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Appellate Court Adopts Expansive Reading of Procedural Bar Under False Claims Act, Limiting Ability of Whistleblowers to Bring Cases

Berger & Montague Whistleblower and Qui Tam Blog

In United States ex rel Oliver v. Phillip Morris USA, Inc., No. 15-7049,  2016 WL 3408023 (D.C. Cir. June 21, 2016), the appellate court in the influential District of Columbia Circuit

adopted an expansive reading of the FCA's public disclosure bar.   Briefly stated, the public disclosure bar provides that a lawsuit filed by a private whistleblower can be dismissed by the courts if the allegations or transactions at issue in the case had already been publicly disclosed.  This provision is a very common ground for defendants to have whistleblower suits dismissed, particularly if the courts use a broad reading of what can constitute a disabling public disclosure.

Relator Anthony Oliver filed a qui tam suit against Phillip Morris USA alleging that the company breached obligations in its sales to the government when the company sold cigarettes to U.S. Military Exchanges at prices higher than prices at which Phillip Morris sold cigarettes to other customers. Oliver alleged that this conduct violated the False Claims Act because Phillip Morris falsely certified compliance with so-called "most favored customer" ("MFC") provisions that are incorporated by reference into government contracts.  The trial court granted the company's motion to dismiss the case based on defendant's arguments that the conduct had been publicly disclosed prior to relator's filing. In its most recent ruling, the Court of Appeals upheld the trial court's dismissal of the case.

Interestingly, this same appeals court had previously held that Philip Morris had not been able to show public disclosure.  U.S. ex rel. Oliver v. Philip Morris (Oliver I), 763 F.3d 36, 44 (D.C. Cir. 2014).  In Oliver I, the court held that the FCA's public disclosure bar was not triggered because the company had not shown that "its allegedly false certifications of compliance with [the MFC] provisions were in the public domain." Id. at 41. The court also held that a 1999 inter-office memorandum discussing concerns about cigarette pricing at a United States naval station in Iceland (the "Iceland Memo") did not publicly disclose the pertinent facts.  Id. at 43.   The case was remanded to the district court for further proceedings.  Id. at 44.

On remand, Philip Morris successfully argued that the FCA's public disclosure bar was triggered because the MFC provisions were published online prior to the filing of Oliver's complaint. Philip Morris submitted archived webpages to show that the MFC provisions were publicly disclosed in an "administrative report" and in the "news media" and it also persuaded the judge that the Iceland Memo adequately revealed that the sales had been at prices higher than sales to other customers. U.S. ex rel. Oliver v. Philip Morris USA, Inc., 101 F.Supp.3d 111, 123-27 (D.D.C. 2015).

In its recent ruling, the Court of Appeals for the District of Columbia Circuit held that although the fraud itself was not publicly disclosed - that is, there was no published report or news story alleging that the company had violated the pricing provisions of the contract -- the "transactions" or "elements" that had been disclosed gave rise to an inference that fraud had taken place.

The court relied on a well-established rubric initially set forth in U.S. ex rel. Springfield Terminal Co. v Quinn, 14 F.3d 645 (D.C. Cir. 1994):  "[I]f X+Y=Z,  Z represents the allegation of fraud and X [the true state of facts] and Y [the misrepresented, or false, state of facts] represent its essential elements.  In order to disclose the fraudulent transaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e., the conclusion that fraud has been committed."  In this Philip Morris decision, the court held that "the transaction would be the fact that Philip Morris was not providing the Exchanges with the best price for cigarettes (X) plus the fact that Philip Morris falsely certified that it complied with the Most Favored Customer provisions (Y)," which "gives rise to the conclusion Philip Morris committed fraud (Z)."  2016 WL 3408023, at *5.

The ruling was based on two separate public disclosures (which courts routinely consider in tandem):  1) The "Iceland Memo," that disclosed that Phillip Morris charged U.S. Military Exchanges higher prices for cigarettes than it charged other customers and 2) contracts with the Military Exchanges that incorporated the most favored customer ("MFC") provisions, which could be accessed on a public website.  Looking at the two disclosures together, the court held that "a hypothetical government investigator aware of the price discrepancies and the MFC provisions would be 'alerted . . . to the likelihood' that the vendor was falsely certifying compliance with the relevant provisions."  Id. According to the court, this was sufficient to dismiss the complaint under the public disclosure bar.

Significantly, and very discouraging for potential whistleblowers, the court held that the Iceland Memo was "disclosed" in a civil hearing, even though the Memo was not actually filed with any court.  As to the most favored customer provisions, the court held that these were disclosed in an "administrative report," broadly construed to include a hyperlink to the Military Exchange website that identified those provisions.

The court doggedly dismissed all of Relator's compelling arguments as to why the Iceland Memo should not be deemed a public disclosure:

the Iceland Memo was originally published online pursuant to a settlement agreement that required Philip Morris to include documents that were produced in litigation. Philip Morris produced the Iceland Memo in subsequent litigation, and it was placed in this previously-established online database. When the subsequent litigation ended, "the district court, as part of its final judgment, ordered [Philip Morris], among others, to maintain an 'Internet Document Website' until September 1, 2016, which was to include, among other things, the documents previously placed in its [settlement] database…."  Th[at] database contains 4,480,485 documents from an additional 421 cases.

2016 WL 3408023, at *5. Despite this strong showing that the Iceland Memo was "disclosed" only in the broadest of senses, in that it was theoretically available on an enormous database focused on other topics, the court found that the " Iceland Memo was in fact actually available on a court-ordered public website. Because they were made available on the website in a civil hearing, they were "actually" made available in accordance with Springfield Terminal's rationale."  Id.

Additionally, the court rejected Relator's argument that the information in the Iceland Memo was stale, holding that "[a]lthough the Iceland Memo predates the sale of cigarettes alleged in the complaint, we have found "disclosures going back as far as forty years prior to the relator's lawsuit ... sufficient to disclose the practices which formed the basis of the relator's suit." 2016 WL 3408023, at *5 (citing U.S. ex rel. Settlemire v. District of Columbia, 198 F.3d 913, 919 (D.C. Cir. 1999 ).

The court also rejected Relator's arguments that there was no public disclosure of Philip Morris' false certifications of compliance with the MFC provisions for purposes of the FCA. Relator's argument, in essence, was that although the contracts containing the MFC provisions were publicly available, nothing contained therein indicated that Philip Morris had falsely certified its compliance.  The court rejected any argument that there was not a disabling public disclosure on this point:   "Because the MFC provisions are incorporated by reference into the Exchanges' contracts [which can be viewed online], a price differential disadvantageous to the government, combined with a contract term certifying that Philip Morris would sell cigarettes at the best possible price, would enable the government to adequately investigate the case and make a decision whether to prosecute."  United States ex rel. Oliver v. Philip Morris USA Inc., 2016 WL 3408023, at *5.

This is a discouraging case in that it allows a company to defeat a FCA suit filed by a whistleblower based on the fortuitous posting of an internal memo on an enormous public website containing over 4 million documents, some years earlier, for different purposes.  Such an expansive reading of the public disclosure bar is ill-suited to the FCA's clear purpose of encouraging whistleblowers to come forward with evidence of fraud against the federal government.  Perhaps the "escape valve" from the public disclosure bar - the original source rule - would have been sufficient in its current iteration to save this lawsuit, but the court rejected that argument under the original source requirements that were in place at the time of this case.  Regardless, though, the expansive reading of public disclosure provides far too easy an escape for cheating defendants.  If the standard is whether a government investigator looking for a particular type of fraud by a specific defendant could possibly have found it, we will lose the advantage of having people come forward to alert the government as to where it should be looking.


 

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