Hughes Hubbard & Reed LLP
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INNOVATION STANDS OUT
WHISTLEBLOWER CASES
UPDATE ON QUI TAM/FALSE CLAIMS ACT LITIGATION
MAY 2003
Supreme Court Holds Municipalities and
Counties Can Be Sued Under False Claims Act
In a very recent decision, the United States Supreme Court significantly expanded the group of
targets whom whistleblowers can sue under the False Claims Act (“FCA”). That decision, Cook County,
Illinois v. United States ex rel. Chandler, 538 U.S. __, 123 S. Ct. 1239 (2003), held that whistleblowers
(also known as “relators”) may assert claims under the False Claims Act against not only private
corporations and individuals, but also against any municipalities and counties that receive federal funds.
Some background: The False Claim Act allows a private citizen whistleblower to bring a civil
action on behalf of the U.S. Government charging fraud by entities or individuals who receive or use
Government funds. If successful, the whistleblower then receives a percentage of the monies recovered
from the defendant. These actions, referred to as “qui tam” cases, effectively allow individuals to act as
“private attorneys general” to prosecute perceived misuses of federal monies. The most common types
of whistleblowers are disgruntled former employees, competitors and subcontractors, state and local
governmental employees, and federal employee “watchdogs.”
The monetary exposure for defendants can be substantial. Under the FCA, “[a]ny person” who,
inter alia, “knowingly presents, or causes to be presented, to an officer or employee of the United States
Government . . . a false or fraudulent claim for payment or approval” is liable to the Government for
treble damages, plus a civil penalty of $5,000-$10,000 per claim, and costs. 31 U.S.C. § 3729(a).
Although the Attorney General may sue under the FCA, most cases are initiated by whistleblowers, who
bring the action in the name of the Government. The action is filed under seal while the Government
investigates whether to intervene and take over the case or to allow the whistleblower to proceed. In
either event, any recovery in the case must be shared with the whistleblower (up to 30 percent of the
proceeds of the action), who is also entitled to have his reasonable expenses, costs, and attorney’s fees
paid by the defendant. Since its amendment in 1986, this provision has spawned a thriving qui tam bar
representing whistleblowers, and resulted in payments of hundreds of millions of dollars by defendants.
In holding in Cook County that counties and municipalities can be sued as qui tam defendants for
damages or penalties, the Supreme Court reversed two circuit courts of appeal and many lower courts
that had held to the contrary. Those lower courts had relied principally upon an earlier decision,
Vermont Agency, in which the Supreme Court held that states cannot be sued under the False Claims
Act. The Court’s stated rationale for that conclusion as to the states was that the FCA’s treble damages
and civil penalty provisions are “essentially punitive”, and that allowing a state to be sued in a qui tam
action would violate the “presumption against imposition of punitive damages on governmental
entities.”
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Cook County involved a federal grant to the Cook County Hospital and an affiliated nonprofit
research institute for a drug abuse study. Like many other qui tam actions, it began with the firing of an
employee, in this case, the head of the institute, Janet Chandler. Chandler filed a qui tam action
claiming that the County and the Institute had submitted false statements to obtain the federal grant
funds. The district court dismissed the action, holding that the County, like a State, could not be
subjected to “essentially punitive” treble damages. The Court of Appeals for the Seventh Circuit
reversed, and the County filed a petition for certiorari.
The Supreme Court unanimously upheld the Seventh Circuit, finding no support in the FCA
itself or its history to support the conclusion that municipalities and counties were excluded from the
class of persons who could be sued under the Act. The Court found no merit in the County’s argument
that the punitive nature of FCA liability warranted the inference that the FCA was not intended to apply
to municipalities. While acknowledging its prior holding in Vermont Agency, the Court emphasized the
compensatory aspects of treble damages, noting that: a substantial portion of the treble damages would
be awarded to the whistleblower; that no prejudgment interest or consequential damages were available;
and that unlike classic punitive damages, the jury’s discretion was not unbounded. The Court found
there is a tradeoff, between local taxpayers, who had presumably received the benefits of the County’s
false claims, versus federal taxpayers, who would have to bear the loss if no FCA recovery were
available. The Court concluded that “the term ‘person’ in § 3729 included local governments in 1863
[when the original FCA was enacted] and nothing in the 1986 amendments redefined it.”
The Cook County decision rings alarm bells for local government entities and the private entities
that assist them in administering federally funded programs. Some of the more common defendants in
qui tam actions are government contractors and subcontractors, colleges and universities, medical care
providers (including hospitals, doctors and clinics), and federal grantees. Qui tam claims, whether wellfounded or not, can enmesh defendants in civil, administrative and even criminal investigations,
sometimes simultaneously. The complications posed by the Act’s sealing requirements and unique
procedural rules add to the threat posed by the whistleblower, who himself enjoys specific protection
under the FCA from retaliation. Cook County paves the way for a new group of “watchdogs” at the
local level.
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This Advisory is for information purposes only and is not intended as legal advice. For more
information on the False Claims Act and qui tam actions, please contact:
Susan M. Campbell
Robert B. Funkhouser
(212) 837-6070
(202) 721-4780
campbels@hugheshubbard.com
funkhous@hugheshubbard.com