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The 3rd U.S. Circuit Court of Appeals has ruled that county governments cannot be sued under the Federal False Claims Act — also known as the federal whistleblower law — because its mandatory treble damages provision is “punitive” in nature and local governments are immune under the common law from being assessed punitive damages. “The rationale for exempting a municipal entity from punitive damages awards is firmly grounded in public policy,” U.S. Circuit Judge Carol Los Mansmann wrote in United States ex rel. Anthony Dunleavy. “Assessing punitive damages against a public entity serves neither the retributive nor the deterrent purposes of civil punishment and contravenes public policy by punishing the taxpayers and citizens who constitute the very persons who are to benefit from the public example which the granting of such damages is supposed to make of the wrongdoer,” Mansmann wrote in a unanimous opinion joined by Judges Jane R. Roth and Julio M. Fuentes. The ruling is a major victory for municipalities because the court refused to create an exception that would allow FCA claims against local governments that eliminated the treble damages and sought only compensatory damages. “Creating an exception for local governments from the existing damages scheme would require us to rewrite the FCA. Of course, while Congress is free to do this if it chooses, such redrafting is outside the traditional province of the courts,” Mansmann wrote. But for whistleblower Anthony Dunleavy, the ruling likely means the end of a roller-coaster ride through the courts that began in 1994. In the suit, Dunleavy, a former consultant to Delaware County, Pa., alleged that county officials misused money from the U.S. Department of Housing and Urban Development by purchasing a tract of land for use as a park but failing to return about $1.9 million when it later sold off part of the land to the Pennsylvania Department of Transportation for use in the construction of the Blue Route. Such suits — which are also called “qui tam” actions (meaning “in the name of the king”) — are automatically filed under seal and sent to the U.S. Attorney’s Office to allow the government the option of prosecuting the case itself. In Dunleavy’s case, the government declined to intervene in 1995, concluding that no fraud had been committed. But HUD conducted an audit and demanded that the county pay it $1.7 million plus interest. In 1996, HUD and the county settled the dispute between them without including Dunleavy in the settlement process. Dunleavy opted to press the case on his own, but Senior U.S. District Judge Thomas N. O’Neill Jr. dismissed it in 1996, finding that Dunleavy was not a true whistleblower since his suit was based on publicly disclosed information. The 3rd Circuit revived the case in 1997, saying Dunleavy had access to inside information because of his work as a consultant to the county. In 1998, Dunleavy cleared another significant hurdle when O’Neill rejected another motion to dismiss and held that his suit alleged an actual fraud with sufficient “particularity.” But in October 2000, O’Neill ruled that Dunleavy’s case suffered a fatal blow from a decision handed down a few months before by the U.S. Supreme Court that said whistleblowers cannot sue a state under the FCA since the law’s treble damages are “punitive in nature.” Before dismissing the suit, O’Neill asked the lawyers to file briefs addressing whether the Supreme Court’s decision in Vermont Agency of Natural Resources v. United States ex rel. Stevens barred Dunleavy’s case. In Stevens, O’Neill said, Justice Antonin Scalia held that one reason not to allow an FCA suit against a state is that the law “imposes damages that are essentially punitive in nature,” and there is a “presumption against the imposition of punitive damages on governmental entities.” Dunleavy’s lawyer, Regina D. Poserina, argued that Stevens did not apply to Dunleavy’s case since Scalia’s reasoning was similar to an 11th Amendment immunity analysis. Although states can benefit from the 11th Amendment, counties cannot, she argued. But O’Neill said Poserina failed to address the finding in Stevens that the FCA’s damages provisions are punitive. Scalia, he said, cited the Supreme Court’s 1981 decision in City of Newport v. Fact Concerts, which held that punitive damages cannot be assessed against any governmental entity. Since Scalia relied on Newport to hold that states cannot be sued by whistleblowers under the FCA, O’Neill said, “it is therefore almost inescapable that the same would be true concerning counties and other state subdivisions — the very subject matter before the court in Newport.” Lawyers with the U.S. Department of Justice also filed a brief supporting Dunleavy’s right to go forward with the case. They argued that the FCA’s treble damages are different from punitive damages. But O’Neill disagreed, saying Scalia used “unequivocal language” in holding that the FCA’s treble damages are punitive. Now the 3rd Circuit has upheld O’Neill’s ruling and held that the FCA can never be used to sue municipalities because its treble damages are both mandatory and punitive. “Unless Congress clearly provides otherwise, a local governmental entity is immune from punitive damages awards,” Mansmann wrote. The same logic, she said, prompted the 3rd Circuit’s 1991 decision in Genty v. Resolution Trust Corp., which held that municipalities were immune from civil punitive damages awards under RICO. “In reaching our holding in Genty, we … commented that in order to subject municipalities to punitive damage awards, a statute must expressly provide for such an award against a municipality,” Mansmann wrote. Mansmann rejected Dunleavy’s argument that the treble damages provision of the FCA is not necessarily punitive in nature. The Supreme Court already decided that question in Stevens, she found. Dunleavy argued that the language in Stevens was dicta since it was not central to the court’s holding that a state is not a “person” that can be sued under the FCA. Mansmann disagreed, saying, “Clearly, the court relied on the act’s treble damages scheme in reaching its holding and thus its declaration that the damages scheme is punitive is not dictum.” The final question, Mansmann said, was “whether Congress intended to disturb local governmental immunity from punitive damages by subjecting local governments to FCA suits.” Dunleavy argued that Congress clearly intended that local governments be subject to the FCA when it was enacted in 1863 and that when Congress added the treble damages in 1986, it must have intended that local governments remain potentially liable under the law. Mansmann disagreed, saying, “The 1986 amendments added nothing to the meaning of the term `person’ that remotely approaches a clear expression of Congress’ intent to abrogate local governmental immunity.” In a friend-of-the-court brief, the Justice Department urged the 3rd Circuit to rule in Dunleavy’s favor and subject the county to at least “some liability” by creating an exception to the mandatory treble damages scheme, effectively reducing any award against a local government to a level that would be deemed compensatory rather than punitive. But Mansmann found that the FCA’s treble damages are mandatory and that creating such an exception would amount to rewriting the law — something only Congress can do.

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