The 10% Solution: Reducing Relator Recoveries

The relators’ bar is well acquainted with facing motions to dismiss predicated on the complaint being based on publicly disclosed information, and the relator failing to qualify as an original source. See 31 U.S.C. section 3730(e)(4)(A) & (B). Such motions can be filed on behalf of the government or the defendant, or both. If successful, this tactic will foreclose the relator from having any jurisdictional standing and benefiting from any subsequent government recovery. Should the government decline intervention, then the case is over.

But what if the relator successfully defends against such a motion (or a comparable motion under Rule 56), the government has intervened, and the prosecution is successful does that mean the relator is home free and entitled to a 15% to 25% share of the recovery? A frequently overlooked (and seldom invoked) provision of the False Claims Act (“FCA”), section 3730(d)(1), represents yet another substantial hurdle a relator must successfully scale or face substantial reduction in its potential share of any recovery.

The neglected element of section 3730(d)(1)

FCA practitioners are, of course, quite familiar with this section of the Act, since it lays out the percentages of recoveries to which relators are entitled in a successful action where the government intervenes, including costs and expenses. The remainder of this section, however, is generally far less familiar because it is so seldom invoked. It reads:

Where the action is one which the court finds to be based primarily on disclosures of specific information (other than information provided by the person bringing the action) relating to allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government [Accountability] Office report, hearing, audit, or investigation, or from the news media, the court may award such sums as it considers appropriate, but in no cases more than 10 percent of the proceeds, taking into account the significance of the information and the role of the person bringing the action in advancing the case to litigation. [Emphasis supplied].

While on the surface this language appears to replicate the text of section 3730(e)(4), there are important distinctions. For example, the public disclosure jurisdictional analysis in section (e)(4) focuses on the public disclosure of allegations or transactions, while the section (d)(1) language looks to the public disclosure of “specific information” (other than information provided by the person bringing the action) “relating to allegations or transactions.” Moreover, section (d)(1) contains the significant qualifier of “primarily” which is absent from the ‘section (e)(4) language. So the analysis a court would employ under section (d)(1) centers on interpreting and applying the undefined terms “specific information,” ” relating to,” and “primarily.”

Another important distinction relates to the district court’s authority when applying this section. Under the public disclosure and original source provisions, a relator either has based its complaint upon publicly-disclosed information or has not, and is either an original source or not. That is, it is a zero sum game. By contrast, under section (d)(1), the court is directed to take into account “the significance of the information and the role of person bringing the action in advancing the case to litigation.” Hence, the 10% sliding scale component of the provision. Given the vague terminology the district court must construe and apply, coupled with additional discretion resulting from applying the 10% sliding scale, makes it evident how expansive the district court’s authority is when applying section 3730(d)(1).

It is important to recognize that even if a relator successfully runs the section 3730(e)(4)(A) & (B) gauntlet, and survives a motion to dismiss, that does not foreclose the district court from invoking the 10% limitation to severely reduce the relator’s share of any recovery. While it is assumed that Congress meant to bestow upon the Department of Justice the ability to invoke this provision, there is nothing in the FCA, its legislative history, or the limited interpretative case authority that forecloses defendants from initiating motions to reduce the relator’s recovery predicated on this section as well.

Conceivably, even should defendants be unsuccessful in seeking to secure dismissal or summary judgment, and even if defendants are found liable under the Act, section 3730(d)(1) affords them a device for punishing the relator by reducing the relator’s share of any recovery.

Legislative History

There are two particularly important Court of Appeals decisions which discuss the pertinent legislative history underlying this part of section (d)(1). Both United States ex rel. Barajas v. Northrop Corp., 5 F.3d 407, 410 (9th Cir. 1993), cert. denied, 511 U.S. 1033 (1994), and United States ex rel. Merena v. Smithkline Beecham Corp., 205 F.3d 97, 106 (3d Cir. 2000), quote the same language from the legislative history. Senator Grassley, sponsor of the 1986 amendments to the FCA, declared that this provision would

limit the possible portion of the judgment recoverable by a qui tam plaintiff to 10 percent or less when the action is based primarily on public information. This limitation will affect those persons who have brought a qui tam action based almost entirely on information of which they did not have independent knowledge but had derived from a public source. 132 Cong.Rec.20536 (Aug. 11, 1986) (emphasis added).

Subsequently, Senator Grassley added further context:

When the qui tam plaintiff brings an action based on public information, meaning he is an original source within the definition under the act, but the action is based primarily on public information not originally provided by the qui tam plaintiff, he is limited to a recovery of not more than 10 percent. In other words a 10-percent cap is placed on those original sources who bring cases based on information already publicly disclosed where only an insignificant amount of that information stemmed from that original source. 132 Cong. Rec. 28580 (1986). [Italics in original]

Representative Berman, the House sponsor, addressed the proposed amendment in the following terms:

A person is an original source if he had some of the information related to the claim which he made available to the government . . . in advance of the false claims being publicly disclosed . . . Where . . . the person qualifies as an original source, but where the essential elements of the case were provided to the government or news media by someone other than the qui tam plaintiff . . . the court may award up to 10% of the total recovery to the qui tam plaintiff. 132 Cong.Rec. 29322 (Oct. 7, 1986).

See also, United States ex rel. Chandler v. Cook County, Illinois, 277 F.3d 969, 976 (7th Cir. 2002); United States ex rel. Stinson, Lyons, Gerlin & Bustamante v. Prudential Ins. Co., 944 F.2d 1149, 1174 (3d Cir. 1991) (dissenting opinion of Sirica, J.).

Case Authority

The 10% provision has very infrequently been invoked by the Department of Justice. During my 11 years in the Civil Fraud Section, I never even encountered the issue. Similarly, instances were defendants unleashed the 10% limitation are even more sparse. As a result, there is very limited (and not always consistent) case authority to assist counsel in gaining an understanding of the specifics of how section 3730(d)(1) operates.

For example, in United States v. CAC-Ramsay, Inc., 744 F. Supp. 1158, 1161 (S.D. Fla. 1990), aff’d, 963 F.2d 384 (11th Cir. 1992), the district court based its invocation of the provision on two considerations: (1) “the suit was based primarily on disclosures, albeit not public, of specific information other than information provided by the relators on their own”, and (2) the relators “had only a minor role in the prosecution of the suit after it was originally filed.” The lesson here apparently is that applicability of the provision is heavily fact-dependent. It is also important to note that the Ramsey court differed from Senator Grassley in holding that the information upon which the action primarily is based need not come from a “public” source.

However, one district court has held that prior disclosures that occurred during discovery which were not filed with the court and thereby made public could not trigger the 10% provision. United States ex rel. Prawer & Co. v. Fleet Bank of Maine, 63 F. Supp. 2d 59, 60-61 (D. Maine, 1998). See also, United States v. Northrop Corp., 59 F.3d 953, 964 n. (9th Cir. 1995), cert. denied, 578 U.S. 1018 (1996) (based primarily “on [previously publicly] disclosed[ed] information”).

The Tenth Circuit added further clarification in United States ex rel. Precision Company v. Koch Industries, 971 F.2d 548, 553 n.3 (10th Cir. 1992). Section 3730(d)(1) is not a jurisdictional provision. In addition, “its application is limited to those cases in which the government proceeds.” If the government declines to intervene, the provision is not applicable.

A couple of points are interesting regarding the district court’s decision in United States v. Stern, 818 F. Supp. 1521 (M.D. Fla. 1993), opinion vacated in part on reconsideration, 932 F. Supp. 277 (M.D. Fla. 1993). First, the court described the kind of information that could invoke the section as being factual information that was already owned by, and had been disclosed by, the Government. Id. at 1522. See also, United States ex rel. Stillwell v. Hughes Helicopters, Inc., 714 F. Supp. 1084, 1098 (C.D. Cal. 1989) (provision triggered if “action is based primarily on governmental disclosures of information”). This unique language perhaps was relied upon because relator was a federal employee. Secondly, the provision had no applicability and could not constrain a relator if it has filed its qui tam complaint before the government filed its FCA action, even if the relator derived its information from a criminal indictment. Id.

As mentioned above, the Third Circuit offered its interpretation in 2000 in United States ex rel. Merena v. Smithkline Beecham Corp., supra at 106, which perhaps has become the leading case on the provision. “The lesser range (up to 10% of the proceeds) is provided for the (presumably unusual) cases in which an ‘original source’ relator asserts a claim that is ‘primarily based’ on information that has been publicly disclosed and that the relator did not provide.” This can result in a district court having to review the relator’s allegations on a claim by claim basis. The court reviewed pertinent legislative history (as discussed above) to buttress its conclusion. Id. at 106.

On remand, the district court grappled with how to apply the “based primarily” standard. The test became whether the government likely would have proceeded even if the relator had not come forward with “information and assistance.” That is, the government had all of the “essential and necessary information” from the prior public disclosures, and had available the tools to obtain all the details (i.e., subpoenas and witness interviews). United States ex rel. Merena v. Smithkline Beechham Corp., 114 F.Supp. 2d 352, 367-8 (E.D. Pa. 2000).

The district court then faced the challenge of how to apply the sliding 10% scale. Ultimately it concluded that while the government could have brought the case without the information provided by the relator, that assistance both increased the government=s recovery and facilitated its realization earlier than if the relator had not been involved. Hence, the maximum 10% share was justified in this instance, but generally would not be. The extent of judicial discretion infused in section 3730(d)(1) again becomes starkly evident.

Further helpful guidance is offered in United States ex rel. Eitel v. Reagan, 35 F. Supp.2d 1151, 1158-59 (D. Arizona 1998), aff’d, 242 F.3d 381 (9th Cir. 2000). The district court placed primary reliance upon Federal Recovery Services v. United States, 72 F.3d 447, 452. There the Fifth Circuit held that the provision is meant to apply in a case “where the information has already been disclosed and the person qualifies as an ‘original source’ but where the essential elements of the case were provided to the government or news media by someone other than the qui tam plaintiff ” (emphasis added). Moreover, the district court found that the provision applies only when the relator has been determined to be an original source under section 3730(e)(4)(B). 35 F. Supp. 2d at 1158. In addition to the essential elements test, the district court pointed to the statutory term “primarily” as being important, without defining its parameters. Id. at 1159.

The Seventh Circuit’s twist on the statutory language is somewhat interesting in United States ex rel. Chandler v. Cook County Illinois, supra, 277 F.3d at 976. “If the basis for the suit was information that was already available, a district court may limit a relator’s recovery to 10 percent of the award…or bar the suit entirely unless the Attorney General prosecutes the case…” (citing to section 3730(d)(4)(A)) (emphasis supplied). Notice that the court is construing the statutory language extremely broadly: any information that is already available from whatever source can trigger the 10% limitation. However, the court’s assertion that the suit is barred under section 3730(d)(4)(A) is certainly incorrect because (1) there is no such section of the FCA, and (2) if the court is referencing ‘ 3730(e)(4)(A), the public disclosure bar has no applicability to section 3730(d)(1)’s 10% provision.

Concluding Discussion

Congress evidently designed the 10% provision as the solution to a fundamental problem. There would be situations in which relators who could qualify as original sources, and thereby avoid being dismissed, nonetheless had to some extent relied upon public information and/or information of which it was not the originator. Thereby, such a relator would probably be contributing nothing to the government’s enforcement actions and receiving a free ride to a share of any recovery. Yet, on the other hand, there might be other ways in which such a relator might render valuable assistance to the government which merited some award.

Since no statutory provision could cover every possible factual situation, the burden was shifted to the district court to determine if the complaint was based “primarily” upon such public information, whether there were other contributions the relator made that would promote “advancing the case to litigation,” and where under the 1% to 10% continuum an award should be made. And I should think it would be very difficult on appeal to successfully contest the exercise of this broad discretion vested in the district court in resolving any of these issues.

It is also a distinct possibility that some in Congress wanted to arm DOJ with an appropriate weapon to “persuade” reluctant relators to voluntarily accept a share of the proceeds smaller than they had anticipated. For example, DOJ could suggest to a relator that it accept an award in the 11% to 14% range (i.e., below the statutory 15% minimum) or face a motion predicated upon the 1% to 10% provision. Even if DOJ were prepared to recommend an award somewhere in the statutory 15% to 25% range, but less than the relator demanded, it could utilize the 10% provision as a threat to persuade recalcitrant relator to become more “reasonable.”

It is interesting to note that none of the cases cited in this article involved defendants filing motions to limit relators recoveries in cases where the relators and/or government had prevailed. However, as mentioned above, there is nothing foreclosing unsuccessful defendants from filing motions seeking to invoke the 10% limitation, just as they often do to contest the award relators and the government have agreed upon after judgment has been rendered or a case settled. It is also possible, I guess, that defendants negotiating with relators in an intervened case could use the 10% threat as a device to encourage relators not to push for larger settlements. But I have not encountered such a case or heard of this situation.

Relators are far more likely to encounter the 10% limitation in their negotiations with the government over relators’ share. That is, the government may argue that if a relator does not accept the proposed share of the recovery, the government will then file a motion under section 3730(d)(1) to scale down the recovery percentage to a 10% maximum, or much less. Unless the negotiations short-circuit and the government files such a motion, we have no way of knowing how extensively this threat is used to soften up relators and their counsel. I am aware of only one such purported situation of this type.

The few existing cases interpreting the 10% sanction afford food for thought in several regards. First, each case is factually intensive. No two of the published decisions involved cases that were identical on their facts. Second, the vague and undefined guidelines the court must apply in reaching its decision afford it a tremendous range of discretion which would seem very difficult to attack on appeal. Third, assuming the court invokes the 10% rule, the very nature of the sliding scale means that it has additional discretion as to where on the 1%-10% continuum it will determine the appropriate award should be paid.

The scarcity of reported cases or even rumors involving the 10% provision suggests that for relators it is somewhat of a paper tiger. But it remains a viable menace for relators nonetheless, and the wise relator counsel will always be sensitive to that possibility as strategy is planned and the qui tam complaint is drafted.

[ With due apologies to Nicholas Meyer and his The 7 Percent Solution]

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