored customer provisions.

Although no document specifically disclosed that Phillip Morris was falsely certifying compliance with the most favored customer provisions, the court held that “a hypothetical government investigator aware of the price discrepancies and the [most favored customer] provisions would be ‘alerted . . . to the likelihood’ that the vendor was falsely certifying compliance with the relevant provisions.”   According to the Court, this was sufficient to meet the public disclosure bar standard.

Second, the court took an expansive view of the public disclosure channels enumerated in the statute.  The court held that the Iceland Memo was disclosed in a “civil hearing,” even though it was not filed with any court.  Judge Wilkins reasoned that the document was produced in discovery in a civil proceeding and it was made available to the public online.   As to the most favored customer provisions, the D.C. Circuit held that these were disclosed in an “administrative report.”  The court broadly construed “administrative report” to cover the “terms and conditions” that were hyperlinked to the Military Exchange website.

Third, the court held that Oliver was not an original source because he lacked “direct and independent” knowledge of the information on which the allegations are based.  31 U.S.C. § 3730(e)(4)(B).  Even though Oliver conducted an investigation to determine whether Phillip Morris violated the most favored customer provisions, the court held that this investigation was not sufficient to render him an original source because it was “his lack of firsthand knowledge [that] prompt[ed] his investigation” in the first place.

The D.C. Circuit’s decision will be helpful for FCA defendants in the future.  The expansive interpretation of the public disclosure bar and the stringent definition of an original source should help end other FCA suits at the motion to dismiss stage.

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