In a significant False Claims Act (FCA) decision issued last week, the US Court of Appeals for the Seventh Circuit overturned its own settled precedent and sided with the majority of circuits, significantly broadening the “public disclosure” jurisdictional bar to qui tam or whistleblower actions. The FCA includes a provision barring whistleblower claims that are “based upon” a “public disclosure” of fraudulent conduct “unless the person bringing the action is the original source of the information.” 31 USC § 3730(e)(4). This bar reflects legislative attempts to strike a balance between encouraging whistleblowers to come forward with information about government fraud and rewarding individuals who attempt to capitalize on already public information.

By adopting the majority view, the Seventh Circuit has narrowed the universe of qui tam actions that can be brought in that circuit. Similar opinions in other circuits led the qui tam relators bar to push for an amendment to the FCA to preclude defendants from seeking dismissals on public disclosure grounds, reserving that right for the government only. Bills to that effect are pending in both the US House and Senate but did not make their way into the recently passed Fraud Enforcement and Recovery Amendments (FERA) — likely due to US Department of Justice opposition.

Split in the Circuits on Meaning of “Based Upon”

The split among the circuits arose out of the proper interpretation of the phrase “based upon.” Leading the minority view, the Seventh Circuit originally adopted a “plain language” interpretation, and allowed suits to proceed so long as the claimant could show they learned of the alleged fraud from sources other than public disclosure. The majority of circuits have interpreted the standard more broadly, barring claimants with no knowledge of the publicly disclosed information, so long as their complaint contains allegations substantially similar to those already in the public domain.

The July 2 decision, Glaser v. Wound Care Consultants, Inc. (2009 WL 1885500 (CA 7 (Ind.)), leaves the Fourth Circuit as the only federal circuit to maintain the “plain language” analysis of section 3730(e)(4). The First and the Eleventh Circuits have yet to consider the issue.

Glaser Overturns Earlier Precedent

The whistleblower in Glaser was a Medicaid recipient with post-polio syndrome, respiratory failure, and arthritis. Glaser at *3. Defendant Wound Care Consultants treated her for the numerous wounds resulting from her conditions, billing them as treatment “incident to” the services of a physician – allowing a higher billing rate – even though Glaser claims she was only treated by a physician’s assistant. Although she never saw how Wound Care billed Medicaid, Glaser’s attorney informed her of the billing, leading to Glaser’s claim. Unfortunately for Glaser, Wound Care was already under investigation for the exact same type of billing practice, based on irregularities uncovered in a routine audit. Id. at *2. The US District Court for the Southern District of Indiana dismissed her suit, holding that her lawsuit was “based upon” a public disclosure and that she was not an original source. Id. Glaser appealed, arguing the Seventh Circuit’s earlier decisions in United States v. Bank of Farmington, 166 F.3d 853 (7th Cir. 1999), and United States ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730 (7th Cir. 2007), permitted her suit.

In these earlier decisions, the Seventh Circuit relied heavily on the strength of the ordinary meaning as an interpretive tool. In Glaser, the court rethinks this position, broadly rejecting “plain meaning” interpretations of the statute. The court noted that the False Claims Act is “hardly a model of careful draftsmanship,” undermining attempts to derive any clear meaning. Glaser at *8. Further, the Seventh Circuit found persuasive the argument that an alternative reading was warranted to give effect to all statutory provisions. Id. Specifically, the court noted that its earlier interpretation of the “based upon” language rendered the “original source” exception meaningless, in part because once a court concludes that a lawsuit derives from publicly disclosed information, the original-source question never affects the jurisdictional result. Glaser at *7. The Seventh Circuit also noted that the US Supreme Court deemed the majority’s interpretive approach “one of the most basic interpretive canons” in an analogous case. Glaser at *7-*8; Corley v. United States, 129 S.Ct. 1558, 1566 (2009). Finally, the court noted that taking an ordinary meaning approach – without regard to context – would lead to “baffling results” in other portions of the FCA. Glaser at *8. For instance, the statute refers to the “Government Accounting Office” instead of the “General Accounting Office,” and to criminal and civil “hearing[s]” “even though the statutory bar presumably covers information publicly disclosed in trials, which are not commonly referred to as “hearings.” Id.

Likely Impact of Glaser

It seems likely that the Fourth Circuit will follow the Seventh Circuit’s lead on this issue when the opportunity arises. The case in which the Fourth Circuit adopted the ordinary meaning interpretation, United States ex rel. Siller v. Becton Dickinson & Co., 21 F.3d 1339 (4th Cir. 1994), relied on the Seventh Circuit’s holding in Bank of Farmington. Id. at 347-48. Moreover, the thoroughness of Glaser’s reasoning provides a powerful incentive for the Fourth Circuit to come over to the majority and set the issue to rest. Additionally, it now appears unlikely that the First and Eleventh Circuits will side with the minority if and when the issue arises there.

A legislative response is also possible. The recently passed Fraud Enforcement and Recovery Amendments show the power of the whistleblowers’ bar. Virtually every pro-defendant court decision in the FCA arena is met with an effort to overturn the result legislatively. As noted above, bills already pending in both the House and Senate propose to eliminate altogether the ability of FCA defendants to seek dismissal on public disclosure grounds, reserving that right to the government only. Although the Justice Department has voiced opposition to the provision, the decision in Glaser may provide the whistleblowers’ bar with the rallying cry they need to push the legislation through.

For more information about the Seventh Circuit’s decision or the False Claims Act, please contact Lisa Estrada, Collin Seals, or another Arent Fox attorney.