The Second Bite: Awarding Attorney’s Fees, Costs and Expenses to Qui Tam Relators

It is not uncommon for defendants settling False Claims Act (31 U.S.C. §§ 3729-33 [“FCA”]) actions with qui tam relators alone, or with relators and the Department of Justice, where the government has intervened, to overlook a vital provision of the FCA–31 U.S.C. § 3730(d)(1) & (2). This provision specifies, in pertinent part, that successful relators “shall also receive an amount for reasonable expenses which the court finds to have been necessarily incurred, plus reasonable attorneys’ fees and costs. All such expenses, fees, and costs shall be awarded against the defendant.” A successful relator is entitled to reimbursement of attorneys’ fees, costs, and expenses whether the government intervenes in the case [§(d)(1)] or if the government declines and the relator litigates the matter to a successful conclusion herself [§(d)(2)].

The section applies whether the favorable resolution comes through settlement or trial. Moreover, § 3730(f) of the FCA (“The Government is not liable for expenses which a person incurs in bringing an action under this section”) forecloses any United States liability for a relator’s attorneys’ fees, costs, or expenses under this provision. United States ex rel. Smith v. Gilbert Realty Co., 34 F. Supp.2d 527, 530 (E.D. Mich. 1998). Surprisingly, given the relatively straightforward language of the provision, some rather significant litigation has ensued in which courts have had an opportunity to expound upon the reach of § 3730(d)(1) & (2).

The Legislative History

Usually, the awarding of fees in litigation is governed by the so-called “American rule” which holds that each party bears the cost of its own attorneys’ fees. For example, Federal Rule of Civil Procedure 54(d) specifically exempts attorneys’ fees from the district court’s authority to otherwise impose costs on the losing party “[e]xcept when express provision therefore is made either in a statute of the United States or in these rules…”

The main exception to the American rule in federal district court litigation is when Congress has by statute specifically authorized the awarding of attorneys’ fees. Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240 (1975). The most common situation in which such statutory authorizations are encountered relates to civil rights litigation, such as under 42 U.S.C. § 1983. It is not surprising then, given the role of FCA relators as “private attorneys general,” that such a provision governing their fees and expenses has been included in the FCA.

The legislative history of § 3730(d)(1) & (2) is quite sparse. It speaks only of reasonable attorney’s fees, and not the other two categories of expenses articulated in the section. The purpose of the provision is to remove one roadblock that might inhibit the bringing of qui tam actions–the fees and expenses that will be incurred by a prospective relator and her counsel. See 1986 U.S. Code Cong. & Admin. News 5266, 5294.

Parsing the Language

It is important to remember that § 3730(d)(1) & (2) provides for the mandatory award of three categories of expenses. The very language of the provision makes it clear that it is addressing three separate categories of expenditures. See United States ex rel. Lidenthal v. General Dynamics Corp., 61 F.3d 1402, 1413-14 (9th Cir. 1995), cert. denied, 517 U.S. 1104 (1996).

Most important, it establishes a relator’s right to “reasonable attorneys’ fees,” the most commonly encountered situation. In addition, the relator is entitled to “costs,” which is apparently a reference to the customary Rule 54 litigation costs that can be awarded by a district court. The most indistinct category, however, is that of “reasonable expenses.” Presumably, this category relates to investigative expenses incurred by a relator as she gathers information to serve as the basis for her complaint.

Key Points Established in the Case Law

The best way to appreciate the intricacies of § 3730(d)(1) & (2) is to dip into the pertinent case authority. Cases interpreting the section, while not extensive at this point, address those issues that would typically arise in litigation. Among the central principles established in the current case holdings are the following:

  • The award of fees, costs and expenses is mandatory, and not a matter of discretion vested in the district court. Shaw v. AAA Engineering & Drafting, Inc., 213 F.3d 538, 544 (10th Cir. 2000); United States v. General Electric, 808 F. Supp. 584, 585 (S.D. Ohio 1992). Aff’d in part; rev’d in part on other grounds, 42 F.3d 1032 (6th Cir. 1994). Therefore, an unsuccessful FCA defendant should be prepared from the outset to deal with this issue because it will eventually surface; similarly, FCA complaints resolved through negotiation inevitably will confront this issue. It simply cannot be avoided. Offers of judgment that do not address this element of a potential recovery will not be construed to include relators attorneys’ fees, expenses, and costs. United States ex rel. Millett v. Reynolds, 1995 WL 788207 (D. Maine, Dec. 14, 1995). Therefore, the issue is best addressed openly at the outset of negotiations so that a qui tam defendant is not under the impression that a case has been settled with the payment of damages to the United States, only to receive a nasty surprise when the relator later demands an additional payment to cover attorneys’ fees, costs, and expenses.
  • Computations of the attorneys’ fee component of § 3730(d)(1) & (2) are usually performed in accordance with the “lodestar” principle. That formula mandates that the award is “the product of hours expended multiplied by an hourly rate for attorneys in the relevant market.” United States ex rel. Averback v. Pastor Medical Associates, 224 F. Supp.2d 342, 348 (D. Mass. 2002). The difficulty inherent in this technique is determining what are the “reasonable” hours expended by the relator’s counsel, and what is a “reasonable” market value rate to be applied to each hour. Id. at 348-49. Such computations can become exceedingly complicated. See, e.g., United States ex rel. Burr v. Blue Cross and Blue Shield of Florida, 882 F. Supp. 166, 170 (M.D. Fla. 1995) (applying a “12 factors” test); United States ex rel. Coughlin v. IBM, 992 F. Supp. 137, 142-145 (N.D.N.Y. 1998). Some courts have factored in counsel’s experience with the FCA and her contributions to the overall success of the government’s recovery. United States ex rel. Poulton v. Anesthesia Associates of Burlington, Inc., 87 F. Supp.2d 351,355-56 (D. Vt. 2000). Alternatively, fees and expenses can be apportioned among multiple defendants. Id. at 355. A second approach recognized by the Supreme Court, the so-called “Model Code” formula, “which combines the lodestar calculation with various other factors such as ‘degree of success obtained,’ ‘novelty,’ and ‘complexity’” has not found much application under this provision. Averback at 348.
  • As the provision states, reasonable attorneys’ fees and costs are assessed “against the defendant.” That is, whatever a court awards under this category, it is not subtracted from the government’s award of multiple damages and penalties, but is assessed separately against the defendant. United States v. Stern, 932 F. Supp. 277, 278 (M.D. Fla. 1993). Hence the “double whammy” element of the provision becomes evident.
  • Only the relator and not counsel can seek attorneys’ fees under this section. However, any fees recovered from the defendant vest in and must be paid over to the relator’s counsel. United States ex rel. Virani v. Jerry M. Lewis Truck Parts & Equipment, Inc., 89 F.3d 574, 578-9 (9th Cir. 1996); United States ex rel. Thornton v. Science Applications International Corp., 79 Supp.2d 655, 659 (N.D. Tex. 1998).
  • The relator’s entitlement to continuing fees and costs does not terminate once the government intervenes in the qui tam case. The FCA contemplates that relator’s own counsel may continue to make valuable contributions in assisting the government even though the Department of Justice is taking the lead in the litigation. As long as the relator’s counsel’s continuing work can be seen as contributing to the eventual and successful outcome, any disputation will be rejected. United States ex rel. Marcus v. NBI, Inc., 142 B.R. 1 (D.D.C. 1992).
  • Relator’s attorneys’ fees expended in post-judgment collection activities can also be assessed against the defendant. United States ex rel. Shaw v. AAA Engineering & Drafting Inc., 213 F.3d 538, 545 (10th Cir. 2000).
  • Fees that a relator incurs in battling the Department of Justice over its statutory entitlement to share in the government’s recovery are not included within the scope of § 3730(d)(1) & (2) and cannot be assessed against the defendant. United States ex rel. Taxpayers Against Fraud and Walsh v. General Electric Co., 41 F.3d 1032, 1045-1046 (6th Cir. 1994).
  • The “costs associated with the litigation are generally recoverable if they are reasonable out-of-pocket expenses incurred by the attorney and which are normally charged to fee-paying clients.” United States ex rel Coughlin v. International Business Machines Corp. and SCI Systems, Inc., 992 F. Supp. 137, 145 (N.D.N.Y. 1998) (quoting Reichman v. Bonsignore, Brignati & Mazzotta, P.C., 818 F.2d 278, 283 (2d Cir. 1987)). The section provides for costs, which are “incidental and necessary” to the representation. “Under this rule, costs are not allowed if they cannot be attached to the advancement of a specific claim, or if they are so general that they could be placed under the cost umbrella of overhead or office expense.” Id.
  • The attorney fees must relate directly to the litigation. For example, generating congressional testimony, media relations, and securing immunity for the relator do not qualify for reimbursement under the provision. United States v. General Electric, 808 F. Supp. 584, 586 (S.D. Ohio 1992).

Finally, a new wrinkle that has recently emerged in this area resulted from the Supreme Court’s decision in Vermont Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765 (2000). There, of course, the Court held that a qui tam relator did not have standing to initiate an action against a state or state entities. In Donald v. University of California Board of Regents, 329 F.3d 1040 (9th Cir. 2002), the Ninth Circuit held that even if a relator originates a case against a state entity that is later taken over by the United States, and it results in a settlement negotiated by the government (in this case in the amount of $22.5 million), the relator still is not entitled to share in the recovery. The lack of standing acts as an absolute bar.

Similarly, the unlucky relator is also unable to recover attorneys’ fees and expenses due to his lack of standing. See, e.g., United States ex rel. Garibaldi v. Orleans Parish School Board, 244 F.3d 486 (5th Cir. 2001), cert. denied, 534 U.S. 1078 (2002) (vacating judgment granting fees, expenses and costs under § 3730(d)(1) & (2) because school board not a “person” within the reach of the FCA).

Conclusions

Whenever defense counsel is facing a qui tam complaint, he should at the outset fully brief the client on the potential additional liability that attaches as a result of § 3730(d)(1) & (2). Depending upon the nature and complexity of the case, this additional liability may well substantially impact the client’s strategy.

Moreover, whenever a qui tam defendant is contemplating possible resolution through settlement, the defendant must once again be apprised of the separate potential liability he has incurred due to the operation of § 3730(d)(1) & (2). Sometimes it is possible to use the obligation to pay attorneys’ fees, costs, and expenses as leverage in the negotiations with a relator. However, under no circumstances should defense counsel assume that somehow relator’s counsel is unaware of this provision and that the matter will not surface if it is not identified at the outset of the negotiations.

At the same time, defense counsel should not suppose that if a settlement agreement is executed with the relator, with no mention of § 3730 (d)(1) & (2) liability, the relator is thereby foreclosed from later seeking recovery under this provision.

The best course, and that most favored by DOJ, is to spell out the terms for settling the § 3730(d)(1) & (2) liability, including specific amounts, in the main settlement agreement between the government and the defendant when DOJ has intervened, or in the settlement agreement with the relator if the government has declined.

Quite simply, there should be no settlement of any part of the qui tam case in isolation. All elements of the settlement, including any § 3730(d)(1) & (2) liability, should be identified and resolved early on to avoid unexpected problems later.

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