Rockwell International Corp. v. U.S. (05-1272)


Appealed from: United States Court of Appeals, Tenth Circuit (March 4, 2004)

Oral argument: December 5, 2006

FALSE CLAIMS ACT, QUI TAM, WHISTLEBLOWER, FRAUD, GOVERNMENT CONTRACTS

The federal False Claims Act permits private citizens and company employees, known as relators, to bring suit in the name of the United States (known as a qui tam suit) against a corporation that has committed fraud against the government, and to share in any judgment thereon. James Stone, a former engineer for Rockwell International, brought a qui tam suit against Rockwell for environmental health and safety violations at the Rocky Flats weapons facility. However, Rockwell claimed that Stone was ineligible to bring suit because the knowledge he had was not sufficiently “direct and independent” to qualify him as an “original source” under the statute. The Supreme Court’s decision in this case will resolve a split among the circuit courts regarding precisely what level of “direct and independent knowledge” a potential qui tam plaintiff must have to qualify as an original source. The Court’s decision will ultimately affect any business that contracts with the federal government or participates in government programs, and could make it either substantially easier or more difficult for potential whistleblowers to bring suit under the False Claims Act.

Question Presented

Whether the Tenth Circuit erred by affirming the entry of judgment in favor of a qui tam relator under the False Claims Act, based on a misinterpretation of the statutory definition of an “original source” set forth in 31 U.S.C. § 3730(e)(4)?

Issues

Did the Tenth Circuit incorrectly decide in favor of a whistleblower on the basis of a lenient construction of the False Claims Act’s definition of an “original source”?

Facts

The Rocky Flats weapons production facility, near Denver, Colorado, manufactured plutonium triggers for nuclear weapons from 1953 to 1988. Between 1975 and 1989, Petitioner Rockwell International operated the site for the U.S. Department of Energy (DOE) under a Management and Operating contract. See U.S. v. Rockwell Int'l Corp., 265 F.3d 1157 (10th Cir. 2001). During this time, Rockwell’s compensation from the DOE came in several forms, but the most significant was a twice-yearly “award fee” based on the DOE’s evaluation of Rockwell’s performance in areas such as management, production, and environmental, health, and safety operations. See id.

In 1980, James Stone began work for Rockwell as a principal engineer, and continued to work at Rocky Flats until he was laid off in 1986. See id. About a year after he was laid off, Stone contacted the FBI about environmental misconduct that had occurred at Rocky Flats while he worked for Rockwell. See id. Stone claimed that he had “unlimited access” at Rocky Flats, and that contrary to public knowledge, Rocky Flats had accepted nuclear and hazardous waste from other DOE facilities. See id. He also alleged that Rocky Flats had continued to incinerate hazardous waste, including plutonium, daily since 1981 despite the failure of the incinerators to pass safety testing at that time. See id. Finally, among other allegations, Stone informed the FBI that he believed the groundwater at Rocky Flats was contaminated from previous waste burial, and that hazardous waste evaporation ponds tended to overflow during and after substantial rainfall. See id. Stone had worked on an engineering project that addressed the manufacturing process for “pondcrete,” a mixture of cement and toxic waste sludge from the ponds intended to immobilize the waste, and “concluded that the suggested process would result in an unstable mixture that would later deteriorate and cause unwanted release of toxic wastes to the environment.” See id.

Using this information, the FBI obtained a search warrant for Rocky Flats, and carried out a search in 1989. See id. Three days after the search, the FBI’s affidavit was unsealed and media coverage of the environmental violations at Rocky Flats exploded. See id. Shortly thereafter, Stone filed a complaint under the qui tam provisions of the False Claims Act (FCA), alleging that Rockwell had committed numerous environmental, health, and safety violations at Rocky Flats since at least 1980, and that Rockwell had knowingly concealed these violations from the DOE in order to “induce the government to make payments or approvals.” See id.

However, in 1992, Rockwell attempted to dismiss Stone’s complaint, alleging that he was not an “original source” under the FCA. See id. Under 31 U.S.C. § 3730(e)(4), an original source must be “an individual who has direct and independent knowledge of the information on which the allegations are based,” but Rockwell asserted that Stone was not an original source because he filed his complaint after the extensive media coverage had occurred. See Supreme Court Docket Report, October Term 2006. On the basis of an additional affidavit submitted by Stone, the trial judge held that Stone had satisfied the FCA’s definition of an original source, and his case was allowed to proceed. See Rockwell, 265 F.3d at 1157.

Extensive litigation continued until 1999, when the district court held in favor of Stone and the United States on the FCA claims. See id. Rockwell then appealed to the Tenth Circuit, which held in favor of Stone’s claim and stated that an original source need only have knowledge of "information underlying or supporting the fraud allegations contained in the plaintiff's qui tam complaint." See id. However, the dissenting judge argued that Stone could not be an original source, because he had participated in engineering projects that concluded that certain processes were environmentally unsound, but he had actually left Rockwell’s employment before the company went forward with those unsound processes. See id. The Supreme Court granted certiorari on the issue of the meaning of “original source” under 31 U.S.C. § 3730(e)(4) in order to resolve a split between the circuit courts on this issue.

Discussion

Whistleblower cases are big news. They make headlines, scandals, and even movies, since the phenomenon of the “little guy” bringing a big corporation to its knees appeals to our sense of justice and independent spirit. However, the legal underpinnings of whistleblower cases can be extremely complicated, and not just anyone can be an Erin Brockovich. The federal False Claims Act permits private citizens and company employees, known as relators, to bring suit in the name of the United States (known as a qui tam suit) against a corporation that has committed fraud against the government, and to share in any judgment thereon. See Barbara Van Gelder & Daniel Graham, Supreme Court to Weigh in on "Original Source" Rule in Qui Tam Suits. In order to be a relator, the person bringing suit must be an “original source” under 31 U.S.C. § 3730(e)(4). An original source must have “direct and independent knowledge” of the activities on which his or her claim is based; the knowledge cannot come from public sources such as the media or judicial proceedings. See Van Gelder & Graham.

The courts currently disagree on what exactly constitutes an original source. The Third Circuit has held that the relator must have actual knowledge of the fraud. See U.S. v. Housing Authority of Pittsburgh, 186 F.3d 376, 387 (3rd Cir. 1999). The Ninth Circuit, in contrast, has taken the position that an original source must have “information” as opposed to “speculation.” See U.S. v. Kitsap Physicians Servs., 163 F.3d 516, 526 (9th Cir. 1998). The D.C. Circuit has defined an original source still differently, requiring that the relator have knowledge of the true state of affairs falsely represented by the defendant. See U.S. v. Quinn, 14 F.3d 645, 657 (DC Cir. 1994). The Tenth Circuit’s definition of an original source in Rockwell is particularly loose and flexible; an original source need only have knowledge of “information underlying or supporting the fraud allegations contained in the [relator]’s qui tam complaint.” See 265 F.3d at 1157. The Supreme Court’s decision in this case will settle the question once and for all.

If the Supreme Court upholds the Tenth Circuit’s more relaxed interpretation, the evidentiary barriers that keep potential relators from bringing qui tam suits will be substantially lowered. Individuals will be able to bring whistleblower cases on the basis of publicly disclosed, broad, and unspecific information, potentially leading to an enormous increase in the number of businesses held liable under the False Claims Act. If, however, the Court elects to follow a stricter definition of “original source,” potential relators could be barred from bringing qui tam suits because they do not have the requisite knowledge, and businesses could more easily continue committing fraud against the government. In other words, the Court’s decision will determine whether the “big guy” or the “little guy” gets the evidentiary advantage in a case of suspected government fraud.

The outcome of Rockwell has major implications for any business that participates in government contracts or programs. The U.S. Chamber of Commerce is particularly concerned, claiming that the qui tam provisions of the False Claims Act “threaten every federal government contractor, health care provider, and grant recipient in the United States.” See Brief of Amicus Curiae Chamber of Commerce of the United States of America in support of Petitioners at 1. Since the original source rule provides an important barrier to those who would file unfounded claims, a relaxation of that rule would permit more potential relators to file. See id. Health care providers will be particularly affected, because the federal government “funds in full or in part” a large percentage of health care services through Medicare and Medicaid. See Brief of Amicus Curiae American Hospital Assn., et al. in support of Petitioners at 3. The defense industry, too, is intimately linked to federal funding and contracts, and will be substantially affected by the Court’s ultimate decision in this case. See Brief of Amicus Curiae AHA & Nat'l Defense Industrial Assn. in support of Appellants.

By the express terms of the False Claims Act, only private plaintiffs who are the “original source[s]” of information supporting a claim of fraud against a government contractor may bring actions on behalf of the federal government. 31 U.S.C. §3730(e)(4)(A). The United States Supreme Court granted certiorari to consider the meaning of the “original source” requirement in the Act. 

Possible Conflict Between Tenth Circuit Decision and Law in Other Circuits

Rockwell International (“Petitioner”) first argues that the Tenth Circuit's holding that Stone was authorized to maintain the action rested on an interpretation of the original source rule that departs from the text of the statute and conflicts with the legal standards adopted by five other circuits. See Petition for a Writ of Certiorari at 14.

The lower courts have differing interpretations of the nature and quantum of “knowledge” a qui tam relator must possess in order to qualify as an “original source” under 31 U.S.C. §3730(e)(4). The Tenth Circuit only requires a relator to know background information “underlying or supporting” his supposition that a defendant might have engaged in fraud, even if the relator pursues a different theory at trial. See Petition for a Writ of Certiorari at 14-15. Because the Act requires a relator to know of and to disclose “the information on which the allegations are based,” Section 3730(e)(4)(B), the Tenth Circuit diverged from the Third and Eleventh Circuits, which require relators to be aware of an actual false statement to the Government, when it held that disclosure of Stone’s 1982 Engineering Order sufficed to carry Stone’s burden on voluntary disclosure. See id. at 14, 18.

Furthermore, Stone conceded that he lacked direct and independent knowledge of fraudulent statements. See id. His prediction that the “pondcrete” design he reviewed would fail is precisely the sort of “speculation or conjecture” that does not suffice in the Ninth Circuit, which requires that a relator either know of a false statement or have been a proximate cause of the Government’s discovery of a false statement. See United States ex rel. Aflatooni v. Kitsap Physicians Services, 163 F.3d 516 (9th Cir. 1999).

Finally, the Tenth Circuit's holding that Stone's production of his 1982 Engineering Order met his burden of voluntary disclosure also conflicts with the law in the District of Columbia and Eighth Circuits, which requires a relator to know the facts that made a statement false. See id. at 14, 21. If a relator must know an “essential element of the underlying fraud transaction,” United States ex rel. Springfield Terminal Railway Co. v. Quinn, 14 F.3d 645, 657 (D.C. Cir. 1994), then he also must adequately disclose an essential element. See Petition for a Writ of Certiorari at 21. Stone did neither, yet the Tenth Circuit held that his speculation about design flaws in the pondcrete system was sufficient. See id.

The United States (“Respondent”), on the other hand, argues that Petitioner’s claim of a circuit conflict is unfounded. See Brief for the United States in Opposition at 12. In United States ex rel. Mistick PBT v. Housing Authority, 186 F.3d 376 (3d Cir. 1999), the Third Circuit held that a relator cannot qualify as an “original source” because it learned of the defendant’s alleged misrepresentations to the federal government through a public release under the Freedom of Information Act, and therefore lacked “direct and independent” knowledge of those misrepresentations. Respondent contends that that holding is consistent with the Tenth Circuit's decision in this case, where Stone was a company insider aware of Petitioner’s willingness to misrepresent relevant facts in order to increase its compensation under the government contract. See Brief for the United States in Opposition at 12.

Moreover, Respondent contends that the Tenth Circuit’s decision in this case is consistent with the Eleventh Circuit’s holding in Cooper v. Blue Cross & Blue Shield of Florida, Inc., 19 F.3d 562 (11th Cir. 1994), in which the court of appeals held that the relator qualified as an original source because the information obtained through the relator’s own efforts was “more than background information. Id. at 568. The court in Cooper did not describe the categories of information that a relator must acquire directly and independently in order to satisfy the requirements of 31 U.S.C. § 3730(e)(4)(B), and did not, therefore, exclude information such as that acquired by Stone. Furthermore, Respondent claims that there is no basis for concluding that the Ninth Circuit would have reached a different outcome in this case. While the Ninth Circuit in Aflatooni, 163 F.3d 516 (9th Cir. 1999), stated that an “original source” must have information, as opposed to speculation, it did not announce any test for distinguishing between the two. See id.

Finally, Respondent claims that the Tenth Circuit's decision in this case does not conflict with the District of Columbia Circuit's ruling in United States ex rel. Springfield Terminal Railway Co. v. Quinn, 14 F.3d 645, 657 (D.C. Cir. 1994) or that of the Eighth Circuit in Minnesota Ass'n of Nurse Anesthetists v. Allina Health System Corp., 276 F.3d 1032. The District of Columbia and Eighth Circuits have rejected the contention that an “original source” must have “direct and independent” knowledge of the specific content of the defendant's misrepresentations. See Springfield, 14 F.3d at 656-657; Minnesota Ass'n, 276 F.3d at 1050. Rather, it is sufficient in both courts' view if the relator has "direct and independent" knowledge of the true state of affairs that the defendant has falsely represented. Those holdings are consistent with the Tenth Circuit's determination that Stone satisfied the requirements of 31 U.S.C. § 3730(e)(4)(B) because “he obtained, through his own efforts and not through the labors of others, direct and independent knowledge that Rockwell's designs for manufacturing pondcrete blocks would result in the release of toxic waste.” Stone, 282 F.3d 787, 800 (10th Cir. 2002).

Possible Departure From Statutory Text

Petitioner also argues that the Tenth Circuit adopted a rule that departs from the statutory text in that it disserves the intended function of the original source rule, which sought to “incentivize ‘whistle-blowing insiders with genuinely valuable information.’” See id. The Tenth Circuit rule permits relators to qualify as original sources without actually knowing of any fraud, or having accurate knowledge about the defendant’s underlying conduct, and without disclosing information evidencing fraud or state of affairs at the time the statements were made. See id. The Act’s requirement that a relator must “have direct and independent knowledge of the information” that forms the basis for the fraud claim should not be read to allow relators to drain large sums of money from the federal treasury based only on speculation. See id.; Section 3730(e)(4). According to Petitioner, the Tenth Circuit’s rule “eviscerates Section 3730(e)(4)’s function as a bulwark against abusive qui tam lawsuits,” which are often brought by disgruntled ex-employees or competitors. Petition for a Writ of Certiorari at 21. Properly construed, Section 3730(e)(4) requires relators to actually know about fraud and thus serves as a bar to abusive qui tam suits. See id. The Tenth Circuit's rule merely requires speculative beliefs underlying or supporting the view that fraud may have occurred and, consequently, gives vindictive ex-employees or unscrupulous business competitors license to use the Fair Claims Act in order to gain a competitive advantage. See id.

Respondent argues, however, that the court of appeals correctly rejected Petitioner’s contention that Stone does not qualify as an “original source” within the meaning of 31 U.S.C. 3730(e)(4)(B), because Stone did not possess the “direct and independent knowledge of the information on which the allegations are based” that the Act requires. See Brief for the United States in Opposition at 10. According to Respondent, the court’s approach is consistent with both the text and purposes of 31 U.S.C. § 3730(e)(4) and reflects a pragmatic effort to distinguish between relators who provide meaningful assistance and those who do not. See id. at 10-11.

In the course of his employment with Petitioner, Stone’s duties included “plant-wide troubleshooting through which he gained knowledge of various environmental, health and safety problems. United States ex rel Stone v. Rockwell Intern. Corp., 282 F.3d 787, 798 (10th Cir. 2002). Furthermore, Stone had been instructed by Petitioner “not to divulge environmental, health and safety problems.” Id. Thus, in his capacity as a Rockwell employee, Stone acquired substantial information concerning both the company's representations to the government and its actual practices at the Rocky Flats facility. The trial judge ruled that given these findings, there was evidence that Mr. Stone had direct and independent knowledge that Rockwell’s compensation was linked to its compliance with applicable environmental, health and safety regulations and that it allegedly concealed its deficient performance so that it would continue to receive payments. Id. at 799. Respondent argues that the fact that Mr. Stone was not aware of the specific persons or documents involved does not change this knowledge. Section 3730(e)(4)(B) requires that an “original source” must have “direct and independent knowledge of the information on which the allegations are based.” 31 U.S.C. 3730(e)(4)(B). It does not, according to Respondent, require that the relator have direct and independent knowledge of particular fraudulent documents or other details of the fraud. See Brief for the United States in Opposition at 12. The text of Section 3730(e)(4)(B) therefore does not require that an “original source” must personally observe the fraud, in whole or in part, as it is occurring. See id.

Conclusion

The Court’s decision in this case has the potential to dramatically change the ability of prospective qui tam relators to bring suit under the False Claims Act. If the Court decides for Rockwell and adopts a stricter definition of “original source,” it will become much more difficult for a potential whistleblower to have the requisite knowledge to bring suit, and businesses will be able to commit government fraud more easily. If the Court adopts a more lenient interpretation of “original source,” the evidentiary barrier to bringing a qui tam suit will be lowered, and plaintiffs could potentially bring unfounded and costly claims based on broad, unspecific information.

Authors

Prepared by: Kiernan Joliat and Emily Green

ADDITIONAL SOURCES

About the False Claims Act