Neil V. Getnick, Lesley Ann Skillen and Richard J. Dircks
Getnick & Getnick LLP
New York, New York
Published in The Taxpayer’s Against Fraud False Claims Act and Qui Tam Quarterly Review,. Vol. 13, April 1998
The past few years have witnessed a series of multi-million dollar fraud recoveries against major national and multinational health care providers and entire health care sub-industries. The government’s clinical laboratory dragnet, aided by qui tam relators, provides the most profound example to date of industry-wide civil and (in some cases) criminal prosecutions, capturing virtually all of the industry’s major corporate players. The series of cases that were investigated under the code name “Labscam” alleged that the leading national clinical laboratories systematically defrauded the federal and state governments over a period of half a decade. The cases resulted in recoveries to the government in the vicinity of one billion dollars.
II.The Multiple Relator Phenomenon
The Labscam cases have shown what happens when more than one qui tam plaintiff (or relator) files a case against the same defendant for the same fraud. In the Laboratory Corporation of America case (settled in November 1996 for $182 million), in which our firm represented a dermatologist who was the principal qui tam plaintiff, there were three other relators. In the SmithKline Beecham case ($325 million), there are six separate suits. According to press reports, there are some twenty-five qui tam relators who have filed cases in connection with the current Columbia/HCA investigation.
The framers of the False Claims Act anticipated this multiple relator phenomenon. 31 U.S.C. § 3730 (b)(5) provides that when two or more cases are filed based on the same facts, only the first to file survives. While the caselaw is somewhat sparse, most courts agree that § 3730 (b)(5) creates a “first-in-time, first-in-right” rule, and a “race to the courthouse” that makes no distinctions or value judgements as to the relative merits of particular qui tam plaintiffs, or indeed the finer points of the information they have to offer, and focuses instead on the first to file.
The “first-to-file” rule makes good practical sense. To what extent, however, are the policies behind the rule consistent with the objectives of the qui tam law? For example, what if a later- filing relator has a more complete or direct knowledge of the fraud? Does it make sense to eliminate a later-filing relator if he or she has more information than the first-to-file and can assist the Government by active participation in an undercover operation or the like?
In this article we discuss the law on the “first-to-file” rule, as well as the policy considerations both in support of and in opposition to it.
III. Current Caselaw
Although the “first-to-file” rule has been considered by the courts only rarely, the cases on the subject exhibit a relatively consistent approach. While the statue bars cases “based on the facts underlying the pending action,” (emphasis added), the approach taken in most of the cases involves an analysis of whether the second-filed case raises additional claims, allegations or causes of action to those in the earlier filed case or cases (rather than additional factual variations to the claims, allegations or causes of action in the earlier litigation). Several courts have added a requirement that the second filed case must potentially give rise not only to additional claims but also to separate recoveries to the Government.
This latter approach was adopted in the most frequently-quoted case on the subject, Erickson ex rel. U.S. v. American Institute of Biological Sciences, 716 F.Supp. 908 (E.D.Va. 1989):
“Simply put, this provision establishes a first in time rule. The qui tam complaint filed first blocks subsequent qui tam suits based on the same underlying facts. In so doing, the statute prevents a double recovery. A subsequently filed qui tam suit may continue only to the extent that it is (a) based on facts different from those alleged in the prior suit and (b) gives rise to separate and distinct recovery by the Government.”(emphasis added)1
The court in Erickson construed the (b)(5) language (“facts underlying the pending action”) broadly, focusing on the recoveries potentially arising from each identifiable allegation.2
Erickson was recently applied in U.S. ex rel. Dorsey et al. v. Dr. Warren E. Smith Community Mental Health Centers, Civ. No. 95-7446 (E.D. Pa. June 25, 1997) (Ditter, J.); 1997 U.S. Dist. LEXIS 9424. Expressly adopting Erickson, the court observed that the purpose of (b)(5) “is to prevent double recovery by parasitic suits.”3 In allowing the later-filed claims to remain, the court was influenced by the fact that the subject matter of Dorsey’s suit (patient care) was not the same as the subject matter of the earlier case (accounting and fiscal matters):
“Each individual false claim is to be treated separately for purposes of recovery and merely because Nixon alleged that the defendant had submitted false claims does not mean that Dorsey is precluded from pursuing other, distinct instances of false claim submission.”4
In general, courts have declined to compare the minutiae of factual and circumstantial variations between overlapping claims.5 For example, in United States ex rel. Hyatt v. Northrop Corp., No. CV 87-6892-KN, 1989 U.S. Dist. LEXIS 18941 (C.D. Ca. Dec. 27, 1989), the court discredited, inter alia, the later-filed relator’s attempt to distinguish similar frauds on the basis that they occurred at different times6 and in different geographic areas.7
The standard used by the court assumed a liberal reading of (b)(5). Factual variations between the cases were not sufficient, in the court’s analysis, to permit the later-filed relator’s claims to stand where they did not raise separate and distinct “issues” or substantive allegations, even where the frauds the relator alleged were a more specific variant of a broader scheme alleged in earlier suits.
The Third Circuit, in Stinson, Lyons, Gerling & Bustamonte, P.A. v. Prudential Ins. Co., 944 F.3d 1149 (3rd Cir. 1991), introduced the term “race to the courthouse” into the (b)(5) vernacular. Although the case was not decided on (b)(5) issues, dissenting Judge Scirica, noting the possibility that more than one person can be an “original source” of information for the purpose of the qui tam law, stated:
“[O]nce an eligible relator has brought an action, no other private party can bring an action based on the same information. See Sec. 3730(b)(5). This situation creates a potential “race to the courthouse” among eligible relators, but such a race may also spur the prompt reporting of fraud.”8
The notion that the primary policy objective of (b)(5) is to encourage people with knowledge of fraud to report it sooner rather than later was advanced recently by an Eastern District of Pennsylvania court in U.S. ex rel. Merena v. SmithKline Beecham Corp., et al., and related cases, Civ. No. 93-5974 (E.D. Pa. July 24, 1997) (VanArtsdalen, J.) This case sought to resolve the competing claims of relators in six separate suits brought against the clinical laboratory SmithKline Beecham.
The court held that “a later-filed action that alleges the same essential or material facts as the pending action” (also expressed as “the same material elements of a fraudulent transaction” as are alleged in the pending action) is barred by (b)(5).9 The court was unequivocal in its view that (b)(5) “does not lend itself to a narrow interpretation that bars only `identical suits’ based on `identical facts.’10
In the court’s view, a strict “first-to-file” rule serves the goals of the qui tam law because it encourages relators to file cases as soon as they learn of a fraud, permitting a prompt investigation by the Government and the speedy recovery of defrauded funds. The prompt reporting of fraud guards against the disappearance of documents, witnesses, stolen funds and the defrauders themselves.11
This “race to the courthouse” analysis, as distinct from one that would permit later-filed claims to remain if they differed in some minor factual respect from earlier-filed claims, has been articulated elsewhere. In U.S. ex rel. Cooper v. Blue Cross and Blue Shield of Florida, 19 F.3d 562 (11th Cir. 1994), the court stated in dicta that “once one suit has been filed by a relator or by the Government, all other suits against the same defendant based on the same kind of conduct would be barred.” (emphasis added)12 The court pointed out that this protects defendants from having to defend themselves against a multiplicity of qui tam suits, a subject that is discussed further below.13
IV. 31 U.S.C. § 3730(e)(3): Government File First
Another “first-in-time, first-in-right” section of the False Claims Act, 31 U.S.C. § 3730 (e)(3),14 gives priority to the first-filed case when that case is filed by the Government rather than another qui tam relator.
Characterizing the case before it as one of first impression, the court in U.S. ex rel. S. Prawer and Co. v. Fleet Bank, 24 F.3d 320 (1st Cir. 1994) allowed a qui tam action concerning an underlying transaction which the Government was already litigating to stand because the qui tam suit sought a distinct remedy that was not being sought by the Government – an analysis that mirrors the separate recovery requirement set forth in Erickson. The court advanced a “host-parasite” analysis, stating that a case is not parasitic where it has the potential for providing a “useful or proper return” to the Government.15
V. Policy Objectives and Issues
The policy objectives behind the “first-to-file” rule are practical and sensible:
(1) The public interest is protected by (b)(5) because it promotes the prompt reporting of fraud. Delay may result in a potential and otherwise viable qui tam plaintiff being non-suited.
(2) Defendants are protected by (b)(5) from the cost and complexity of defending multiple lawsuits based on the same, or similar facts. The rule creates a singular, focused suit which the defendant can address and counter in a productive and cost-efficient manner.
(3) The Government is likewise protected from the costs associated with investigating and administering multiple qui tam suits and dealing with multiple relators who have nothing to contribute to the Government’s recoveries. These costs can be particularly burdensome if “competing” cases are allowed to proceed to a single settlement and relator share issues must be resolved between two or more parties.
(4) Congress sought, through the 1986 Amendments, to increase the role of the private citizen in fighting fraud perpetrated against the Government. The “first-to-file” rule furthers this goal by ensuring that, other things being equal, the relator who files expeditiously will be able to recover what he or she has earned through effort and risk, namely, the relator share of the recovery. The rule encourages cooperation and a working partnership between the relator and the Government throughout the investigation because it eliminates the risk that by agreeing to multiple extensions of the seal, the relator may be exposed to the filing of a “competing” lawsuit.
And yet the “first-to-file” rule may have results that are inefficient or unfair. For example:
(1) Giving priority to the party that arrives at the courthouse first may not be giving priority to the party with the best, or the most, information. Consequently, the “first-to-file” rule has the potential to limit the information received by the Government. The first-filing relator’s information may be second-hand and/or non-specific, while the later-filing relator may not only be able to provide direct evidence of fraud but to proactively assist the Government’s investigation.
(2) While the prompt reporting of fraud is no doubt desirable, the risk that another relator may get to the courthouse first will result in the filing of some qui tam suits without adequate investigation of the merits and without regard to the dictates of Federal Rules of Civil Procedure 9(b) and 11(b). At the very least, counsel may well feel compelled to elevate the interests of staking a claim above the interests of thorough due diligence by filing a bare bones complaint based on a preliminary investigation and following up with an amended complaint at a later stage.
(3) At present, the Government does not automatically inform a later-filing relator of an earlier-filed case. On one level, the longer the existence of more than one relator remains undisclosed, the more information the Government can obtain from different sources. On the other hand, failure to inform the later-filing relator may work an injustice if the relator is encouraged to invest time, money and resources in a qui tam case that is statutorily barred.
(4) It may be impractical to expect that “competing” qui tam relators will be able to litigate priority issues when their cases are under seal and the Government is attempting to conduct a covert investigation. All parties would have to agree to partially lifting the seal in order to disclose their identities, allegations and/or complaints to each another. What if a relator seeks to dismiss another’s claims and/or case? Litigation amongst relators over a potential recovery would not assist and might even compromise the Government’s investigation.
31 U.S.C. § 3730(b)(5) is a “first-in-time, first-in-right” provision which addresses the relative rights of multiple relators in actions under the False Claims Act.
The statute bars a second case which is based on the “facts underlying the pending action.” Current caselaw, while scarce, supports a broad construction of this phrase and the notion of a “race to the courthouse” between relators with knowledge of the same fraud. The statutory language of (b)(5) and the cases on (b)(5) bear out that the subsection was not intended to invite a detailed comparative analysis of each and every particular raised by each relator in order to reach a conclusion on whether the second filed case is barred by (b)(5). Instead, the analysis is focused on whether the allegations or causes of action in the second filed case are separate and distinct, and possibly whether they potentially give rise to separate recoveries.
The “first-to-file” rule promotes the prompt reporting of fraud and protects defendants against a multiplicity of similar suits. It protects bona fide relators against parasitic later-filed claims. It prevents undue administrative burdens on the Government and the potential for more than one relator share to be claimed. However, the means by which the rule is to be applied efficiently and consistently with the overall aims of the qui tam law are open to discussion.
Mr. Getnick and Ms. Skillen are partners in Getnick & Getnick LLP, New York City. Richard J. Dircks is a law clerk to Hon. James M. Ideman, Federal District Court Judge for the Central District of California.
1. 716 F. Supp. at 918.
2. See also U.S. ex rel. Precision Co. v. Koch Industries, Inc., 31 F.3d 1015 (10th Cir. 1994), dealing with related, but not multiple lawsuits. Here, a corporate relator’s two sole shareholders sought, and were allowed by the court, to intervene in the lawsuit and be added as plaintiffs. Citing Erickson, The Tenth Circuit stated that “when § 3730(b)(5) speaks of intervention, it means to prohibit parties unrelated to the original plaintiff from joining the suit to assert a claim based on the same facts relied upon by the original plaintiff.” 31 F.3d at 1017-8.
3. 1997 U.S. Dist. LEXIS 9424, at *12.
4. Id., at *14
5. In Dorsey, the court stated that the relator’s claims survived because they “are not identical to Nixon’s and would not lead to a double recovery.” (emphasis added) The court cited both Erickson and the legislative history in support of this statement. Id., at *14-5. The Senate Committee on the Judiciary stated that “private enforcement under the civil False Claims Act is not meant to produce class actions or multiple separate suits based on identical facts and circumstances.” (emphasis added) Senate Report No. 345, 99th Cong., 2nd Sess. (July 28, 1986), reprinted in U.S. Code Cong. & Admin. News 5266, p. 25. The Committee cited U.S. v. Baker-Lockwood Manufacturing Co., 138 F.2d 48 (8th Cir. 1943), in which “three civil actions involv[ing] the identical cause of action against the defendants” had been filed, one by the Government and the other two by qui tam plaintiffs (emphasis added). The Committee’s reference to “identical facts and circumstances” should not be taken to mean that the (b)(5) bar was only intended to operate when the second filed case pled the exact same dates, times, places or other factual predicates supporting the claims or causes of action. Such an interpretation has found little, in any, support in the courts.
6. Id., at *4;
7. Id., at *14;
8. 944 F.3d at 1176 n.5 (Scirica, J., dissenting).
9. The court disagreed with the Erickson “separate and distinct recovery test” as imposing an additional, impermissible requirement that is not present in the statutory language and, furthermore, is unhelpful: every false claim, in the court’s analysis, gives rise to “a separate and distinct recovery,” and there may be literally thousands of them (at pp.42-43).
10. “The `facts underlying’ a qui tam action (or any other action for that matter) are not merely the details regarding the time and place of the alleged fraud …; they are, as the plain meaning of `facts underlying’ more broadly suggests, the allegations regarding the material elements of the fraudulent transaction that will support a claim for relief under the FCA.” at p. 42.
11. at pp. 44-45.
12. 19 F.3d at 567.
13. 19 F.3d 562, 567.
14. “In no event may a person bring an action under subsection (b) which is based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the government is already a party.”
15. 224 F.3d at 327, 328. While the “host-parasite” analysis will not always be relevant to (b)(5) circumstances (because, assuming that the first-filed case is still under seal, the later-filing relator will be unaware of it), the court in Prawer nonetheless saw the analysis as results-driven. (See also U.S. ex rel. Alexander v. Dyncorp, Inc., 924 F. Supp. 292 (D.D.C. 1996), applying the Prawer analysis.)