Wake Forest Law Review

By Mickey Herman

On Thursday, March 16, 2017, the Fourth Circuit issued a published opinion in United States ex rel. Carson v. Manor Care, Inc., a civil case. Plaintiff-appellant, Patrick Carson, on behalf of the United States, appealed the dismissal of his False Claims Act (“FCA” or “Act”) qui tam and retaliation claims as well as related state fraud claims, arguing that none were barred by the FCA’s first-to-file rule. After evaluating Carson’s claims in turn, the Fourth Circuit affirmed with respect to his qui tam claims, but vacated and remanded the portion of the trial court’s decision as it related to his retaliation and state fraud claims.

Facts & Procedural History

In early 2009, Christine Ribik filed a qui tam suit on behalf of the United States against Manor Care, alleging violations of the FCA arising from overbilling of the government for medical services. Specifically, she contended that the nursing facility operator “regularly and fraudulently classified . . . patients as needing more physical therapy than necessary,” “instructed its physical therapists to spend more time than needed with the patients,” “sent some patients to physical or occupational therapy who did not need it at all,” and “refused to discharge patients for whom physical therapy was no longer useful.”

In September 2011, Carson filed a qui tam suit on behalf of the United States and several states against Manor Care, alleging violations of the FCA (and its state-level equivalents) markedly similar to those asserted by Ribik. In addition, Carson asserted a FCA retaliation claim, contending that his termination from Manor Care was a direct and impermissible result of “his repeated complaints about the fraudulent . . . practices.”

The two cases were consolidated in 2012 and the United States Government subsequently intervened in the action. The district court denied Manor Care’s motion to dismiss the Government’s complaint. It granted, however, the defendant’s motion to dismiss Carson’s complaint, concluding that “the FCA’s first-to-file rule barred all of [his] claims.” Carson appealed.

Qui Tam Claims

The Court first considered whether the first-to-file rule barred Carson’s qui tam claims. Pursuant to its qui tam provision, the FCA permits private citizens to sue on the federal government’s behalf for violations of the Act. However, “[w]hen a person brings an action under [the qui tam] subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” To determine whether a subsequently-filed suit is based on the facts underlying a pending complaint, the Court applies the “material elements test,” which “bars later suit ‘if it is based upon the same material elements of fraud as the earlier suit, even though the subsequent suit may incorporate somewhat different details.’” Although Carson argued that his “allegations go well beyond [Ribik’s],” the Court, after thoroughly comparing the complaints’ allegations, disagreed. It also rejected Carson’s assertion that their complaints’ consolidation protects his claims from the first-to-file bar, emphasizing that the relevant statutory language explicitly prohibits intervenors other than the Government. It thus affirmed the district court’s dismissal of Carson’s qui tam claims.

Retaliation Claim

The Court turned next to Carson’s retaliation claim. “The FCA prohibits employers from retaliating against any employee ‘because of lawful acts done by the employee . . . in furtherance of an action under this section or other efforts to stop 1 or more violations of this subchapter.’” Noting that the district court dismissed this claim on the same grounds as the qui tam claims—the first-to-file rule—the Court endeavored to determine whether retaliation claims fall within the scope of that rule. Considering first the relevant statutory language and structure, the Court emphasized that the first-to-file rule is subsumed by, and therefore only limits, the Act’s qui tam provisions. The Court continued by emphasizing that barring a whistle-blower’s retaliation claim on such grounds makes little sense, both because such claims are considered personal to the plaintiff (unlike the qui tam claims, which effectively belong to the Government) and due to the risk of deterring whistle-blowers. For these reasons, the Court vacated the district court’s dismissal as to Carson’s retaliation claim and remanded the issue for proceedings consistent with the proper scope of the first-to-file rule.

State Fraud Claims

Finally, the Court considered whether the FCA’s first-to-file rule was properly applied to Carson’s state fraud claims. Determining that the district court failed to “support its decision with any discussion or authority to establish that any of the states apply the FCA first-to-file rule, or its equivalent, to that state’s statute,” the Court vacated and remanded the issue to the district court.

Conclusion

Agreeing that the FCA’s first-to-file rule barred Carson’s qui tam claims, the Court affirmed the district court to that extent. It refused, however, to extend the scope of the first-to-file rule to Carson’s retaliation and state fraud claims. It therefore vacated the district court’s judgment as to those issues, and remanded for further proceedings.

By Kelsey Hyde

Today, in the civil case of United States ex rel. Michaels v. Agape Senior Community, Inc., the Fourth Circuit published an opinion affirming the district court’s decision on the Attorney General’s unreviewable veto power under 31 U.S.C. § 3730, and dismissing the appeal of an evidentiary issue. In affirming the lower court’s ruling, the Court found the U.S. District Court for the District of South Carolina properly interpreted the relevant statute and persuasive case law on the issue of the Government’s right to veto a settlement for qui tam action cases in which they elected not to take part. In dismissing the appeal of the district court’s decision to disallow statistical sampling as hard evidence, the Court strictly construed 28 U.S.C. § 1292(b) and declined to review the present issue for it did not concern a pure question of law.

Procedural Matters in Determining the Parties

This action arose from the allegations of Brianna Michaels and Amy Whitesides regarding the dealings of their former employer, defendant Agape Senior Community, Inc. and twenty-three affiliated elder care facilities throughout South Carolina (collectively, “Agape”). The two former employees alleged that Agape had fraudulently billed Medicare and other health care programs run by the Federal Government for thousands of patients who were ineligible or did not actually receive the charged services.

Michaels and Whitesides proceeded with this matter under the False Claims Act (FCA), which authorizes private individuals (referred to as “relators”) to pursue legal actions on behalf of the United States in order to receive civil remedies for fraud committed against the Government, called a “qui tam action”. See 31 U.S.C. §§ 3729-3733. This type of suit permits the Government to intervene within specified time periods, or decline to intervene and instead allow the relators to conduct the action. Id. at § 3730(b)(4)(A)-(B). In this case, the Government declined to intervene, but did alert the relators of a provision in § 3730(b) which provides the Attorney General ultimate, non-reviewable authority to object to proposed settlements and dismissals, a provision at the center of this appeal.

The Two District Court Rulings that Led to Interlocutory Appeal  

Discovery efforts revealed that Agape had filed over 50,000 claims for federal health care programs for a relevant time period in which they had also admitted 10,000 patients. Based on the unreasonable cost of reviewing all such documents and materials pertaining to these claims and individuals, estimated at over $36 million, the relators sought instead to use a statistical sampling of the evidence to prove their case of fraudulent federal health care billing. However, the District Court ruled this to be an improper evidentiary method (referred to as “the statistical sampling ruling”).

The parties then negotiated and reached a proposed settlement agreement, but the Attorney General objected to the settlement amount, pursuant to § 3730(b)(1), based on the Government’s own statistical sampling assessment and estimated damages. Agape sought to enforce the settlement over such objection, but the District court refused and found instead that the Attorney General possessed absolute veto power over such decisions under § 3730(b)(1). In this ruling, the court did note the peculiarity of the Government involving itself in a case in which it chose not to be a party, and by way of a method in which the court had found improper, but still upheld this veto power (referred to as “the unreviewable veto ruling”).

Challenges & Standards of Review on Appeal

On appeal, the Fourth Circuit addressed the district court’s two rulings, the statistical sampling ruling and the unreviewable veto ruling. Namely, these matters raised two issues: (1) the extent of the Attorney General’s power under § 3730(b)(1) to veto an FCA qui tam action settlement in which the Government chose not to intervene; and (2) the authority of the Court of Appeals to review the district court’s decision regarding the evidentiary use of statistical sampling in this case. The Court’s review of these matters was de novo. The appeal of these issues occurred before the actual trial to better serve judicial efficiency, based on the court’s opinion that both involved important and controlling questions whose result could lead to the ultimate termination and judgment of litigation. As such, the Fourth Circuit granted appeal and heard these issues pursuant to 28 U.S.C. § 1292(b).

Fourth Circuit Adopts Finding of Attorney General’s “Absolute Veto Power” Over Such Settlements

            In reviewing the district court’s interpretation of Section 3730(b)(1), the Court began by assessing two different interpretations of this very statute put forth by different circuit courts. First, the Ninth Circuit’s decision in United States ex rel. Killingsworth v. Northrop, 25 F.3d 715 (9th Cir. 1994) held that the Attorney General’s consent-for-dismissal provision for FCA qui tam suits is not absolute, but instead can be limited and subject to a reasonableness review if the government chooses not to intervene. Conversely, the Fifth and Sixth Circuits both determined that the Attorney General has absolute veto power over such settlements, regardless of the Government’s choice to intervene, and therefore relators may not seek voluntary dismissals without the consent of the Attorney General. See Searcy v. Philips Electronics North America Corp., 117 F.3d 154 (5th Cir. 1997); United States v. Health Possibilities, P.S.C., 207 F.3d 335 (6th Cir. 2000).

The Fourth Circuit chose to adopt the interpretation of the Fifth and Sixth Circuits, holding that the Attorney General does indeed have absolute, unreviewable power to consent or object to voluntary settlements in FCA qui tam suits. It reached this conclusion based on the plain language of the statute and the determination that the consent-for-dismissal provision is unambiguous. Additionally, the court found that the statute’s legislative history reveals a clear Congressional intent to grant such unreviewable authority to the Attorney General, and that Congress did in fact act purposefully by choosing not to articulate limitations on this authority. Moreover, the court reasoned that this interpretation is wholly consistent with the FCA, a statutory scheme that still construes the United States Government as the real party of interest, regardless of their choice to intervene.

District Court’s Evidentiary Ruling Did Not Present Question of Law Subject for Review on Interlocutory Appeal

            In examining the district court’s statistical sampling ruling, the Circuit relied on other Fourth Circuit precedent concerning interlocutory review to determine that this issue was not eligible for this specific type of appeal. Namely, the court observed that such review is to be used sparingly under strictly construed requirements, and must involve a controlling question of law. See Myles v. Laffitte, 881 F.2d 125, 127 (4th Cir. 1989). Moreover, the court emphasized that review under Section 1292(b) is not proper when the question turns on genuine issues of fact where the district court applies settled law to the facts and evidence of a particular case. Based on such standards, the Court found that the district court’s ruling to disallow statistical sampling did not concern a question of law regarding its admissibility in general, but instead solely concerned its admissibility with respect to the particular facts and evidence in this case. Thus, the issue did not raise a pure question of law subject to interlocutory review.

Fourth Circuit Affirmed in Part, and Dismissed in Part

Accordingly, the Fourth Circuit affirmed the district court’s unreviewable veto ruling, and dismissed the relators’ appeal of the statistical sampling ruling.

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By M. Allie Clayton

On November 15, 2016, the Fourth Circuit released a published opinion in the civil case of United States v. Government Logistics N. V., and held that, while the substantial continuity test for successor corporate liability did not apply, the factual allegations regarding the fraudulent transaction test could not be resolved in this case except by a fact finder, and thus reversed.

Facts and Procedural History

This complex case began over fifteen years ago as a bid-rigging scheme by shipping businesses in order to defraud the United States. The Fourth Circuit has entertained appeals from decisions in this case at three different points throughout the litigation.

This case began in the year 2001, when Gosselin Group N. V. (then known as Gosselin World Wide Moving, N. V.) and at least one other entity, the Pasha Group, implemented a bid-rigging scheme with regard to two government programs—the International Through Government Bill of Lading (“ITGBL”) program and the Direct Procurement Method (“DPM”) program—that facilitate the trans-Atlantic shipping of household goods that belong to military and domestic personnel. The ITGBL program involves the Department of Defense (“DOD”) soliciting bids from domestic freight forwarders, and those domestic forwarders subcontract foreign operations to businesses overseas. The DPM program involves the DOD soliciting bids from international businesses. Both programs were administered by the Army’s Military Transport Management Command (the “MTMC”).

The Gosselin defendants (Gosselin Group N. V., Gosselin World Wide Moving N. V., and Gosselin Group’s CEO and former managing director, Marc Smet) and the Pasha Group (“Pasha”) implemented a bid-rigging scheme in which they increased the prices that the DOD paid to ship goods to and from Europe under the ITGBL and DPM programs. This led to the DOD paying millions of dollars more than it should have paid. Those bid-rigging schemes did not go undetected, and led to the qui tam proceedings in this case, and successful criminal prosecutions. Qui tam proceedings are lawsuits in which a whistleblower brings a civil claim pursuant to the False Claims Act (“FCA”). Under the FCA, 31 U.S.C. § 3730, whistleblowers are rewarded for assisting the United States in recovering any money lost to the defendants, up to 25% of the proceeds if the government participates, and up to 30% of the proceeds if the government does not participate.

The Criminal Prosecutions

In November of 2003, a grand jury returned a two-count indictment against Gosselin Group and Smet that charged each with “conspiracy to restrain trade, in violation of 15 U.S.C. § 1, and conspiracy to defraud the United States, in contravention of 18 U.S.C. § 371.” In February 2004, Gosselin Group and Pasha agreed to be charged and prosecuted by criminal information for the conspiracy offenses. Gosselin Group N. V. and the Pasha Group entered conditional guilty pleas to a pair of criminal conspiracy offenses. Smet signed the plea both for himself and for the Gosselin Group, thereby escaping further criminal prosecution. Pursuant to that plea agreement, both the Gosselin Group and Pasha admitted to various elements of the conspiracy. The plea agreement was accepted on February 18, 2004. As a result of a contemporaneous agreement between Smet and the Army, Smet was barred from doing business with the United States for three years (March 2004-March 2007). A United States Management Team—consisting of four Gosselin Group employees: COO Stephan Geurts St., Stephan Geurts Jr., Timotheus Noppen, and Ludi Bokken—was created within Gosselin Group to allow Gosselin Group to continue working with DOD, in the absence of Smet.

Under the plea agreement, Gosselin Group and Pasha were able to pursue an immunity claim in the district court to seek dismissal of both the charges lodged in the information. The two defendants claimed that the bid-rigging scheme was immune from federal prosecution. In August 2004, the Eastern District of Virginia dismissed one of those charges, finding that certain provisions of the Shipping Act granted Gosselin Group and Pasha immunity from federal prosecution on the antitrust conspiracy. However, the district court also found that the defendants did not have immunity from prosecution on the charge of conspiracy to defraud the United States. Therefore, the two defendants were sentenced only on the latter charge. This decision led to cross appeals from the defendants and the United States. The Fourth Circuit determined that immunity did not apply to either charge, and further held that the defendants were both criminally liable for both conspiracies and remanded to the district court for resentencing. United States v. Gosselin World Wide Moving, N. V., 411 F. 3d 501 (4th Cir. 2005). The resentencing proceedings began in 2006. The district court imposed a $6 million dollar fine on Gosselin Group, and two separate $4.6 million dollar fines on Pasha. The court also ordered both defendants to make restitution to the DOD in the sum of $865,000.

The Qui Tam Proceedings

In 2002, realtors Kurt Bunk and Ray Ammons (the “Realtors”) brought qui tam proceedings against the Gosselin defendants under the FCA. Bunk filed his qui tam action alleging an FCA claim related to the DPM program in the Eastern District of Virginia in August of 2002. Ammons filed his qui tam action alleging an FCA claim related to the ITGBL program (“ITGBL claim”) and to Gosselin Group exerting pressure on Covan International (“Covan claim”) and Cartwright International Van Lines (the “Cartwright claim”) to submit higher ITGBL claims. These cases were sealed, pursuant to 31 U.S.C. § 3730, and remained under seal and pending while the criminal cases were resolved.

Once the criminal proceedings were resolved in 2006, the Department of Justice (“DOJ”) gave the Gosselin defendants notice of the two pending qui tam actions. The DOJ not only detailed the false claims and bid rigging evidence that was underlying the qui tam actions, but also advised the Gosselin defendants that the United States might intervene. In January 2007, the DOJ sent a settlement demand to the Gosselin defendants.

Smet conveyed his frustration regarding the criminal liability and pending civil matters to Geurts Jr. Later Smet approached Jan Lefebure, the Managing Director of International Freight Forwarding Service—the company that handled Gosselin Group’s commercial exports—with a proposal to move Gosselin Group’s business as it related to the United States to another business entity. Lefebure owned another corporation called Brabiver—described as a “company doing nothing” but that had “a license for transportation or freight forwarding.” Smet proposed to Lefebure a scheme to rebrand and reopen Brabiver and move all of his [a.k.a. Gosselin Group’s] government contracts into Brabiver.

On June 27, 2007, Smet made several interest free loans, totaling over €100,000 to the four principles involved in the Brabiver venture, Noppen, Geurts Jr., Lefebure, and Rene Beckers. The loans were not secured, and only repayable on Smet’s demand, but that never occurred. The next day, Smet’s principles used the loans to purchase shares in Brabiver and formalize the change from Brabiver to GovLog. The very next day, GovLog and Gosselin Group entered into a series of agreements that were memorialized by contracts with terms dictated by Smet, not negotiated, and drafted by Smet’s attorneys and presented by Smet to the GovLog principals. These agreements transferred Gosselin Group’s business with the DOD to GovLog, and also committed GovLog to exclusively use Gosselin Group and its related entities to perform said DOD contracts. In exchange for Gosselin Group’s business with DOD, GovLog did not pay, but promised Gosselin Group a percentage of its future net revenue—“all of those revenues received by GovLog . . . minus the amount of the [services] invoiced by [Gosselin Group] to GovLog in connection with the services provided to GovLog by Gosselin Group and its subsidiaries.” Once GovLog obtained Gosselin Group’s DOD contracts, it began its shipping operations on behalf of Gosselin Group on July 1, 2007—approximately four days after Smet made loans to the GovLog Principals.

GovLog consisted of 20 employees, all but one of whom were previous Gosselin Group employees. Their sole business was signing contracts with DOD and arranging shipping services for DOD, but GovLog was not responsible for any actual shipping, nor did it have any warehouses (GovLog leased warehousing facilities from Gosselin Group). All GovLog actually owned was a couple of automobiles, a chair, and a table. GovLog earned no net revenues during 2007 or 2008, and thus was not obligated to pay any funds to Gosselin Group in exchange for Gosselin Group’s business with the DOD. However, GovLog did pay for the leased warehouse facilities and other services provided by Gosselin Group, which essentially meant that any “money that’s going to GovLog is actually ending up being paid to Gosselin.”

Later that year, on November 7, 2007, Ammons’s qui tam action was transferred to the Eastern District of Virginia and consolidated with Bunk’s qui tam action. In 2008, the Realtors’ complaints were unsealed, but on July 18, 2008 Ammons’s qui tam action was superseded by the government’s Complaint in Intervention under 31 U.S.C. § 3730(b)(2). The government did not intervene in Bunk’s qui tam suit. In the Complaint in Intervention, the government named GovLog as a defendant, and alleged that GovLog was “a successor/transferee in interest of Gosselin [Group].” On October 2, 2008, Bunk filed his Second Amended Complaint, which included GovLog as a named defendant and alleged successor corporation liability claim against GovLog.

The Bunk Complaint pleaded numerous FCA theories of liability against the Gosselin defendants and others. Bunk joined several additional complaints, including a 42 U.S.C. § 1985 claim and state law claims. However, only his DPM claim was not superseded by the government’s Complaint in Intervention. In 2011, the government and the Relators moved for summary judgment on the issue of whether GovLog was liable as a successor corporation of Gosselin Group. The district court severed the claims against GovLog from those against the Gosselin defendants, and then proceeded to conduct a trial to first resolve the claims against the Gosselin defendants.

On July 18, 2011, the jury trial for the Gosselin defendants began on the DPM, ITGBL, and Covan claims. At the close of the government’s case, the district court awarded judgment as a matter of law to the defendants on the ITGBL claim, and submitted the DPM and Covan claims were submitted to the jury. On August 4, 2011, the jury returned a verdict against the Gosselin defendants on the DPM claim and in favor of the Gosselin defendants on the Covan claim. Despite evidence establishing that the defendants had submitted over 9,000 false invoices to the DOD, the district court did not impose any civil penalties, reasoning that such an award would be unconstitutionally punitive (each false claim authorized a minimum civil penalty of $5,500, which would have resulted in a cumulative penalty in excess of $50 million dollars).

Both parties appealed. Bunk challenged the district court’s denial of civil penalties, the government challenged the court’s award of judgment on the ITGBL claim, and the Gosselin defendants argued that Bunk lacked standing. The Fourth Circuit rejected the Gosselin defendants’ standing argument, and directed the court to amend its civil penalties judgment and award $24 million dollars in civil penalties on the DPM claim. The Fourth Circuit also vacated the grant of judgment in favor of the Gosselin defendants on the ITGBL claim and remanded the matter for further proceedings.

Once the claims against the Gosselin defendants were resolved, the district court proceeded to determine the successor corporation liability claims pending against GovLog. The district court initially focused on identifying the applicable legal test for successor corporation liability claim. In September 2014, the district court ruled that application of Carolina Transformer’s substantial continuity test would be inconsistent with the Supreme Court’s decision in Bestfoods. United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992); United States v. Bestfoods, 524 U.S. 51 (1998). The court then found that only traditional common law principles governed the issue of GovLog’s liability as a successor corporation.

On November 3, 2014, the Relators and the government moved for summary judgment, relying on the common law’s fraudulent transaction theory of successor corporation liability. Bunk presented two theories of successor corporation liability against GovLog: (1) the substantial continuity theory, and (2) the fraudulent transaction theory. GovLog cross-moved for summary judgment, stating that the theory proposed by the government and the Relators was entirely speculative. On December 23, 2014, the district court granted judgment to GovLog under two theories: (1) neither complaint had properly alleged that GovLog was liable as a successor corporation under any recognized legal theory; and (2) GovLog was entitled to summary judgment for want of a genuine dispute of material fact. The court ruled that the transactions between GovLog and Gosselin Group were not shown to have been pursued with a fraudulent intention because there was “no evidence sufficient to establish any of the recognized ‘badges of fraud’” in regard to the creation or operation of GovLog. On December 29, 2014, the court entered judgment in favor of GovLog. The Relators appealed from the judgment, and the Fourth Circuit has jurisdiction under 28 U.S.C. § 1291.

The Initial Jurisdictional Question

Initially, the Fourth Circuit addressed whether or not the district court had subject matter jurisdiction over Bunk’s successor corporation complaint. The Fourth Circuit found that the court possessed supplemental jurisdiction over Bunk’s claim. Bunk’s FCA claim provided original jurisdiction under 28 U.S.C. § 1331. The question remained whether the successor corporation liability claim revolves around the same central fact pattern as the original FCA claim against the Gosselin defendants. The Fourth Circuit held that GovLog’s successor corporate entity liability is wholly dependent on the Gosselin defendants’ liability. Because the “successor corporation liability question is part and parcel of Bunk’s original qui tam action,” the district court did not err in exercising supplemental jurisdiction on this claim.

The Alleged Errors

The Fourth Circuit had to decide whether or not the district court erred by entering judgment in favor of GovLog on the successor corporation liability issue. Bunk challenged the three rulings of the District Court: (1) that the substantial continuity test is inconsistent with Supreme Court precedent; (2) that Bunk had not adequately pleaded the fraudulent transaction theory; and (3) that the fraudulent transaction theory was without evidentiary support, thus leaving no genuine issue of material fact and entitling GovLog to summary judgment.

Successor Corporation Liability Theories

There are four exceptions from the general rule that a corporation that acquires the assets of another corporation does not acquire its liabilities. Under federal common law, a successor corporation takes on the liabilities of its predecessor if: (1) the successor agrees to assume the liabilities; (2) the transaction is a de facto merger; (3) the successor may be considered a “mere continuation” of the predecessor; or (4) the transaction is fraudulent. United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992).

Under exception (3), the mere continuation theory states that liability can pass to the successor if “after the transfer of assets, only one corporation remains.” This is not applicable to Bunk’s case because two corporations were viable after the transfer of assets. However, there was another theory proposed in Carolina Transformer—the substantial continuity theory. Substantial continuity theory allows a court to look at eight factors to determine whether successor corporation liability should be imposed. However, the Supreme Court stated in United States v. Bestfoods that “‘[i]n order to abrogate a common-law principle, the statute must speak directly to the question addressed by the common law.’” United States v. Bestfoods, 524 U.S. 51 (1998) (quoting United States v. Texas, 507 U.S. 529 (1993)). Because the FCA doesn’t speak to successor corporation liability, it has “no impact on the traditional common law principles governing successor corporation liability.” Therefore, the district court did not err in declining to apply the substantial continuity test.

Bunk also relied on exception (4), the “fraudulent transaction theory of successor corporation liability.” Because this was dismissed on a motion for summary judgment, the Fourth Circuit reviewed whether the pleadings were legally sufficient under a de novo standard of review. The Fourth Circuit did not decide whether the heightened standard of pleading in Fed. R. Civ. P. 9(b) applied because the Court stated that even if there was a heightened standard it was satisfied in this case. The Bunk Complaint sufficiently outlined the dealings between GovLog and Gosselin Group that formed a solid foundation for the fraudulent transaction theory. Therefore, the district court erred in dismissing Bunk’s successor corporation liability claim as insufficiently pleaded.

The Fraudulent Transaction Theory

However, because the district court ruled in the alternative that GovLog was entitled to summary judgment on Bunk’s fraudulent transaction theory, the Fourth Circuit had to also address whether the summary judgment award was warranted.

Because direct evidence of intent to defraud is rare, courts have developed recognized “badges of fraud” that constitute indirect and circumstantial evidence. Those “badges of fraud” include; (1) the conveyance is to a spouse or near relative; (2) inadequacy of consideration; (3) transactions different from the usual method of transacting business; (4) transfers in anticipation of suit; (5) retention of possession by the debtor; (6) transfer of all or nearly all of the debtor’s property; (7) insolvency caused by the transfer; (8) failure to produce rebutting evidence when the circumstances surrounding the transfer are suspicious; or (9) transactions in which the debtor retains benefits.

In this situation the court found that the evidence did not simply fail to dispel the required fraudulent intention, but it could easily establish it. The Fourth Circuit found that “[a]t least four of the badges of fraud are readily apparent on the evidence . . .:” (1) inadequacy of consideration; (2) transactions different from the usual method of transacting business; (3) transactions in anticipation of suit or execution; and (4) transactions through which the debtor retains benefits. The consideration was found to be grossly inadequate because, in effect, GovLog paid nothing for the business interests it received from Gosselin Group. The transaction was made in haste and with little input from GovLog or any GovLog owners, and Smet was in control of every facet of the transaction—which is not something that occurs in the usual mode of transacting business. Also, the Fourth Circuit found that a reasonable juror could find that Gosselin Group continued to reap the benefits of the business that it transferred to GovLog. But the most suspicious aspect, according to the Fourth Circuit, was the timing of the transaction. “[T]he temporal proximity of the Gosselin defendants’ being advised of the qui tam actions and the GovLog transaction being consummated suggests that the transaction was made to defraud Bunk and the United States out of civil penalties.”

Disposition

According to the Fourth Circuit, the various factual disputes in this case cannot be resolved by anyone except a factfinder. Therefore, the district court erred in awarding summary judgment to GovLog. The Fourth Circuit vacated the judgment and the case was remanded to the district court for further proceedings.

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By Sarah Walton 

On August 10, 2015, the Fourth Circuit issued a published opinion in the civil case of Smith v. Clark. The Fourth Circuit held that the plaintiff stated a claim under the False Claims Act and affirmed the district court’s holding in part, reversed in part, and remanded for further proceedings.

Smith Alleged Violations of the False Claims Act and the District Court Dismissed the Complaint

From 2012-2013, plaintiff Brian K. Smith (“Smith”) worked on several construction projects on Washington D.C. landmarks, including the Smithsonian and the City Market on O Street. Because these were sizable projects, the Davis-Bacon Act (“DB Act”) applied to Smith’s work. Under the DB Act, contractors and subcontractors cannot pay workers less than the prevailing wage in that geographic area. The Secretary of Labor sets the prevailing wage in accordance with the type of task that an employee performs. In the event of a dispute concerning the classification of a task, the Department of Labor will determine the appropriate pay grade.

Smith alleged that his work was misclassified and, as a result, he received less pay than the DB Act required. Smith made an oral complaint with the Department of Labor about the discrepancy. Smith further alleged that the Department of Labor investigated and concluded that Smith was paid less than the DB Act’s minimum requirements. After the investigation, Smith was reassigned to a project in which he received lower wages.

Smith then filed a complaint in the District Court for the District of Maryland, alleging, in pertinent part, violations of the False Claims Act (“FCA”). Smith complained that defendants Shirley Construction Company and Clark Construction Group (collectively, “Defendants”) reported false information when they failed to categorize his work properly and subsequently retaliated against him when he reported the infractions. Under Section 3730(b)(2) of the FCA, a plaintiff must file the complaint under seal. Smith’s attorney filed the complaint under seal, but over the next few days, disclosed to the Defendants that a complaint had been filed against them. When the government became aware of the allegations, it moved to partially lift the seal. The government investigated the allegations and decided not to intervene. The Defendants then filed a Motion to Dismiss under Fed. R. Civ. P. 12(b)(1) and 12(b)(6). The district court dismissed the complaint with prejudice. The district court dismissed the complaint for three reasons: (1) Smith’s violation of the FCA’s seal requirements, (2) jurisdictional deficiencies, and (3) Fed. R. Civ. P. 9(b) pleading deficiencies.

The District Court Erred in Dismissing Smith’s Claims on Procedural Grounds

A violation of the FCA’s seal requirements warrants dismissal when the violation “incurably frustrates” the statutory purpose. The Fourth Circuit determined that the FCA’s seal requirement had the following purposes: “(1) to permit the United States to determine whether it already was investigating the fraud allegations (either criminally or civilly); (2) to permit the United States to investigate the allegations to decide whether to intervene; (3) to prevent an alleged fraudster from being tipped off about an investigation; and, (4) to protect the reputation of a defendant in that the defendant is named in a fraud action brought in the name of the United States, but the United States has not yet decided whether to intervene.” The Fourth Circuit held that violation of the seal requirement did not incurably frustrate the FCA’s statutory purpose, reasoning that the government properly investigated the allegations and that the Defendants did not suffer any harm because Smith’s attorney made the disclosures to counsel, rather than to the public.

The Fourth Circuit also determined that the District Court erred in reasoning that even if violating the seal requirements did not warrant dismissal, Smith could not proceed because of (1) jurisdictional deficiencies and (2) his failure to meet the pleading requirements under Fed. R. Civ. P. 9(b).

On the jurisdictional deficiencies issue, the district court invoked the “primary jurisdiction doctrine.” This doctrine allows courts to refer matters to an agency when the agency may have more expertise to make a determination. Thus, because the Secretary of Labor was authorized to determine whether Smith’s work was misclassified, the district court referred the matter to the Department of Labor. However, after the district court made the referral, it dismissed Smith’s claims with prejudice. The Fourth Circuit held that the district court should have stayed or dismissed the action without prejudice, pending the agency determination.

Regarding the Fed. R. Civ. P. 9(b) requirements, Smith’s attorney made an oral motion to amend the complaint in response to the district court’s concerns about Smith’s inability to meet the pleading requirements. The district court denied the motion. The Fourth Circuit affirmed the denial of the motion to amend, reasoning that Smith had met all of the pleading requirements in accordance with Fed. R. Civ. P. 9(b), which negated any need to amend the complaint.

The Fourth Circuit Reverses the District Court’s Dismissal of the Retaliation Claim 

In order to state a claim for retaliation, the plaintiff must show that he (1) engaged in a protected activity, (2) the employer knew about the activity, and (3) the employer took an adverse action against him as a result of the activity. While the district court held that Smith could not show that his employer knew about the activity, the Fourth Circuit reasoned that because Smith made a complaint to the Department of Labor, this satisfied the knowledge prong. As a result, the Fourth Circuit held that the district court erred when it dismissed Smith’s retaliation claim.

The Fourth Circuit Affirms in Part, Reverses in Part, and Remands for Further Proceedings

The Fourth Circuit affirmed the district court’s denial of Smith’s motion to amend and reversed the district court’s holding on the remaining claims on appeal. The court remanded the case to the district court for further proceedings.

By Taylor Ey

Today, the Fourth Circuit issued its decision in a published opinion in the civil case of United States ex rel. Wilson v. Graham Cnty. Soil & Water Conservation Dist.  Appellant, Ms. Karen Wilson, brought this claim on behalf of the United States under the False Claims Act’s qui tam provision, alleging that the appellee, Graham County Soil and Water Conservation District, fraudulently took money from the government.  The Fourth Circuit reversed the district court’s decision, holding that the district court did have subject matter jurisdiction to decide this action brought under the False Claims Act.

History of the case

In February 1995, a storm hit parts of western North Carolina, causing significant flooding and erosion in the area.  North Carolina’s Graham and Cherokee counties applied for relief under the Emergency Watershed Protection Program (“EWP Program”).  The EWP Program provides financial assistance to eligible states “to relieve imminent hazards . . . created by a natural disaster that causes a sudden impairment of a watershed.”  7 C.F.R. § 624.2.

Both counties entered into a “Cooperative Agreement,” as required by 7 C.F.R. § 624.8(c), and each agreed to perform or contract out the necessary work.  The Soil and Water Conservation District (“SWCD”) of each county was responsible for ensuring compliance with the EWP Program.  Each county hired independent contractors to complete the required cleanup and remediation.

During this time, Ms. Karen Wilson, the appellant in this case, was a secretary at the Graham County SWCD.  She suspected fraud in the implementation of the program both by her colleagues at the SWCD and by the government officials responsible for overseeing the EWP Program.  The Graham County SWCD was also being audited by county auditors at that time.

In April 1996, the auditors issued a formalized report (“the Audit Report”), stating that the independent contractor was likely hired “in violation of the County’s code of conduct,” and that the SWCD did not keep proper documentation of the EWP contracts.  According to the cover letter of the Audit Report, the auditors supplied four copies of the Audit Report: two copies for the Graham County records, one for the Graham County SWCD, and one for the United States Department of Agriculture (“USDA,” the department overseeing the EWP Program).

Ms. Wilson continued to suspect foul play.  She reported her concerns to the USDA.  In August 1997, USDA’s Special Agent Golec completed a Report of Investigation.  The report was distributed to state and federal law enforcement agencies, but the report was “not to be distributed outside [those agencies] . . . without prior clearance from the Office of Inspector General, USDA.”

In 2001, Ms. Wilson filed suit under the False Claims Act’s qui tam provision, alleging that the federal government received fraudulent invoices under the EWP Program in Graham and Cherokee counties.  In 2006, Ms. Wilson filed her third amended complaint, the pleading at issue in this case, naming several other defendants.

Should the District Court Have Dismissed Ms. Wilson’s Claim for Lack of Subject Matter Jurisdiction?

The issue before the Fourth Circuit was whether the qui tam provision of the False Claims Act barred Ms. Wilson from bringing this suit in federal court.

The qui tam provision allows private citizens to bring suit on behalf of the United States “to recover from those persons who make false or fraudulent claims for payment to the United States.”  Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280, 283 (2010).  The public disclosure bar, 31 U.S.C. § 3730(e)(4)(A) (2006), requires claims be dismissed if the claims are brought under public disclosure, unless the claimant qualifies as an original source.

The case turns on the proper interpretation of “public disclosure” under the qui tam provision.

The District Court’s Findings of Fact and Decision

The district court considered three questions: (1) whether any relevant audits, reports, hearings, or investigations had been publicly disclosed, (2) whether Ms. Wilson based her claims on any such public disclosures, and (3) if so, whether Ms. Wilson nonetheless was an original source of her claims.  The court concluded that (1) the Audit Report and the Report of Investigation from the USDA Special Agent had been publicly disclosed, (2) that Ms. Wilson based her claims on those reports, and (3) that Ms. Wilson was not an original source.  Thus, the district court dismissed Ms. Wilson’s claim for lack of subject matter jurisdiction.

The District Court’s Legal Conclusions Are Reviewed De Novo

The Fourth Circuit could uphold the district court’s dismissal of Ms. Wilson’s claim only if it found that (1) all relevant reports were publicly disclosed, (2) Ms. Wilson based her claims on those reports, and (3) Ms. Wilson was not the original source.  However, the Fourth Circuit held that the district court applied the incorrect legal standard to the factual findings under (1), thus the district court reached the improper result that the reports were publicly disclosed.

What is the Meaning of “Public Disclosure?”

The False Claims Act removes actions under the qui tam provision if the reports were “publicly disclosed” before the action was filed.

The Fourth Circuit looked to the plain meaning of “public disclosure,” citing to Webster’s Dictionary to define “disclosure” as “to open up to general knowledge,” “to expose to view,” and “to make known.”

Thus, the Fourth Circuit reasoned that it was Congress’s intent to remove jurisdiction if reports were made known to the public at large.  Because neither the Audit Report nor the USDA Special Agent Report were made known to the public, and the cover letters clearly indicated that the reports were only to be distributed to a select list, the record did not support the conclusion that the reports were publicly disclosed.

Although the Seventh Circuit has adopted the view shared by the district court, that the reports were publicly disclosed because they were distributed to public officials representing the community, this view is not adopted by any other circuit.  The Fourth Circuit expressly rejected this interpretation.

The Fourth Circuit Reversed the District Court

The Fourth Circuit held that the district court had jurisdiction to hear Ms. Wilson’s case because no public disclosure deprived the district court of jurisdiction.  The holding was limited to the matter of jurisdiction only.