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Will The Public Disclosure Bar Be The Next Provision Of The False Claims Act Reviewed By The United States Supreme Court?

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  • Posted on: Oct 28 2016

On October 3, 2016, the United States Supreme Court invited the U.S. Solicitor General to express the U.S. Government’s views about the application of the False Claims Act (“FCA”) public disclosure bar. 31 U.S.C. § 3730(e)(4)(A).  The request was made in the United States ex rel. Advocates for Basic Legal Equality v. U.S. Bank, a qui tam action that the Sixth Circuit held was properly dismissed because of the public disclosure bar.

In United States ex rel. Advocates for Basic Legal Equality v. U.S. Bank, 816 F.3d 428 (6th Cir. 2016), the Sixth Circuit held that prior public disclosures are “substantially the same” for purposes of the public disclosure bar if they “encompass” the allegations in the subject qui tam action even though the prior disclosures do not reveal the specific fraud alleged. Based upon that analysis, the court dismissed the case against U.S. Bank on the grounds that two prior public disclosures barred the action.

The Public Disclosure Bar

The public disclosure bar precludes a relator from pursuing a qui tam action if the allegations have been publicly disclosed through official proceedings or in the news media, unless the relator was an original source of the information upon which the action was based.  The bar operates regardless of whether the whistleblower knew about or reviewed the public information prior to filing the complaint.

Courts generally apply a two-part test to determine whether the public disclosure bar applies. First, the courts inquire whether there has been any public disclosure of the fraud in (1) a federal criminal, civil, or administrative hearing in which the government is a party; (2) a congressional, Government Accountability Office, or other federal report, hearing, audit or investigation; or (3) the news media (such as newspapers; scholarly, scientific, and technical periodicals, including trade journals; advertisements in periodicals; and widely accessible internet publications). Second, the courts look to whether the whistleblower’s allegations are substantially the same as the previously disclosed fraud. If either requirement is not satisfied, the bar does not apply and the relator can proceed with the action. If both requirements are met, the action is barred unless the relator qualifies as an original source under the FCA. An original source is “an individual who either (i) prior to a public disclosure … , has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under [the False Claims Act].”

The Proceedings in Advocates for Basic Equality

Advocates for Basic Legal Equality involved a mortgage insurance program, backed by the Federal Housing Administration, that encouraged banks to lend money to high-risk borrowers. The insurance provided under the program covered the losses incurred by a lending institution that were caused by a borrower who defaulted on a loan. To participate in the program, a lender, such as U.S. Bank (which participated in the program), had to certify that it would meet, and did meet, certain requirements each time it requested an insurance payment. 816 F.3d at 429. The key requirement to be certified, for purposes of the action, was that the lender, in this case U.S. Bank, would engage in “loss mitigation” measures, such as attempting to arrange a face-to-face meeting with the defaulting borrower, before foreclosing. Id.

The relator, Advocates for Basic Legal Equality (“ABLE”), an Ohio non-profit organization that advances the interests of low-income individuals, claimed that U.S. Bank did not satisfy the loss mitigation requirement. It alleged that U.S. Bank promised to engage in loss mitigation, failed to do so, and then lied about the failure.  816 F.3d at 429. ABLE cited to three foreclosures where this happened, claiming that those instances demonstrated a widespread pattern showing that U.S. Bank wrongfully foreclosed on 22,000 homes and wrongfully collected $2.3 billion in federal insurance benefits. Id. ABLE filed the action on behalf of itself and the United States claiming that U.S. Bank violated the FCA. The Department of Justice declined to intervene. Id.

The district court found that two of ABLE’s claims stated a violation of the FCA. United States v. U.S. Bank, N.A., No. 3:13 CV 704, 2015 WL 2238660, at *4–7 (N.D. Ohio May 12, 2015). Nevertheless, it dismissed the action because ABLE based its case on information that had been publicly disclosed, precluding it from bringing the lawsuit as a qui tam plaintiff. Id. at *8–11. In that regard, the court found that ABLE’s allegations had been publicly disclosed in: (1) a 2011 consent order between U.S. Bank and the federal government, which required U.S. Bank to implement a wide variety of reforms, including measures “to ensure [that] reasonable and good faith efforts, consistent with applicable Legal Requirements, are engaged in Loss Mitigation and foreclosure prevention for delinquent loans”; and (2) a 2011 foreclosure practices review from three federal agencies, which noted that various banks, including U.S. Bank, had failed to take a variety of loss mitigation measures, and which emphasized the need for banks to make “reasonable and good faith efforts … to engage in loss mitigation and foreclosure prevention for delinquent loans where appropriate.” 816 F.3d at 431.

The Sixth Circuit affirmed the dismissal, holding that a general disclosure suffices to bar a case involving more specific and detailed claims of wrongdoing: “the broader, publicly disclosed category (a variety of mortgages) encompasses ABLE’s narrower category (federally insured mortgages).” 816 F.3d at 432. The court reasoned that if the rule were “[o]therwise, one could always—or at least nearly always—evade the public disclosure requirement by focusing the allegations in a second action on sub-classes of potential claims covered by the initial action.” Id.

ABLE filed a writ of certiorari with the Supreme Court.

Split in the Circuits?

According to ABLE, there is a split between the Sixth Circuit, on the one hand, and the Seventh and Ninth Circuits, on the other hand, about how to define “substantially the same”. ABLE contends that the Seventh and Ninth Circuits have considered and rejected the Sixth Circuit’s “broad-brush approach”, holding that “a complaint that is similar [to a public disclosure] only at a high level of generality” does not “trigger[] the public disclosure bar.” Petition for Certiorari at 1 (citing United States ex rel. Mateski v. Raytheon Co., 816 F.3d 565, 575 (9th Cir. 2016); United States ex rel. Goldberg v. Rush Univ. Med. Ctr., 680 F.3d 933, 936 (7th Cir. 2012). In those circuits, public disclosure of some wrongdoing does not bar an FCA action unless it “alerted the government to the specific areas of fraud alleged” in the action. Mateski, 816 F.3d at 579. Only disclosures alleging “that a particular [defendant] had committed a particular fraud in a particular way” suffice. Goldberg, 680 F.3d at 935.

In response, U.S. Bank contends that there is no split between the circuits.  U.S. Bank notes that the panels in the Seventh and Ninth Circuits merely held that “where a relator alleges a different type of fraud from what has been publicly disclosed, courts should not construe the disclosures and allegations so broadly as to obviate the distinction between the kind of fraud alleged and the kind of fraud disclosed.” Brief in Opposition at 15 (citations omitted). According to U.S. Bank, nothing in the Sixth Circuit’s opinion conflicts with the Seventh and Ninth Circuits: “The Sixth, Seventh, and Ninth Circuits all apply the same overarching rule: public disclosures bar a given complaint when they reveal allegations or transactions that are substantially the same as those presented in the complaint and so suffice to put the government on notice of its allegations.” Id. at 24 & n.8 (noting that the First, D.C. and Tenth Circuits are each in accord).

Better Markets, Inc., which filed an amicus brief, contends that the Eighth Circuit’s approach offers another view in the split among the circuits.  The Eighth Circuit requires the prior public disclosure to “expose[ ]” “the essential elements” of “the transaction as fraudulent” in order for the bar to apply. United States ex rel. Rabushka v. Crane Co., 40 F.3d 1509, 1512 (8th Cir. 1994). According to Better Markets, the Eighth Circuit found persuasive a similar articulation by the D.C. Circuit.  See United States ex rel. Springfield Terminal Ry. v. Quinn, 14 F.3d 645, 654 (D.C. Cir. 1994) (“The language employed in § 3730(e)(4)(A) suggests that Congress sought to prohibit qui tam actions only when . . . the critical elements of the fraudulent transaction themselves were in the public domain.”).  Better Markets requested that the Court adopt a rule based on this approach:

Previous public disclosures bar a qui tam action only where they contain information that, taken as true, describes fraud with sufficient particularity to state a claim to relief under the False Claims Act. In other words, if the disclosures, standing as the sole allegations in a hypothetical complaint against the same defendant, are insufficiently particularized to survive a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure (and the heightened pleading standard for fraud under Rule 9(b)), then they do not bar a qui tam suit that features additional allegations.

Potential Outcome

This Blog believes that there is a split among the circuits.

In analyzing the different approaches, the Seventh and Ninth Circuits advance a framework that strikes a balance between the competing interests of the parties. By requiring a nexus between the prior public disclosure and the qui tam action such that the government is alerted to the fraud alleged (Mateski, 816 F.3d at 579), both the relator and the defendant have a fair and reasonable framework upon which to argue over the application of the bar.

The Sixth Circuit’s approach is far too broad. By analyzing the issue in terms of whether the prior disclosure “encompasses” the alleged fraud, the court creates a rule that potentially has no limit. Any general allegation of fraud necessarily “encompasses” specific frauds that the government does not know about.  The Sixth Circuit’s approach therefore would swallow virtually every fraud filed under the FCA.

Finally, the rule proposed by Better Markets takes the Eighth and D.C. Circuits’ rulings (which are closer to the approach of the Seventh and Ninth Circuits) too far. Such a rule would allow virtually every qui tam action to escape the application of the public disclosure bar. Indeed, relators would be able to base their qui tam actions on public disclosures, without adding anything material (i.e., original source information) to the claim, because the prior public disclosures did not state a claim under 12(b)(6) and meet the heightened pleading requirements of Rule 9(b).

The Supreme Court has not set a deadline for the Solicitor General to file its brief. If the Court takes the case, it will likely result in a decision that clarifies the FCA’s requirement that the prior public disclosure be “substantially same” as the allegations in the qui tam complaint.

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