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You recently learned that the defense contractor where you are general counsel has been overcharging in one of its manufacturing units. An internal review determined the extent of the overbilling and its accidental nature. Upon your recommendation, the company voluntarily disclosed the overcharges to the local U.S. Attorney’s Office. Successful negotiations are leading to a resolution without any criminal charges. Within days of signing a settlement and returning the overpayments, you receive a False Claims lawsuit filed by a former employee. Even though your disclosure to the government was complete, can your company still be exposed to qui tam claims? The answer may depend, at least in part, on the location of your business and on the language in your employment manual. THE QUI TAM STATUTE The qui tam provisions of the False Claims Act (FCA), 31 U.S.C. � 3729 et seq.(1999), was designed to allow individual citizens with knowledge of fraud against the government to file actions on the government’s behalf. Congress has provided significant financial incentives for the “relator” who files the qui tam action. The government has sixty (60) days to decide whether to intervene or file an extension asking for additional time. If the government intervenes, the relator may receive between 15 percent and 25 percent of the proceeds of any settlement. If the government opts not to intervene, the relator may bring the action alone (although still on the government’s behalf) and is entitled to not less than 25 percent and not more than 30 percent should the action be successful. A False Claims action may be barred if it is based on public information. 31 U.S.C. � 3730(e)(4). While the FCA’s purpose is to “promote private citizen involvement in exposing fraud,” it simultaneously seeks to ban “parasitic suits by opportunistic late comers” using information that already has been made public. Accordingly, a government contractor, such as the one in our example, may prevent a qui tam action by making the false claim “public.” In evaluating whether a private qui tam action is viable, a court will look at three factors: � Have the relator’s allegations been “publicly disclosed” prior to the filing? � If so, is the action “based upon” publicly disclosed information? � If so, is the relator an “original source” of the information? Thus, the threshold inquiry is what constitutes a “public disclosure.” A NEW VIEW OF DISCLOSURE Whether disclosure to a government attorney during settlement negotiations qualifies as a “public disclosure” has not been fully resolved. Before 1986, a private qui tam action was expressly barred if it was based on information already in the government’s possession. That language was supplanted by a 1986 amendment requiring that the information be disclosed to the public, either in a hearing, investigation or in the media. “[I]t is not enough for the evidence of fraud [to exist] inside the government’s overcrowded file cabinets.” U.S. ex rel. Findley v. FPC-Boron Employees’ Club, 105 F.3d 675 (D.C. Cir. 1997). Instead, courts require the information be “affirmatively provided to others not previously informed thereof.” U.S. ex rel Ramseyer v. Century Health-care Corp., 90 F.3d 1514 (10th Cir. 1996). Several courts have held that information learned during discovery in a prior lawsuit had to be “actually filed” with a court in order to be considered disclosed for qui tam purposes. See, e.g., U.S. ex rel. Springfield Terminal Railway Co. v. Quinn, 14 F.3d 645 (D.C. Cir. 1994). A recent ruling by the U.S. Court of Appeals for the Seventh Circuit held that information disclosed to a public official who has responsibility for the transactions upon which the qui tam action is based can be considered “publicly disclosed.” U.S. ex rel. Mathews v. Bank of Farmington, 166 F.3d 853 (7th Cir. 1999), was a qui tam action against a bank for its failure to disclose to the Farmers Home Administration (FHA) the existence of private guarantors on loans also guaranteed by the FHA. The relator, Eunice Mathews, was one of the guarantors and had been sued by the bank on his guaranty. During that lawsuit, Ms. Mathews’ attorney learned that the bank had failed to disclose Ms. Mathews’ guaranty and subpoenaed an FHA official, who, in turn, phoned the bank, which then disclosed Ms. Mathews’ guaranty. The Seventh Circuit held that the bank’s failure to reveal the guaranty had been “publicly disclosed” to the FHA official in the phone call, and that the qui tam action was therefore barred. The Farmington court also broadly interpreted the statute’s requirement that the disclosure be made in a hearing or investigation. 31 U.S.C. � 3730(e)(4). The court characterized the phone call from the FHA to the bank as an administrative investigation, noting the “investigation need not be . . . formal . . . they may be informal or casual inquiries so long as they are undertaken by authorized officials with an official purpose.” 166 F.3d at 862. It remains to be seen whether other jurisdictions will adopt this broad construction of “public disclosure.” Even if they do, qui tam actions can still be maintained if the allegations are not “based upon” the publicly disclosed information, or if the relator was the “original source” of the disclosure. �ORIGINAL SOURCE’ Sec. 3730(e)(4)(B) of the FCA defines “original source” as “an individual who has direct and independent knowledge of the information on which the allegations are based.” The statute also requires that the “original source” voluntarily disclose the substance of the complaint to the government prior to filing the action. Some courts hold this voluntary disclosure must be made prior to the disclosures that gave rise to the jurisdictional bar. Independent knowledge means that the relator’s information derives from a source other than the information contained in the public disclosure. Direct knowledge “is marked by the absence of an intervening agency” and typically requires the relator to have been personally involved in the fraudulent conduct or to have observed it first-hand. Barth v. Ridgedale Electric Inc.,44 F.3d 699 (8th Cir. 1995). In Barth, the court held that the relator did not have direct knowledge of fraudulent payroll claims where his information was obtained by personally visiting the job site, interviewing employees and reviewing publicly available payroll records. �BASED ON’ PUBLIC INFORMATION Whether you are protected against a qui tam suit may depend on the federal circuit where your company is located. The majority view broadly holds that an action is “based upon” publicly disclosed information if it is “supported by,” or is “substantially similar” to, that disclosure. Under this interpretation, once the allegations are publicly disclosed, any complaint with similar allegations is necessarily “based upon” that disclosure. Thus, a relator’s complaint will be barred even if he is only “theoretically” aware of the disclosure. But the Fourth and Seventh Circuits hold that a complaint is “based upon” publicly disclosed information only if it “actually derives from” that disclosure. Thus, a relator who claims he is unaware of a prior civil action in which the allegations are publicly disclosed will not necessarily be prevented from bringing a qui tam action. U.S. ex rel Siller v. Becton, Dickinson & Co., 21 F.3d 1339 (4th Cir. 1994). This distinction may prove critical in devising a company’s disclosure strategy. Under the minority view, a company that voluntarily meets with government officials and publicly discloses still might not be insulated from a qui tam action brought by an employee or company insider who can allege he was unaware of those public disclosures. Moreover, the relator can bring the action despite your company’s public disclosure without relying on the act’s “original source” exception. Indeed, the minority’s interpretation has been roundly criticized for “swallow[ing] the original source exception whole.” Findley at 683. To aid in establishing that a qui tam complaint is “based upon” public disclosures, businesses could find it advantageous to conduct well-documented meetings with employees who might have knowledge of questionable practices prior to engaging in voluntary disclosure talks with government officials. These meetings should adequately outline the general nature of the disclosures, but great detail may not be necessary. Even those courts that require that the relator’s complaint be “actually derived from” the public disclosures are likely to bar a qui tam suit where it is based in any part on disclosed transactions. CAN YOUR COMPLIANCE OFFICER BECOME A QUI TAM PLAINTIFF? Compliance officers are the first line of defense in preventing a qui tam suit by detecting and correcting wrongdoing. However, once considered part of the “solution,” they are also being viewed as potential relators. Some companies have considered asking compliance officers to sign a confidentiality agreement to restrict disclosures. Even consultants who review compliance programs or special issues, such as health care billing codes, have been asked to sign some type of confidentiality pledge. This approach has little chance of success. The Ninth Circuit has held that prefiling constraints on an individual’s ability to bring a qui tam action would eviscerate the basic policy of the FCA — having private citizens assist in the uncovering of fraud. U.S. ex rel Green v. Northrup Corp., 59 F.3d 953, 963 (9th Cir. 1995). Michael Green uncovered evidence that Northrup had allegedly overcharged the U.S. Air Force. When Mr. Green was terminated, he filed an employment action that was eventually settled, and signed a release covering “any theory under the law whether . . . statutory or of other jurisdiction.” Eight months later, Mr. Green filed a qui tam action. Northrup argued that he had relinquished his right to bring a qui tam action, but the Ninth Circuit refused to enforce the release because it would “threaten to nullify the incentives Congress intended to create in amending the provisions of the False Claims Act in 1986.” Rather than making a doubtful attempt to prevent disclosure through a confidentiality agreement, companies should make clear that disclosure by a compliance officer is disclosure by the company itself. Several courts have adopted this reasoning in the public sector, holding that government employees whose job responsibilities include an obligation to report fraud cannot meet the statute’s “independent knowledge” and “voluntary” disclosure component. See, e.g., U.S. ex rel. Pentagen Technologies Int. Ltd. v. CACI Int. Inc., 1997 WL 473549 (S.D.N.Y. 1997). The same should be true in the private sector. It is essential that the employee manual or employment agreement clearly describe the employee’s job duties and affirmative obligation to investigate and report fraud. Of course, it should make clear that the compliance officer must follow certain procedures and not act alone. The audit committee, or at least one member, should be affirmatively charged with reviewing suspected false claims and reaching a joint decision with the compliance officer of what should be disclosed and when. Jonathan S. Feld is a partner at Katten Muchin Zavis in Chicago, where he specializes in criminal and complex civil litigation. Michael S. Weisman is an associate specializing in these areas. This article appeared first in Business Crimes Bulletin.

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