1. INTRODUCTION

Since the amendment of the civil False Claims Act (31 U.S.C. §§3729, et seq. ("FCA" or the "Act")) in 1986, courts and commentators have agreed that there has been little legal benefit to voluntary disclosure of FCA violations to the government. While parties have disclosed violations in order to obtain double instead of treble damages, or to improve their negotiating position or equitable arguments, disclosure was thought to have no other legal effect, and often exposed parties to additional liability when their purported wrongdoing became more widely known.

However, on January 16, 2001, a District Court sitting in the Northern District of Illinois found that voluntary disclosure of violations do have another legal effect. United States ex rel. Cherry v. Rush-Presbyterian/St. Luke’s Medical Center, No. 99-c-06313, 2001 WL 40807 (N.D.Ill. Jan. 16, 2001). The Cherry court found that disclosure of FCA violations to government officials whose duties relate to the claims in question in some significant way can constitute a "public disclosure" under the Act. Such public disclosure divests federal courts of jurisdiction over qui tam actions based on the disclosure, and operates to bar any action by parties other than the government on disclosed information.

In so finding, the Cherry court may have opened the door to further decisions expanding protection of parties who voluntarily approach the government after discovering their own potential violations of the Act. While the long-term ramifications of the Cherry decision remain to be seen, the opinion is welcome news to those who have argued that the Act as it was interpreted failed to adequately reward those who voluntarily disclosed potential violations to the government.

2. BACKGROUND

The FCA imposes civil penalties on parties who knowingly submit false claims for payment to the United States government. Penalties under the Act include a civil penalty between $5,000 and $10,000 for each false claim, as well as three times the amount of damages sustained by the government as a result of those claims. 31 U.S.C. §3729(a). The qui tam provisions of the FCA allow private persons, called "relators," to bring civil FCA actions on behalf of the government. 31 U.S.C. § 3730(b)(1).

The Act contains a number of jurisdictional bars against qui tam suits, including a provision which divests courts of jurisdiction over allegations or transactions that have been "publicly disclosed." 31 U.S.C. §3730(e)(4). Courts have applied a three-part test regarding public disclosure: (1) whether the allegations made by the relator have been "publicly disclosed"; (2) if so, whether the lawsuit is "based upon" the publicly disclosed information; and (3) if so, whether the relator is an "original source" of the information. See, e.g. United States v. Bank of Farmington, 166 F.3d 853, 859 (7^th Cir. 1999).

Traditionally, courts have not interpreted the Act’s public disclosure provisions to apply to a voluntary disclosure to the government. See, e.g. United States ex rel. Eberhardt v. Integrated Design & Construction, 167 F.3d 861, 870 (4^th Cir. 1999)(refusing to find public disclosure where defendant voluntarily met with government officials and disclosed allegations which were basis of FCA claims). These decisions generally have interpreted the Act’s public disclosure bar narrowly, finding that disclosure could occur only in those circumstances specifically set forth in the FCA. Id. Given this interpretation, the legal effect of voluntary disclosure of violations appeared limited to the FCA’s reduction of penalties to doubled damages upon voluntary and timely disclosure of violations by a claimant. See 31 U.S.C. §3729(a)(7).

Representatives of the health care and public contract sectors have proposed statutory amendment of the Act in order to deal with this problem; amendments which would, for example, bar any qui tam suit relating to facts voluntarily disclosed to the government. See, e.g. H.R. 3523, 105^th Cong. (1998)("Health Care Claims Guidance Act," would prohibit FCA actions on claims submitted in connection with approved compliance and reporting program). However, amendments to the Act have never been passed, and voluntary disclosure of FCA violations remains a proposition rife with risk.

In 1999, the Seventh Circuit issued an opinion which ran contrary to a narrow interpretation of the public disclosure jurisdictional bar. United States v. Bank of Farmington, 166 F.3d 853, 859 (7^th Cir. 1999). In Farmington, the panel held that a claimant’s inadvertent disclosure of fraudulent acts could constitute "public disclosure" for purposes of the Act. 166 F.3d at 860-62. Specifically, the Seventh Circuit found that revelation of allegations to a government official who had direct responsibility over the claim constituted public disclosure, because the informing of such officials fulfilled the same policy objectives which the listed disclosure circumstances sought to implement. Id. While the Farmington decision was rendered in connection with an accidental disclosure to the government, nothing in the opinion appears to bar the application of its logic to a voluntary and intentional disclosure of information to the government.

It is with this background that Chief Judge Aspen of the Northern District of Illinois was presented with a motion to dismiss a qui tam complaint for lack of jurisdiction prior to the government’s decision to intervene and prior to formal service of the complaint by the relator.

3. THE CHERRY DECISION
1. Facts of the Case

In early 1999, Rush-Presbyterian/St. Luke’s Medical Center ("Rush") found that doctors at its Liver and Kidney Transplant Clinic had submitted bills for patient exams which were in reality conducted by clinic nurses, and that doctors at the same facility had prepared bills with numeric codes that did not accurately reflect the complexity of provided treatment. These bills were passed onto the federal government in Medicare and Medicaid cost reports, and potentially constituted false claims for purposes of the Act.

Representatives of Rush met with a Deputy Chief of the local U.S. Attorney’s Office’s Civil Division in May 1999, and disclosed the irregularities they discovered. After the meeting, Rush provided documentation and further details regarding the irregularities, and provided the names of employees who could give further insight into Rush’s practices. A subsequent meeting on the topic took place in June 1999, and included Rush representatives, investigators and attorneys from the U.S. Attorney’s Office, an FBI investigator, and representatives of the Health Care Financing Administration. Again, Rush representatives answered questions and provided specifics regarding the irregularities.

The government subsequently initiated an investigation into Rush’s misconduct, and entered into negotiations with Rush to resolve the matter. In the midst of its dealings with the government, Rush held an internal meeting in which it advised its employees of the improper practices, its disclosure, and the ensuing investigation.

In September 1999, an employee who was present at the internal meeting filed a qui tam FCA lawsuit against Rush based in large part on the same irregularities Rush had revealed to the government. The government obtained a limited unsealing of the complaint and disclosed it to Rush in the course of their negotiations. Rush moved to dismiss the complaint for lack of jurisdiction based on the FCA’s jurisdictional bar against qui tam suits based on information which had already been "publicly disclosed." The government joined in Rush’s motion, also seeking dismissal of the substantive FCA claims.

2. Legal Conclusions

At the outset, the Court brushed aside the Relator’s objection that the motion was untimely. Rush had filed its motion prior to the government’s decision as to intervention in the matter; indeed, it filed its motion prior to service of the complaint. However, because Rush’s motion involved a challenge to subject matter jurisdiction, an issue which courts can address at any time (even without being raised by any party), the Court found the procedural posture of the case irrelevant to its consideration of the motion.

Substantively, the Court found that Rush’s disclosure of its billing irregularities constituted a "public disclosure" of the information which deprived the Court of jurisdiction over the Relator’s complaint pursuant to Section 3730(e)(4)(a). Utilizing the three-part "public disclosure" test set forth by the Seventh Circuit in Farmington, the Court held that: (1) the allegations and facts regarding Rush’s billing irregularities were "publicly disclosed;" (2) the Relator’s complaint was "based upon" the allegations and facts which had been disclosed; and (3) the Relator was not the "original source" of the allegations and facts.

The Court’s finding of "public disclosure" under the Act was based upon Farmington’s finding that disclosure to government officials whose duties extend to the questionable claims in a significant manner constitutes public disclosure. In the Cherry case, Rush had disclosed its billing irregularities to officials who were charged with investigating Medicare and Medicaid fraud, and had thereby made a "public disclosure" for purposes of the FCA.

The Court held that the Relator’s complaint was "based upon" Rush’s disclosure because the Relator had referred in its Complaint to the employee meeting at which Rush disclosed the investigation to its employees. In so doing, the Court found that Rush had satisfied the narrow "based upon" test adopted by a minority of the federal appellate circuits, including the Seventh Circuit, which requires a showing that the complaint actually have derived from the public disclosure.

Finally, the Court found that the Relator did not satisfy the "original source" requirement because it had not shared the information in its possession prior to its filing of the suit. All three elements of public disclosure were therefore met, and the Court found that it lacked jurisdiction over Relator’s allegations and dismissed the qui tam FCA counts of the Complaint.

4. POTENTIAL IMPACT OF THE CHERRY DECISION

The Cherry opinion makes two significant findings regarding the FCA. First, the Cherry court is one of the first courts to consider and rule on a motion to dismiss a qui tam FCA complaint prior to its being unsealed or served by the relator. Normally, defendants in qui tam matters are unaware of the existence of the complaint until it is disclosed to them by the government, usually in connection with the government’s decision to intervene. Under Cherry, defendants would not be forced to wait until the government made its intervention decision, or until the complaint was formally served by the relator, to move to dismiss on the basis of lack of jurisdiction. Public disclosure challenges, which inherently involve subject matter jurisdiction, can be brought at any time under Cherry.

Second, the Cherry court’s holding expands the public disclosure doctrine to cover the voluntary disclosure of information to the government. As discussed above, courts have been hesitant to do so in the past; indeed, certain courts have specifically refused to so find. Eberhardt, 167 F.3d at 870. But the Cherry decision appears to be a logical outgrowth of the Seventh Circuit’s opinion in Farmington, an opinion based at least in part on an examination of the Act’s goals.

The Cherry opinion certainly has its limitations. It may be subject to appellate scrutiny; its holdings constitute a divergence from those of other federal courts. Moreover, it does not set a firm standard by any means; whether information is "publicly disclosed" under the opinion depends a great deal upon the government official to which the information is revealed—the more involved with the claim the official is, the more likely a public disclosure. Such an ill-defined standard is subject to a number of interpretations, and goes nowhere near as far as many public disclosure proponents would desire.

Nevertheless, the Cherry opinion breaks new ground and certainly merits the attention of corporations and individuals who work with the government in the context of compliance efforts and programs.