January 28, 2020 / 11:00 PM / a month ago

DOJ eyes requirement that False Claims Act whistleblowers disclose litigation funding

(Reuters) - In a speech Monday to False Claims Act lawyers, Deputy Associate Attorney General Stephen Cox of the Justice Department said DOJ is considering whether to require whistleblowers to tell Justice about any agreements they’ve struck with litigation funders. Cox said DOJ doesn’t really know the extent to which litigation financiers are involved in FCA litigation, aside from what the litigation finance industry says publicly. (And that’s not much, based on my long experience writing about the industry.) DOJ, Cox said, is mulling “what, if any, interests the United States has with respect to third-party litigation funding in qui tam litigation and whether it is worth seeking some disclosure, at least to the department, of such arrangement.”

The context for DOJ’s discussion, Cox said, is a push by litigation funding skeptics in Congress and in the business lobby to mandate disclosure to courts overseeing big cases, either through legislation or changes in the federal rules, as well as DOJ’s own concerns that litigation financiers may be promoting unwarranted False Claims Act suits. The Justice Department recently moved to dismiss 10 whistleblower cases backed by what Cox described as “a for-profit private investment group.” Only one of those cases survived DOJ’s dismissal motion.

The unique nature of FCA suits means that DOJ’s view of litigation funding could have a disproportionate impact on cases if whistleblowers are required to disclose outside financing. Remember, FCA suits are typically initiated by private whistleblowers, who file their allegations of fraud against the government under seal. DOJ then investigates the claims and determines whether to pursue them on behalf of the government, with the whistleblower receiving a slice of the government’s ultimate recovery. If the Justice Department opts not to intervene, whistleblowers have a right to pursue their cases on their own, although the lion’s share of any recovery they obtain still belongs to the government.

If DOJ is skeptical about the motives of whistleblowers who have backing from for-profit litigation funders, prosecutors may be less likely to intervene in their cases - and more likely, as in the cases Cox mentioned in Monday’s speech, to seek dismissal of the suits after declining to take over the litigation. Conversely, Justice Department lawyers might rationally regard litigation funders as economically-motivated evaluators of whistleblower claims. A smart, diligent litigation funder isn’t likely to sink money into a losing cause, so DOJ lawyers could conclude that a case financed by such a funder has a better chance of resulting in a payout to the government.

Or here’s a radical thought: What if whistleblowers can’t actually pursue FCA suits if they’ve agreed to cut litigation financiers in on a piece of their bounty?

That issue, as Cox said in Monday’s speech, is before the 11th U.S. Circuit Court of Appeals in Ruckh v. Salus Rehabilitation, in which whistleblower Angela Ruckh is appealing a 2018 decision granting judgment as a matter of law to Florida nursing homes that allegedly defrauded Medicaid and Medicare. U.S. District Judge Steven Merryday of Tampa ruled (304 F.Supp.3d 1258) that the allegedly fraudulent conduct was not material, wiping out a $115 million jury verdict that, after trebling, would have resulted in a nearly $350 million judgment for the U.S. But according to the nursing homes’ appellate counsel at Skadden Arps Slate Meagher & Flom, Ruckh’s appeal should be dismissed because she struck a deal with a litigation funder.

After the jury verdict, but before Judge Merryday ruled on the nursing homes’ post trial motion for judgment, the whistleblower agreed to sell a small stake, less than 4%, of whatever bounty she may ultimately receive to a newly-formed limited liability corporation called ARUS. (Skadden found out about the deal when Ruckh’s counsel from Kellogg Hansen Todd Figel & Frederick disclosed in an 11th Circuit filing that ARUS had an interest in the case.)

Skadden’s novel theory, laid out in its motion to dismiss the appeal, is that under the U.S. Supreme Court’s 2000 ruling in Vermont Agency of Natural Resources v. U.S. (120 S.Ct. 1858), whistleblowers only have standing to pursue FCA suits because the government has assigned them an interest pursuant to the statute. Nothing in the text of the statute permits whistleblowers to turn around and give a piece of the recovery to a third party. So, according to Skadden’s theory, because Ruckh effectively breached the terms of her “contract” with the government by making an unauthorized deal to assign an interest to the case to a third party, she has lost her standing to pursue her claims.

Ruckh’s lawyers at Kellogg Hansen pointed out in their response that nothing in the text of the False Claims Act prohibits litigation funding. The FCA itself, and the Supreme Court’s interpretation of the law, requires whistleblowers to satisfy a long list of requirements to qualify as relators, Kellogg argued. Ruckh met those requirements. Her deal with ARUS only entitles the litigation funder to a small percentage of her prospective bounty – not to any of the government’s recovery – and does not allow ARUS any say in resolving the case. Kellogg Hansen also said that as a matter of law, Ruckh’s agreement with ARUS was not an assignment, so the premise of Skadden’s argument is flawed.

At oral arguments last November, 11th Circuit Judge Stanley Marcus was particularly interested in the whistleblower standing argument, peppering Skadden’s Gregory Luce with questions. Like Ruckh’s lawyers, Marcus said that nothing in the FCA prohibits an otherwise qualified whistleblower from selling a piece of their prospective bounty. When Luce answered that it’s dubious policy to allow a “shadow treasury” of litigation funders to wield a semi-criminal statute to finance FCA suits, Judge Marcus responded, “Congress created its own balance … You want us to read (a funding prohibition) into the structure of the FCA even though the FCA itself is silent.”

Interestingly, the U.S. had a chance to express its view of the standing of whistleblowers who have side deals with litigation funders in the Ruckh case – but opted not to. The Justice Department submitted an amicus brief backing Ruckh’s arguments about the materiality of the Medicaid and Medicare fraud allegations she asserted on behalf of the government but did not address her standing.

Cox acknowledged the Justice Department’s silence on the question in the Salus case in his speech Monday, but hinted that DOJ is going to be quite interested in the 11th Circuit’s decision. If the appeals court agrees with Skadden, after all, there likely won’t be much need for DOJ to ask whistleblowers about litigation funding deals because there probably won’t be many deals.

Ruckh counsel Derek Ho of Kellogg Hansen and Salus counsel Luce of Skadden declined to provide statements in response to my emails.

The views expressed in this article are not those of Reuters News.

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