In the Spring of 2000 the Supreme Court held in Vermont v. U.S. ex rel. Stevens that states and state agencies are not subject to liability in suits brought under the qui tam provisions of the federal False Claims Act (“FCA”). At the time, state-affiliated academic medical centers and clinical research entities welcomed the ruling and hoped that it would lead to a reduced risk of FCA liability.

However, in the two years that have followed the decision in Vermont, courts have grappled with the question of how far the immunity from liability reaches. For example, the Supreme Court left open the question of whether states and state agencies are immune from FCA liability in actions prosecuted by the United States. Similarly, the Court did not define state agency or provide any indication about when an entity with ties to the state will be considered a state agency for purposes of the FCA. Finally, questions remain about whether the Court’s reasoning in Vermont should be employed to exempt all governmental entities from qui tam liability.

This last question-which is of particular importance to government-affiliated academic medical centers and clinical research entities-has already produced divergent conclusions by two Courts of Appeals. In U.S. ex rel. Dunleavy v. County of Delaware, the Third Circuit held recently that local governmental entities are not subject to qui tam liability. However, in United States ex rel. Chandler v. Cook County, the Seventh Circuit recently reached the opposite conclusion.

The Third Circuit based its holding that local governmental entities are immune on the Supreme Court’s statement in Vermont that the FCA’s damages provision is punitive in nature and “the well-settled doctrine of local government immunity from punitive damages.” The case involved an allegation that Delaware County defrauded the United States Department of Housing and Urban Development (“HUD”) by failing to pay to HUD the proceeds of the sale of land purchased by the county with HUD funds. The government declined to intervene in the case. The Court dismissed the relator’s claim concluding that Congress did not intend to subject Delaware County to qui tam liability because the imposition of trebly damages is “powerful evidence” of congressional intent to exclude local governments from FCA liability.

The Seventh Circuit expressly rejected the defendant county’s contention that the Court could not interpret the FCA to include counties because of municipalities’ traditional common-law immunity from punitive damages. While recognizing the thrust of the argument that taxpayers should not be left holding the bill for punitive damages, the Court noted that in the FCA context, the taxpayers have been enriched by the fraudulent conduct of the municipality: “[E]ven though some of the burden of the FCA’s treble damages shifts to the local taxpayers, this shift is not unjust, because the local taxpayers have already received without justification, some of the benefit.”

Given the Circuit split, this issue is likely to be resolved eventually by the Supreme Court. Additionally, other questions left open by Vermont are likely to be aggressively litigated. Although the Supreme Court’s holding in Vermont is probably not a broad-based immunity from qui tam liability, its reach may be extended in the coming months and years so that it will significantly benefit academic medical centers and other clinical research entities.