Wednesday, March 28, 2007

Rockwell International v. U.S. ex rel. Stone, The False Claims Act And Anti-Corruption Campaigns in the U.S.

One of the more useful vehicles in the battle against corruption in the United States involving the expenditure of public funds has been the False Claims Act, 31 U.S.C. § 3730. One of the provisions of the False Claims Act permits whistle blowers the right to collect as a reward a portion of the amounts recovered under the Act (its qui tam provisions). Section 3730(b)(1) of the False Claims Act permits an action to be brought by an individual in the government's name, but the jurisdiction of the courts over the claim is lost if the action is “based upon the public disclosure of allegations or transactions . . . , unless the action is brought by the Attorney General or the person bringing the information,” §3730(e)(4)(A). To satisfy the statutory standard as an "original source", the claimant must demonstrate that she had "direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action . . . based on the information.” §3730(e)(4)(B).

In Rockwell International v. United States ex rel Stone, 05-1272, decided March 27, 2007, the U.S. Supreme Court interpreted the reward provision of the False Claims Act narrowly to deny recovery of a reward for a claimant whose initial suit eventually led to the recovery of a portion of the judgment to be recovered by the claimant and the U.S. government against Rockwell International (now part of Boeing). Greg Stohr, Whistleblower Suits Limited By Court in Boeing Case (Update 5),, March 28, 2007.

The whistle blower, a Mr. Stone, had
"worked at Rocky Flats until 1986, when he was laid off. While there, he questioned the company's plan for disposing of toxic sludge by mixing into cement.

Soon after his departure, Stone began giving information to the Federal Bureau of Investigation and the Environmental Protection Agency about various environmental, safety and health problems at the plant. The government's investigation culminated in 1992, when Rockwell pleaded guilty to 10 federal environmental violations.

In the civil case, a jury concluded that Rockwell had defrauded the government from April 1987 to September 1988, after Stone had left the company. The Denver-based 10th U.S. Circuit upheld the award." Stohr, supra.

In an exceedingly formalist opinion, in which the majority declined to give much weight to the substance of the issues and policies raised, the majority read the relevant provisions of the False Claims Act against Stone's claims. The court first determined that because the original source requirement is jurisdictional, the court was required to satisfy itself that the standard had been met whether or not the defendant raised the issue (Slip op. at 8-11). It then determined that Stone did not have "direct and independent knowledge of the information" as required by the statute (Slip op. at 12-18). Justice Scalia concluded that because Stone had correctly predicted the violation, but did not "know" that the outcome predicted would occur, and because though Stone had predicted the result but had incorrectly hypothesized the cause (Stone thought the piping system was defective but the problem he predicted was caused by worker action after he left his employment with Rockwell) he did not possess "direct and independent knowledge" within the meaning of the False Claims Act (Slip op. at 17-18).

Stone’s knowledge falls short. The only false claims ultimately found by the jury (and hence the only ones to which our jurisdictional inquiry is pertinent to the outcome) involved false statements with respect to environmental, safety, and health compliance over a one-and-a- half-year period between April 1, 1987, and September 30, 1988. As described by Stone and the Government in the final pretrial order, the only pertinent problem with respect to this period of time for which Stone claimed to have direct and independent knowledge was insolid pondcrete. Because Stone was no longer employed by Rockwell at the time, he did not know that the pondcrete was insolid; he did not know that pondcrete storage was even subject to RCRA; he did not know that Rockwell would fail to remedy the defect; he did not know that the insolid pondcrete leaked while being stored onsite; and, of course, he did not know that Rockwell made false statements to the Government regarding pondcrete storage. (Slip op. at 17).

The majority was unsympathetic to functional argument made in light of the policy underlying the False Claims Act. Justice Scalia, for example, rejected the Bush Administration's policy based arguments.
The Government objects that this approach risks driving a wedge between the Government and relators. It worries that future relators might decline to “acquiesc[e]” in the Government’s tactical decision to narrow the claims in a case if that would eliminate jurisdiction with respect to the relator. Brief for United States 44. Even 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. (Slip op., at 16-17).

In addition, Justice Scalia, for the majority, rejected the idea that the False Claims Act applied to any claim that actually resulted in liability merely because someone was an original source with respect to some other (even related) information Slip op., 18). "Section 3730(e)(4) does not permit jurisdiction in gross just because a relator is an original source with respect to some claim. We, along with every court to have addressed the question, conclude that §3730(e)(4) does not permit such claim smuggling. " (id.). While the government's intervention saved the action against Rockwell, it could provide no independent basis for recovery by Stone. (Slip op. at 19-20).

From a constitutional law perspective, there is little to complain about in the majority's reading of the statute. Putting aside the former law professor's obvious delight in extracting a certain logic and meaning from the words of the statute that Justice Scalia indulged, the opinion raises no great jurisprudential issue. It does suggest, though, a continuing reluctance, on the part of the Court, to read into statute a power of private monitoring and enforcement of law. The Court continues to act as a protector of the borders between public activity, presumptively a governmental function, and private activity, in which individuals are free to act. The recruitment of private individuals to monitor and enforce public law for or on behalf of or in place of the state has been increasingly indulged by a government strapped for funds and eager to extend its enforcement. The Supreme Court has tended to resist a wholesale transfer of enforcement rights to individuals, from private attorney general provisions, to the affirmation of implied private rights of action under a variety of federal statutes. Perhaps the problem is one of democratic accountability (Cf. N.Y. v. U.S., 488 U.S. 1041 (1992)). Private attorney generals may serve the state in its efforts to enforce the law, but they are not accountable directly to the electorate and tend to serve their own private interests in choosing the timing and focus of their law enforcement efforts rather than those of the state. On the other hand, there does not yet appear to be a constitutional impediment to this devolution of executive power in individuals by creating "quasi-public" causes of action or rights to enforce. And indeed, such devolutions of enforcement power has become fairly commonplace, culminating recently in the private enforcement provisions well marbled throughout the Sarbanes Oxley Act. It was then no surprise that the Bush administration sided with Stone and against the interests of the business community in this litigation. "The Bush administration sided with Stone, arguing that it was in the government's interest to encourage whistle-blowers, even though the government keeps more money now that Stone has lost." Mark Sherman, Court Tightens Whistle Blower Rules, AP, March 27, 2007.

But these issues never invaded the interpretive tour de force of the majority opinion. Lamentably, it did not find its way into Justice Steven's dissent either. Justice Steven, joined in dissent only by Justice Ginsberg, rejected the majority's narrow reading of the qui tam provisions. Justice Stevens argues that
the majority’s approach suggests that the relator must have knowledge of actual facts supporting the theory ultimately proven at trial—in other words, knowledge of the information underlying the prevailing claims. . . . Such a view is not supported by the statute, which requires only that the relator have “direct and independent knowledge” of the information on which the publicly disclosed allegations are based and that the relator provide such information to the Government in a timely manner. (Slip op., Stevens, J., dissenting, at 2).
Justice Stevens suggested, however, only that Stone had not been given the chance to establish that he had provided his direct and independent knowledge of the violation before filing his own suit. (Id., Slip op., at 3). "Because there has been no finding as to whether Stone was an original source as to those public disclosures, I would vacate and remand for a determination whether Stone was in fact an original source of the allegations publicly disclosed by the media in 1988 and 1989." (Id., at 3-4).

As a consequence, Boeing may wind up liable on the judgment against its predecessor, but Stone, whose allegations and efforts prompted the investigation leading to the recovery, will not. Stohr, supra.

It is lamentable that Justice Stevens did little more to discuss both the underlying policy reasons favoring his more functional reading of the statute nor the difficulties with the strictly formalist approach adopted by the majority. It seems clear that Congress had not meant to create traps for the unwary in creating a reward system for exposing corruption. The greater the technical difficulties a court reads into the provision the less likely that any person would risk job, reputation, time and energy to attempts to expose possible corruption among much more financially secure, well connected and established economic entities. The majority's reading, thus, whole plausible, as a formal matter, effectively raises sufficient large transaction costs to private exposure of corruption as to make such action unlikely. That result appears at odds with the intent of Congress in privatizing anti-corruption efforts. After Rockwell, it is likely that the individual will be cut out of the monitoring process, leaving it to the government (funded by scarce taxpayer dollars) and the civil society community or other collectives organized for such purposes, to seek to monitor and enforce under the False Claims Act system. "The ruling likely will reduce 'fishing expeditions' among relators, as whistle blowers are known under the False Claims Act, according to Peter Hutt, a government contracts lawyer at Miller & Chevalier in Washington. . . Hutt said the ruling might affect pending cases claiming fraud by companies involved in the reconstruction of Iraq." Stohr, supra.

National whistleblower advocacy organizations were dismayed by the result. Stephen M. Kohn, president of the National Whistleblower Center posted the following statement on the NWC website:

The Supreme Court overturned the jury verdict, and permitted the contractor to pocket the fruit of its fraud. Rockwell stole from the taxpayers when it failed to adhere to the terms of a binding federal contract. The Supreme Court ruling will result in whistleblowers being cheated out of rewards by unscrupulous contractors. This is a disastrous ruling for the American public. By shutting the door on whistleblowers, the Supreme Court has cut the legs off of America’s most effective anti-fraud law. (National Whistleblower Center, Supreme Court Again Undermines Whistleblower Rights, March 27, 2007, Statement of Stephen M. Kohn)

The business community had an understandably different reaction. The decision makes it less likely that it will have to fear tattling by its employees and can get back to the business of developing relationships with its governmental handlers.

The only fly in the ointment, perhaps, for the business community, is that Rockwell International had nothing to say about the power of civil society elements, who may not need the financial incentive, to bring actions. This hole is much more important than it might seem. Justice Scalia determination that the federal courts do not lose jurisdiction when a case, originally brought by an individual on the basis of one set of allegations, is thereafter maintained by subsequent governmental intervention (Slip op., at 17-18) provides civil society elements fighting corruption a large opening through which they might seek individuals willing to commence False Claims actions with the hopes of triggering the type of media attention that invariably draws government reaction (and hopefully a decision to join the action--whatever the posture of the litigation thereafter).

For the whistle blowing community and elements of civil society advocating private enforcement of the corruption aspects of public contracts, the case presents a difficult choice. Either civil society will have to find a way to provide additional incentives to potential whistle blowers, or they will have to engage in the long, complex and uncertain process of seeking a revision of the False Claims Act. Perhaps during the two years before the next general election in 2008, something along those lines migth be possible. The Bush administration might be amenable to some sort of change and the Democratically controlled Congress might find some sort of "fix" desirable before 2008. But the results might not please anyone. Still, the political solution appears to be the best course for the NGO community at this point, if only as a vehicle for generating public interest in the issues and educating the political community before the next general elections.

But there is some possible bad news potentially on the horizon, as well. The Supreme Court did not consider the constitutionality of whistle blowing provisions in statutes like the False Claims Act. Cf. Garcetti v. Ceballos, No. 04-473 (May 30, 2006) (no first amendment protection for employee speech for statements made pursuant to their official duties). But opinions like Rockwell may embolden the business community to press that line of attack in other cases. The likely target might not be the False Claims Act but the Whistle Blower provisions of the Sarbanes Oxley Act. Among the likely candidates are the whistle blower cases which are increasingly asserted against Wal-Mart. See Michael Barbaro, Wal-Mart Hires Justice Scalia's Son for Whistle-Blower Suits, San Fransisco Chronicle, July 10, 2005. Two of those actions were grounded in the whistle blowing provisions of the Sarbanes-Oxley Act Section 806 ("Scalia, who was solicitor of the Department of Labor from 2002 to 2003, is defending Wal-Mart against two of the lawsuits, those filed by Bowen and Armstrong under the Sarbanes-Oxley Act, which expanded whistle-blower protections for employees of public companies. " Barbaro). While the Sarbanes Oxley provisions are in some respects substantially different than the provisions at issue in Rockwell International, it may also provide a vehicle for testing the power of Congress to impose such rules on business. At least one of those claims, those of Jared Bowen, were still being reviewed by the Department of Labor as of December 2006. See Stephen Taub, Wal-Mart Whistle Blower Drops Suit,, Dec. 1, 2006. Other courts have alfready indicated a reluctance to read their mandate broadly to enforce Department of Labor recommendations under the Sarbanesd-Oxley Whistle blower provisions. See Stephen Taub, Judge Won't Enforce Whistle Blowing Ruling,, Oct. 6, 2006 ("Whistle-blower David Welch, the former chief financial officer of Cardinal Bankshares, had filed a complaint in the district court in Roanoke, Virginia, to force the bank to comply with an earlier order of reinstatement. However, Judge Glen Conrad said he did not have the authority to enforce the ruling by the DoL's administrative review board since it was a preliminary action, according to the wire service.").

On the scale of great cases, Rockwell International would hardly rate. Reduced to its essence, it is little more than another example of the Supreme Court applying a plausible, if somewhat tortured reading of the language of a statute against its authors. While such an interpretive stance is common in interpreting contract provisions at common law, it is hardly always appropriate in constitutional interpretation. It is least appropriate when language is read, again plausibly, in a way that clearly is inconsistent with the intent of the statute read as a whole. The consequences "on the ground", in this case, will be much greater than the effect on constitutional jurisprudence. At a time when corruption occupies an increasingly important place in national and international policy, it is a shame that the Court insisted on making anti-corruption efforts harder rather than easier.

1 comment:

Anonymous said...

Mr Stone some claim was cut out of any $$ award(under the qui tam provisions). He was fired, and was he not wrongfully discharged, and retaliated against, by the illegal activity of Rockwell.
So, where were Stone's attorneys standing tall for Mr Jim Stone under 31 U. S. C. 3730(h) which provided a personal cause of action that had no jurisdictional bars. This part of the Stone saga seems to remain under the radar. Can any explain, since some are concerned Mr Stone was not made whole--where was his $ 10 million NYC law firm(its claimed billing hours) standing up for those rights. Indeed, how did that get submerged in the larger picture of the events on Rocky Flats ? Hopefully some can provide answers to that ? Justice should demand that full disclosure.