Monday, March 11, 2013

Eighth Circuit Finds that Relators Are Entitled to Share of FCA Settlement Obtained by Government Because Their Suit Resulted in Defendant Making a Voluntary Disclosure on a Different Claim

In a rather remarkable case, the Eighth Circuit Court of Appeals in a split decision affirmed an estimated $6.9 million qui tam award to two relators who, the Government argued, did not actually allege a claim against the defendant, Hewlett-Packard Company (HP): US ex rel Roberts et al. v. Accenture, LLP, et al, 2013 WL 764734 (March 1, 2013, 8th Cir.) In that case, HP had conducted its own internal audit and voluntarily disclosed to the Government that it discovered "defective pricing" in one of its government contracts that was not identified in the relators' complaint. Nevertheless, the Court found that the relators were entitled to a "finder's fee" award because HP began its internal audit of its "pricing practices" after responding to subpoenas from the Government that were drafted by the relators. In making its ruling, the Court rejected the Government's argument that relators were not entitled to recover any portion of the settlement with HP relating to HP's voluntary disclosure since the relators' Complaint did not plead or identify the HP "defective pricing" scheme with particularity sufficient to satisfy Rule 9(b).

According to the relators' Complaint, Accenture was a "systems integration consultant" (SIC) that recommended computer systems and other related products to the federal government: sometimes it resold computer products from the manufacturer to the government and other times, it recommended products to the government and the computer manufacturer would sell the products directly. The relators alleged that Accenture was receiving kickbacks from HP and other computer vendors whose equipment Accenture either sold or recommended to the government. The relators charged in their complaint that HP and others defrauded the government out of "hundreds of millions of dollars" by exchanging kickbacks to consultants for government referrals. Additionally, the relators claimed that "Defendants failed to provide to the General Services Administration (GSA) and other governmental agencies current, accurate, and complete disclosure of their best pricing . . . thereby causing the defective GSA and other governmental pricing schedules."

The Court related in its opinion that the relators worked closely with the government, including drafting administrative subpoenas to issue from the GSA-Office of Inspector General to all potential defendants, including HP in 2006. In August 2008, HP informed the government of the results of an independent audit and admitted that it had not complied with the "price reductions clause in one particular government contract, GS-35F-066N." Subsequently, the government conducted its own audit and "determined that HP had not fully informed GSA of prices it had given to non-government end users, resulting in a 'defectively priced' GSA contract."

The Government intervened in the relators' action, and entered into a $55 million settlement agreement with HP: $9 million on the relators' kickback claims and $46 million for the defective pricing claim, which the government "attributed to HP's voluntary disclosure and the government's own audit" rather than to the relators. The Government objected to the relators recovering anything from the $46 million on the grounds that the "relators' allegations of defective pricing failed to satisfy the requirements for pleading fraud under Rule 9(b)" and that "the discovery of defective contract 35F resulted from HP's voluntary disclosure . . . and was wholly unrelated to the relators' action."

The Court rejected the Government's Rule 9(b) argument and noted that "HP began its internal investigation just a few weeks after the seal was lifted [on the relators' complaint and] a copy of the relators' complaint was provided to HP." The Eighth Circuit affirmed the 15% "finder's fee" of the $46 million settlement for the relators in part because HP began "the internal audit of its pricing practices only after becoming aware of the allegations in the relators' complaint, and only after responding to the extensive subpoenas drafted by the relators at the government's request." The Court observed further: "Thus, the government's claim that HP's disclosure of its defective pricing on Contract 35F was purely 'voluntary,' and that the relators' pending action and assistance in prosecuting the action played no role in uncovering the defective pricing scheme, is disingenuous."

Additionally, following the D.C. Circuit in U.S. ex rel. Batiste v. SLM Corp.,659 F.3d 1204, 1210 (D.C. Cir. 2011), the Eighth Circuit stated: "We reject the contention that Rule 9(b) plays a part in determining whether a relator is entitled to share in the settlement proceeds resulting from a qui tam action in which the government elects to intervene. Rule 9(b)'s standards are meant to test the sufficiency of a complaint at its outset. If a defendant challenges the sufficiency of a complaint's allegations at the outset of a case, a plaintiff still has the opportunity to cure the deficiency.  . . . . . at least with respect to those qui tam actions in which the government elects to intervene, a relators' initial allegations need not satisfy Rule 9(b)'s heightened pleading requirements in order to accomplish the purpose they were meant to serve, which is to provide the government sufficient information to launch an investigation of a fraudulent scheme." (internal citations omitted).

In a lengthy dissent, Judge Colloton essentially found that the proceeds of the HP's voluntary disclosure were simply not part of any claim brought by the relators and that the "better view . . . is that the relator may recover only from the proceeds of the settlement of the claim that he brought." According to the dissent, the District Court found that the relators were entitled to a recovery from HP not because they had brought such a claim against HP but "because the relators caused HP to disclose additional information that led the government to achieve the settlement of a different claim." "Whatever the merit of this theory as a policy matter," observed the dissent, "it is not derived from the statute . . . [that] allows relators to recover a percentage of the proceeds of the settlement of the claim brought by the relators, and only that claim." Stated simply, the dissent found it was not enough for the relators' suit to simply serve as a "catalyst" that led eventually to a settlement. To share in that settlement, the relators need to have brought or pled the claim that the Government settled.

Overall, US ex rel Roberts seems to be saying that "but for" the relators' complaint, there would have been no recovery, and since there was a recovery, relators are entitled to share in it, even if they did not actually state a legal claim that would have brought about such a recovery. Moreover, this case further tilts the circuit split in favor of United States ex rel. Batiste v. SLM Corp., and against, Walburn v. Lockheed Martin Corp., 431 F.3d 966, 971 (6th Cir. 2005) which held that “[o]nly a complaint that complies with Rule 9(b) can have preemptive effect under [31 U.S.C]. § 3730(b)(5).”

A. Brian Albritton
March 11, 2013