Monday, July 22, 2013

Using the False Claims Act to Police Wages on Public Works Contracts: US ex rel International Brotherhood of Electrical Workers v. The Farfield Company

Dear Readers:

The broad scope of the False Claims Act and its creative use by relators continues to surprise me. For example, I recently came across a case where the relator was a labor union that brought a False Claims Act case against an employer who it claimed failed to pay the prevailing wage to certain union employees on jobs that were funded by federal grants. U.S. ex rel International Brotherhood of Electrical Workers, Local Union No. 98 v. The Farfield Company, 2013 WL 3327505 (E.D. Pa. July 2, 2013). In that case, the union claimed that the employer, an electrical contractor, had intentionally and methodically misclassified workers in violation of the Davis-Bacon Act, 40 U.S.C. 276a et seq. ("DBA"). The DBA requires that an "appropriate wage" be paid to workers on construction contracts funded by the federal government and that contractors on such jobs must certify that their "payroll information is correct  . . . and workers have been paid not less than the applicable wage rates . . . for the classification of work performed."  

The union claimed that the employer violated the False Claims Act in three different ways. First, the union charged the contractor obtained an advantage in bidding for the contract by manipulating the worker classifications, whereby workers that should have been classified (and paid more) as electricians due to the work they were performing were instead classified as less expensive laborers and groundsmen. By doing so, alleged the union, the contractor was able to "underestimate its labor costs and underbid competitors" for the job contract. Second, the union alleged that the employer in fact underpaid workers by misclassifying them to positions that received lower wages. And third, the union claimed that the employer had "falsely certified" its compliance with the DBA.

The Court rejected the employer's argument that it was without subject matter jurisdiction and that the matter was committed to the discretion of the Secretary of Labor, who alone determines the prevailing wage for particular classifications. Though it acknowledged that there may be instances where a court must first defer to the primary jurisdiction of the Secretary of Labor for a determination as to a job classification, the Court did not find any "complex Davis-Bacon classification regulations in this action" and it refused to defer the matter. Additionally, the Court found that even though the employer did not present a false claim for payment to the government, nevertheless the employer faced possible liability under 31 U.S.C. 3729(a)(2), which applies to anyone using a false record or statement to get a false or fraudulent claim paid by the government. Finally, even though the employer had been subject to a Department of Labor audit, the Court denied the employer's claim that such an audit qualified as an "administrative civil money penalty proceeding in which the government is already a party" that also could have led to a loss of subject matter jurisdiction. See 31 U.S.C. 3730(e)(3).

In short, the Farfield case illustrates the breadth of the False Claims Act, and its creative use by relators; in this instance, to police the wages paid to workers on construction and other public works contracts funded by the federal government.

A. Brian Albritton
July 22, 2013

Tuesday, July 2, 2013

Limiting Discovery in False Claims Act Cases: US ex rel Duxbury v. Ortho Biotech Products, L.P.

I recently came across an interesting case that provides some hope to False Claims Act ("FCA") defendants who seek to limit discovery in the event they have not been successful in stopping a FCA complaint at the motion to dismiss stage: U.S. ex rel. Duxbury v. Ortho Biotech Products, L.P., 2013 WL 2501930 (1st Cir., June 12, 2013). Essentially, in Duxbury, the relator alleged that the defendant had engaged in a "nationwide" kickback scheme to encourage healthcare providers "across the United States" to prescribe the drug, Procrit, to patients. In turn, the relator argued that he should be permitted discovery for the six year period after he left the company and that discovery be allowed "nationwide" since his amended complaint alleged a "nationwide" kickback scheme. The District Court refused to permit discovery past the date of the relator's termination from the company and beyond the state where the relator worked for the company. The relator could not substantiate his kickback claim with this limited discovery and summary judgement was granted against him. 

On appeal, the First Circuit affirmed the District Court's order and discretion in limiting relator's discovery of the defendant to the time period when the relator worked for the company as well as to the "five accounts" in Washington state about which the relator "had direct and independent knowledge." The First Circuit observed that the "district court was not required to expand the scope of discovery based upon the amended complaint's bald assertions that the purported kickback scheme continued after [the relator's] termination or that it was nationwide in scope." The Court agreed with the district court to limit relator's discovery to only those allegations for which the relator had satisfied Rule 9(b)'s requirement to plead fraud with particularity and rejected the relator's attempt to "undertake a fishing expedition into the amended complaint's purely speculative allegations." 

Duxbury is a reminder that just because a relator survived a Rule 9(b) challenge, that does not open the flood gates to all discovery based on the bald allegations of a relator's complaint. Courts can and in many instances should fashion limits on discovery, such that the relator is first allowed a limited though reasonable opportunity to substantiate or support their specific claims before permitting more wide ranging and burdensome discovery, especially on a nationwide basis. 

The question, of course, is the basis or principle on which a court should limit discovery or allow it only in stages. In U.S. ex rel Minge v. Tect Aerospace, Inc, 2012 WL 1118948 (April 3, 2012 D. Kan), we saw one solution. In that case, the Court permitted the relator to engage in what it called "litmus test" discovery, whereby the relator obtained discovery of a sample of "exemplar aircraft" in order to prove his claims. In Duxbury, we see another solution: the Court permitted the relator to obtain discovery in that region and time period in which the relator had "direct experience." I would be interested in hearing from readers about other cases where courts have allowed relators only limited discovery and their basis for doing so.

A. Brian Albritton
July 2, 2013