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In an opinion that will be of interest to both corporations and qui tam relators, the U.S. Supreme Court recently limited federal-court jurisdiction over False Claims Act proceedings through strict application of the “original source” requirement of the statute. Under the court’s ruling, the “original source” requirement precludes actions by qui tam relators after public disclosure of fraud through the media unless the relator is an “original source” of the allegations proven at trial. Rockwell International Corp., et al., v. United States, et al. The False Claims Act prohibits the submission of false or fraudulent claims for payment to the United States, and authorizes either the attorney general or private individuals in the government’s name to bring civil actions to recover damages. In 1986, Congress amended the statute to strike a balance between “parasitic” qui tam actions brought by individuals with no independent knowledge of fraud, on the one hand, and over-deterrence stemming from provisions then in effect which denied jurisdiction in actions where there had been “public disclosure” of the fraud. The 1986 amendments included a modified “public disclosure bar” which added two exceptions to the elimination of federal-court jurisdiction. The attorney general and any person who was an “original source” of allegations could bring an action regardless of any public disclosure. The court’s recent Rockwell opinion strictly defines the term “original source.” In Rockwell, a former employee of the company named James Stone filed a false claim action against Rockwell in 1989, three years after he had been laid off. Stone had worked at the Rocky Flats nuclear weapons plant in Colorado between 1980 and 1986 under a contract between Rockwell and the Department of Energy. Rockwell operated the plant for the government and was paid, in large part, based on the extent to which it successfully managed environmental, safety and health risks. One of these risks involved the disposal of toxic pond sludge. During the 1980s, Rockwell devised a plan to dispose of the sludge by combining it with concrete to form “pondcrete” blocks that could be stored onsite or transported to other sites for disposal. Stone, an engineer, concluded that the proposal would not work because of a perceived defect in the piping system that extracted the sludge from the ponds. Despite Stone’s prediction, Rockwell proceeded with the project and successfully manufactured concrete-hard “pondcrete blocks” while Stone was employed. After Stone was laid off in March 1986, Rockwell discovered that one of its foremen had mismanaged the process and had changed the ratio of concrete to sludge. The result was unstable blocks that quickly deteriorated and “leaked” hazardous waste. The failure and contamination, however, did not stem from the piping system as predicted by Stone. The DOE did not become aware of the problems until May 1988, after which the media reported the discovery. In the interim, Stone had met with the FBI to report numerous, unrelated environmental lapses, which led to a search of the plant in 1989, and ultimately to a corporate guilty plea to environmental violations and a fine of $18.5 million. One month after the search, in July 1989, Stone filed a qui tam suit under the False Claims Act. Stone alleged that Rockwell was required to comply with certain federal and state environmental laws; that Rockwell had violated the laws throughout the 1980s; and that Rockwell submitted false claims for payment on the Rocky Flats contract by failing to disclose the violations. As required under the act, Stone filed his complaint under seal and delivered a confidential disclosure statement to the government. The statement identified 26 environmental and safety issues, only one of which involved pondcrete. As to that claim, Stone alleged that he had reviewed the design for the pondcrete system and had foreseen that the piping mechanism would not work. The government initially declined to intervene, but later joined the action in 1996. The government and Stone then filed a joint, amended complaint that omitted any reference to a failed piping system. The plaintiffs further amended their claims in a statement that later became part of the final pretrial order and which superseded their earlier claims. They asserted that a new foreman had compromised the pondcrete’s stability by reducing the ratio of concrete to sludge in an effort to increase production. The case proceeded to trial in 1999. None of the witnesses Stone had identified testified at trial. The government did not offer any of his documents into evidence. Nor did the plaintiffs argue at trial that a defect in the piping system caused the problem pondcrete. The jury found for the plaintiffs on the pondcrete claim for the period of April 1, 1987, to Sept. 30, 1988, after Stone had left the plant. As was noted above, Section 3730(e)(4)(A) of the act eliminates federal court jurisdiction over an action which is based upon the “public disclosure of allegations or transactions � from the news media, unless the action is brought by the attorney general or the person bringing the action is an original source of the information.” Section 3730(e)(4)(B) of the act defines “original source” as “an individual who has direct and independent knowledge of the information on which the allegations are based.” That phrase, “information on which the allegations are based,” framed the court’s analysis. The court determined that final allegations, as opposed to allegations stated in an initial complaint, resolved the question of who is an “original source.” Justice Antonin Scalia, writing for the court, opined: “The statute speaks not of the allegations in the �original complaint’ (or even the allegations in the �complaint’), but of the relator’s �allegations’ simpliciter.” As applied to Stone, this required examination of the allegations as amended by the final pretrial order and the false claims ultimately found by the jury. On this score, Stone fell short. He did not know that the pondcrete was insolid when he left the plant. He did not know that Rockwell would fail to address the problem. He did not know about the leaks. And he did not know about the subsequent false statements Rockwell made to the government. In short, “Stone’s prediction that the pondcrete would be insolid because of a flaw in the piping system [did] not qualify as �direct and independent knowledge’ of the pondcrete defect” charged and proved at trial. In reaching its decision, the court brushed aside the government’s concern that a focus on amended “allegations” at the time of trial would likely drive a wedge between qui tam relators and the government. In cases where the government joins a qui tam action, the solicitor general advised, the government often seeks to narrow its theories of liability as trial approaches. This practice, the government warned, might eliminate jurisdiction as to the relator. The court was unmoved, stating: “[e]ven if this policy concern were valid, it would not induce us to determine jurisdiction on the basis of whether the relator is an original source of information underlying allegations that he no longer makes.” While the Rockwell opinion restricts the definition of “original source,” the court left the jurisdictional door open for relators with imperfect information about a false claim so long as it rises to the level of actual knowledge. The court noted that “a qui tam relator’s misunderstanding of why a concealed defect occurred would normally be immaterial so long as he knew the defect actually existed.” Finally, the court left intact the $4.2 million judgment and award in favor of the government despite the finding that the False Claims Act barred jurisdiction over the relator’s claims. The court reasoned that dismissal of the relator did not bar the government from proceeding because the government had an independent right to initiate an action. Members of the defense bar will welcome this opinion as affording much needed protection to companies which find themselves beleaguered by opportunistic former employees who besiege corporations with hypothetical allegations of fraud. Plaintiffs counsel will bemoan the opinion as an overly restrictive statutory construction which penalizes relators for bringing good faith allegations of fraud which are ultimately proven at trial, although under modified theories of liability. Christopher Hall is a partner in the litigation department at Saul Ewing. As a former federal prosecutor, Hall represents individuals and corporations facing criminal charges, government investigations and enforcement actions. He specializes in industries such as life sciences, defense, financial services and health care. Hall may be reached at 215-972-7180.

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