United States Ex Rel. Fine v. MK-Ferguson Co. , 99 F.3d 1538 ( 1996 )

PUBLISH
UNITED STATES COURT OF APPEALS
Filed 11/6/96
TENTH CIRCUIT
UNITED STATES OF AMERICA,
ex rel., HAROLD R. FINE,
Plaintiff-Appellant/
Cross-Appellee,
v.
MK- FERGUSON COMPANY, a No. 95-2011
Morrison Knudsen Company; No. 95-2021
INDUSTRIAL CONRACTORS;
MORRISON KNUDSEN
CORPORATION, doing business as
MK-Corporation Operations,
Defendants-Appellees/
Cross-Appellants.
UNITED STATES OF AMERICA,
Amicus Curiae.
Appeal from the United States District Court
for the District of New Mexico
(D.C. No. CIV-91-1122 JB/LFG)
Duff H. Westbrook of Duff H. Westbrook, P.C., Albuquerque, New Mexico,
(Maureen A. Sanders, Albuquerque, New Mexico, with him on the brief) for
Plaintiff-Appellant/Cross-Appellee.
Paul Bardacke (Kerry C. Kiernan and Peter S. Kierst with him on the briefs) of
Eaves, Bardacke & Baugh, P.A., Albuquerque, New Mexico, for Defendant-
Appellee/Cross-Appellant Industrial Contractors Corporation.
William P. Snyder (John C. Burgin, Jr., with him on the brief) of Kramer, Rayson,
Leake, Rodgers & Morgan, Knoxville, Tennessee, for Defendant-Appellee/Cross-
Appellant MK-Ferguson Company.
Michael F. Hertz (Barbara C. Biddle, Joan E. Hartman, and Dara A. Corrigan with
him on the brief), Attorneys, Civil Division, U.S. Department of Justice,
Washington, D.C., for Amicus Curiae.
Before HENRY, HOLLOWAY, and MURPHY, Circuit Judges.
MURPHY, Circuit Judge.
This case arises under the False Claims Act, 31 U.S.C. §§ 3729-33, and
specifically the qui tam provisions that allow individuals to sue on behalf of the
government to recover federal monies lost as a result of false claims and
fraudulent charges. The individual bringing the qui tam suit, called a relator,
shares a percentage of any proceeds recovered. Id. § 3730(d).
The False Claims Act contains jurisdictional limits on those who may bring
qui tam actions. It bars all qui tam suits that are based upon publicly disclosed
information unless the person bringing the action is an original source of the
information. Id. § 3730(e)(4)(A). The primary questions presented in this appeal
are whether the relator’s suit is based upon a “public disclosure” under section
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3730(e)(4)(A) and, if so, whether the relator qualifies as an “original source”
under section 3730(e)(4)(B).
Harold R. Fine is a former employee of the Office of the Inspector General,
U.S. Department of Energy. He brought suit as the relator under the qui tam
provisions of the False Claims Act against defendants MK-Ferguson Company
(“MK-Ferguson”) and Industrial Contractors Corporation (“Industrial
Contractors”). Fine’s Complaint alleges that these firms submitted false and
fraudulent claims with respect to six matters involved in the remediation of
residual mill tailings at a uranium mining site in Lakeview, Oregon.
The district court granted in part MK-Ferguson’s motion to dismiss on the
ground it lacked subject matter jurisdiction. The district court held that Fine’s
Complaint was based upon publicly disclosed allegations and that Fine was not an
original source of these allegations. 1 United States ex rel. Fine v. MK-Ferguson
Co., 861 F. Supp. 1544, 1552, 1554 (D.N.M 1994). This appeal followed the
district court’s dismissal and its denial of the defendants’ motions for attorneys’
1
The district court also denied Industrial Contractors’ motion for summary
judgment against Fine. The motion was premised on an implied jurisdictional bar
to qui tam suits by employees of the Office of the Inspector General. Industrial
Contractors appeals the denial of its motion and is joined by amicus curiae, the
United States of America. Because Fine’s suit is barred under the jurisdictional
requirements of the False Claims Act, 31 U.S.C. § 3730(e)(4), this court
specifically does not address the district court’s ruling that there is no implied
jurisdictional bar to employees of the Office of the Inspector General filing suit
under the qui tam provisions of the False Claims Act.
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fees. Appellate jurisdiction exists pursuant to 28 U.S.C. § 1291. For the reasons
set forth below, this court affirms the district court’s rulings that Fine’s suit is
based on a public disclosure, that he does not qualify as an original source, and
that an award of attorneys’ fees to MK-Ferguson and Industrial Contractors is not
appropriate.
I.
Fine alleges false claims and fraudulent charges in the construction of
facilities for the remediation of residual mill tailings at a uranium mining site in
Lakeview, Oregon. In 1978, Congress enacted the Uranium Mill Tailings
Radiation Control Act (the “Uranium Tailings Act”), Pub. L. No. 95-604, 92 Stat.
3021 (codified as amended at 42 U.S.C. §§ 7901-42), to stabilize and control mill
tailings from uranium mining operations in several western states. 42 U.S.C. §
7901. The Uranium Tailings Act directs the United States Department of Energy
to enter into cooperative remediation agreements with states which have
designated cleanup sites. Id. § 7913. Under these agreements, the Department of
Energy is responsible for 90% of the costs of the remediation, while the state is
responsible for the remaining 10%. Id. §§ 7913, 7917.
The State of Oregon and the Department of Energy entered into a
cooperative agreement concerning the Lakeview, Oregon, site. The Department
of Energy then entered into a contract with MK-Ferguson as the prime contractor
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for all engineering and construction work at the Lakeview site. MK-Ferguson in
turn entered into a subcontract with Industrial Contractors for all the construction
work at the site. Oregon is not a party to either the prime contract between the
Department of Energy and MK-Ferguson or the subcontract between MK-
Ferguson and Industrial Contractors.
After commencing work at the site in June 1986, MK-Ferguson and
Industrial Contractors claimed additional construction costs, explaining that site
conditions were not as anticipated. Oregon, however, questioned whether some
of these new costs were allowable under the contract between the Department of
Energy and MK-Ferguson and the subcontract between MK-Ferguson and
Industrial Contractors. Oregon conducted three separate audits on the Lakeview
site and sent an audit report on the contested costs to the Department of Energy.
The Oregon report focused on four cost areas: (1) unabsorbed overhead paid to
Industrial Contractors when a wood-chip encapsulation cell for contaminated
organic material was deleted from the project; (2) costs for work on a waste-water
retention pond; (3) costs for reconstructing pads used to decontaminate trucks
operated on the site and on public roads; and (4) costs associated with winter
shutdowns.
As a result of the Oregon audit report, the Department of Energy undertook
an investigation into the questioned costs and activities. Following a lengthy
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investigation by the Department of Energy, Oregon requested that an audit be
performed by the Department of Energy’s Office of the Inspector General. The
Office of the Inspector General subcontracted the audit to ADC, Ltd., an
independent firm. ADC performed the audit, wrote a draft report, and submitted
it to the Office of the Inspector General.
On April 30, 1991, the Office of the Inspector General then issued a final
report and audit based on ADC’s audit. The final report and audit was intended
to determine whether the costs of the questioned activities were: (1) allowable
under the contract between the Department of Energy and MK-Ferguson, the
subcontract between MK-Ferguson and Industrial Contractors, or the Uranium
Tailings Act cooperative agreement between the Department of Energy and
Oregon; and (2)incurred under generally accepted business practices.
The final report and audit concluded as follows: (1) that $40,168 of
unearned overhead for the wood-chip encapsulation cell was unallowable under
the cooperative agreement; (2) that the entire cost of the decontamination pad,
$86,009, was unallowable under the subcontract between MK-Ferguson and
Industrial Contractors; (3) that Oregon had a valid claim for its share of the costs
of equipment standby during the winter shutdowns; and (4) that part of the cost of
constructing the third waste-water retention pond, $14,690, was unreasonable.
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The Department of Energy sent this final report and audit to both Oregon
and MK-Ferguson officials under cover of a letter dated May 3, 1991. The cover
page of the final report and audit contained no special restrictions on its
availability, referring only to the general procedure for determining the release of
audit reports pursuant to requests under the Freedom of Information Act. In
addition, the cover letter neither imposed limitations on the public availability of
the report nor restrained in any way its dissemination by Oregon.
At the time of these events, Fine was an Assistant Regional Manager,
Western Region, in the Office of the Inspector General for the U.S. Department of
Energy. Fine had held this position since August 1984 and was in charge of
financial-related audits. Fine performed no audit work himself; rather, he
supervised audit directors who in turn supervised auditors performing the actual,
on-site audit work.
Fine had no involvement in the Department of Energy’s initial investigation
of the questioned costs at the Lakeview site and was only marginally involved in
the audit ordered by the Office of the Inspector General and performed by ADC.
Fine’s involvement was limited to: (1) attending a preaudit conference; (2)
authorizing the original direction to ADC; and (3) later helping to draft the final
report and audit based on the ADC audit. Fine described his involvement at the
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drafting stage as converting the ADC audit into layman’s language. In addition,
Fine later solicited information about the alleged fraud through newspaper ads.
Fine left the Office of the Inspector General and government service on
July 18, 1991. Four months later, he filed this suit in the United States District
Court for the District of New Mexico under the qui tam provisions of the False
Claims Act, 31 U.S.C. §§ 3729-33. In his Complaint, Fine alleges that MK-
Ferguson and Industrial Contractors submitted false and fraudulent claims for cost
reimbursement relating to work performed at the Lakeview site. Fine alleges
wrongdoing in six different matters: (1) alleged excess costs relating to the waste-
water retention pond liner, totaling $14,690; (2) costs associated with winter
shutdowns for idle equipment allegedly used at other sites, totaling $127,110; (3)
overhead costs for the deleted wood-chip cell, totaling $40,168; (4) reconstruction
costs for the decontamination pad, totaling $86,009; (5) use of estimated rather
than actual costs for equipment associated with the winter shutdowns; and (6) use
of estimated rather than actual overhead rates for contract modifications. With
the exception of item (6), which was ultimately dismissed with prejudice at Fine’s
request, each of Fine’s claims of wrongdoing was addressed in the April 30, 1991,
Inspector General’s final report and audit.
As required by the False Claims Act, Fine filed his Complaint under seal.
31 U.S.C. § 3730(b)(2). The Complaint remained under seal while the U.S.
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Department of Justice considered its option to intervene. See id. The Department
of Justice declined to intervene and the litigation proceeded with Fine the sole
protagonist.
MK-Ferguson filed a motion to dismiss which the district court granted in
part. MK-Ferguson, 861 F. Supp. at 1554. The district court resolved that counts
1-18 of Fine’s Complaint, which encompass all allegations of wrongdoing
excepting only that concerning the use of estimated overhead rates for contract
modifications, were based upon the Inspector General’s final report and audit. Id.
at 1552-53. The court then concluded that the final report and audit was a public
disclosure under the False Claims Act upon its referral to the State of Oregon. Id.
at 1552. The district court rejected MK-Ferguson’s claims that any of the three
Oregon audits, the Oregon audit report issued to the Department of Energy, or the
Department of Energy investigation constituted a public disclosure under the
False Claims Act. Id. at 1550-52.
Continuing its analysis, the district court also held that Fine was not an
original source under 31 U.S.C. § 3730(e)(4)(B). MK-Ferguson, 861 F. Supp. at
1553-54. Because Fine did not conduct any of his own investigations and his
knowledge was based upon the audit prepared by ADC for the Inspector General,
the district court concluded that Fine could not be considered to have “direct and
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independent knowledge” of the information upon which his Complaint was based.
MK-Ferguson, 861 F. Supp. at 1554.
At Fine’s request, the district court dismissed with prejudice his remaining
claim regarding the use of estimates on contract modifications. Fine filed this
appeal presenting the following issues: (1) whether the Inspector General’s
release of the final report and audit to Oregon is a public disclosure under the
False Claims Act; (2) whether his Complaint is “based upon any public
disclosure”; (3) whether the allegations regarding specific transactions not
contained in the Inspector General final report and audit can be dismissed; and, if
this court concludes that a public disclosure has occurred, (4) whether Fine
qualifies as an original source under the False Claims Act. MK-Ferguson and
Industrial Contractors cross-appeal the district court’s denial of their motions for
attorneys’ fees.
II.
The statutory provisions of 31 U.S.C. § 3730(e)(4) address the court’s
subject matter jurisdiction. When a court’s subject matter jurisdiction depends
upon the same statute that creates the substantive claims, the jurisdictional inquiry
is necessarily intertwined with the merits. Holt v. United States, 46 F.3d 1000,
1003 (10th Cir. 1995). In a qui tam action under the False Claims Act, the
jurisdictional question of whether a “public disclosure” has occurred arises out of
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the same statute that creates the cause of action. United States ex rel. Ramseyer
v. Century Healthcare Corp., No. 94-6299, 1996 WL 412819, at *2 (10th Cir.
July 24, 1996). This court has determined that these “intertwined” jurisdictional
inquiries should be resolved under Federal Rule of Civil Procedure 12(b)(6) or,
after proper conversion into a motion for summary judgment, under Rule 56. Id.The district court here resolved MK-Ferguson’s motion to dismiss under Rule
12(b)(1). The district court should have treated MK-Ferguson’s attack on the
court’s subject matter jurisdiction as a motion for summary judgment under Rule
56. Id. Accordingly, we exercise our plenary power and consider the motion as a
motion for summary judgment. Id.We review the grant of summary judgment de novo, applying the same legal
standard that would be used by the district court pursuant to Rule 56(c).
Universal Money Ctrs., Inc. v. AT&T, 22 F.3d 1527, 1529 (10th Cir.), cert.
denied, — U.S. —, 115 S. Ct. 655 (1994). This court reviews the district court’s
dismissal for lack of subject matter jurisdiction de novo. United States ex rel.
Precision Co. v. Koch Indus., Inc., 971 F.2d 548, 551 (10th Cir. 1992), cert.
denied, 507 U.S. 951 (1993).
Federal courts are courts of limited jurisdiction. A court’s jurisdiction is
therefore presumed not to exist absent a showing by the party invoking federal
jurisdiction. Precision, 971 F.2d at 551; Penteco Corp. v. Union Gas Sys. Inc.,
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929 F.2d 1519, 1521 (10th Cir. 1991). Moreover, “statutes conferring jurisdiction
on federal courts are to be strictly construed, and doubts resolved against federal
jurisdiction.” F&S Constr. Co. v. Jensen, 337 F.2d 160, 161 (10th Cir. 1964).
As this court noted in Precision, the False Claims Act should not be read in a
manner that impermissibly expands federal jurisdiction. 971 F.2d at 552. Fine
thus bears the burden of alleging facts essential to jurisdiction and supporting
those facts by competent proof. Id. at 551.
The False Claims Act imposes the following jurisdictional requirements at
issue here:
(e) Certain actions barred.—
....
(4)(A) No court shall have jurisdiction over an action
under this section based upon the public disclosure of
allegations or transactions in a criminal, civil, or
administrative hearing, in a congressional,
administrative, or Government Accounting Office report,
hearing, audit, or investigation, or from the news media,
unless the action is brought by the Attorney General or
the person bringing the action is an original source of
the information.
(B) For purposes of this paragraph, “original source”
means an individual who has direct and independent
knowledge of the information on which the allegations
are based and has voluntarily provided the information
to the Government before filing an action under this
section which is based on the information.
31 U.S.C. § 3730.
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Given the posture of this case, the jurisdictional inquiry under 31 U.S.C. §
3730(e)(4)(A) involves four questions: (1) whether the alleged “public
disclosure” contains allegations or transactions from one of the listed sources; (2)
whether the alleged disclosure has been made “public” within the meaning of the
False Claims Act; (3) whether the relator’s complaint is “based upon” this “public
disclosure”; and, if so, (4) whether the relator qualifies as an “original source”
under section 3730(e)(4)(B). If the court were to answer “no” to any of the first
three questions, its inquiry ends at that point and the qui tam action proceeds.
The last inquiry, whether the relator is an original source, is necessary only if the
answers to each of the first three questions is “yes,” indicating the relator’s
complaint is based upon a specified public disclosure. See Precision, 971 F.2d at552 & n.2.
Here, as MK-Ferguson argues, the alleged public disclosure is the final
report and audit of the Office of the Inspector General, which is an administrative
report specifically referenced in 31 U.S.C. § 3730(e)(4)(A). The first of the
threshold inquiries thus commands an affirmative response. As a consequence,
the court must address the next inquiry.
A. “Public Disclosure”
The district court concluded that a public disclosure occurred when the
Department of Energy sent the final report and audit of the Office of the Inspector
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General to the State of Oregon. MK-Ferguson, 861 F. Supp. at 1552. But, as the
district court noted, when the form of disclosure at issue is an administrative
report, the question of whether the report has been publicly disclosed is not as
clear as the instance when the government holds a public hearing and airs the
allegations or transactions at issue. Id. at 1550-51. The district court concluded
the False Claims Act contained an affirmative disclosure requirement—the
allegations or transactions must somehow be made known to the public. Id. at
1551.
In Ramseyer, this court reasoned as the district court below. Plaintiff
Ramseyer alleged she became aware of the defendants’ submission of false claims
for Medicaid reimbursement while employed at defendants’ mental health facility.
United States ex rel. Ramseyer v.Century Healthcare Corp., No. 94-6299, 1996
WL 412819, at *1 (10th Cir. July 24, 1996). Independent of the plaintiff, the
Oklahoma Department of Human Services conducted an inspection and audit of
the defendants’ facilities. Id. A subsequent report detailed the same Medicaid
compliance problems discovered by the plaintiff. Id. Three copies of the report
were made: two remained within the government agency’s files and the third was
sent to the defendants. Id. From these facts, this court determined that public
disclosure had not occurred. Id. at *6.
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En route to reaching its decision, the court interpreted the False Claims Act
to contain an “affirmative disclosure” requirement. Id. at *4. On the basis of this
actual disclosure rule, the court rejected the argument that the existence of the
report in the files of the Oklahoma government agency constituted public
disclosure. Id. at *5. The court reasoned that to bar qui tam suits because of
mere potential public disclosure was contrary to the purposes of the False Claims
Act. Id. at *4. Furthermore, the court rejected arguments that actions taken by
Oklahoma personnel were public disclosures. It determined that any disclosure of
the report from one employee of the Oklahoma Department of Human Services to
another employee did not constitute public disclosure. Id. at *5 n.4. The court
also concluded that disclosure of the report to the defendants in the qui tam suit
was not public disclosure. Id. Rather, public disclosure occurs when the
allegations or fraudulent transactions upon which the qui tam suit is based are
affirmatively disclosed to members of the public who are otherwise strangers to
the fraud. Id. at *5.
Here, the Department of Energy sent the final report and audit of the Office
of the Inspector General to the State of Oregon. When the Department of Energy
sent this final report and audit to Oregon, it placed no restrictions on its
dissemination after Oregon’s receipt. As a consequence, this disclosure is distinct
from what might otherwise be deemed a private disclosure. See id. at *5 n.4.
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Fine nevertheless argues that the final report and audit in the hands of
Oregon constituted mere potential availability, not public disclosure. In so
arguing, Fine seeks to soften his own deposition testimony and to rely upon a
purported designation by the Office of the Inspector General of the final report
and audit as a document not to be released to the public. These points miss the
real target.
Regardless of any purported internal limitation on circulation, the Office of
the Inspector General indisputably circulated the final report and audit to Oregon.
Oregon was not a party to the questioned contracts and projects. Oregon was thus
a stranger to the fraud like any other member of the public, with no disincentive
to making the information public. See id. Fine himself testified that to the extent
of his knowledge, the final report and audit was available to the public once it
was sent to Oregon. Moreover, he has come forward with no evidence to indicate
there was any limitation on Oregon’s releasing the final report and audit to the
public.
Any internal limitation on dissemination within the Office of the Inspector
General or external limitation under the Freedom of Information Act are
inapplicable to the State of Oregon. The cover letter sent to Oregon enclosing the
final report and audit contained no limitations or conditions on Oregon’s power to
release it. Once the Department of Energy sent the final report and audit to
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Oregon without restrictions on its public availability, the government caused the
final report and audit to be actually, as opposed to potentially, available to the
public. This was an affirmative disclosure constituting public disclosure within
the meaning of the False Claims Act. Consequently, Fine’s Complaint mandates
further inquiry.
B. “Based Upon”
The next required inquiry is whether Fine’s Complaint is “based upon” the
publicly disclosed “allegations or transactions”: the final report and audit sent to
Oregon. Precision, 971 F.2d at 552-54. “Based upon,” in 31 U.S.C. §
3730(e)(4)(A), means “supported by.” Precision, 971 F.2d at 552. The test is
whether “substantial identity” exists between the publicly disclosed allegations
and the qui tam complaint. Id. at 553-54. The False Claims Act can thus bar a
qui tam action that is only partly based upon publicly disclosed allegations or
transactions. Id. at 552. Moreover, this “based upon” analysis is a threshold
inquiry “intended as a quick trigger” to reach the “original source” analysis. Id.This analysis requires comparison of the publicly disclosed final report and
audit with the allegations contained in Fine’s Complaint. The final report and
audit disclosed to Oregon by the Department of Energy questioned costs relating
to four different construction activities at the Lakeview site: the deleted wood-
chip encapsulation cell, the reconstructed decontamination pad, the equipment
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standby costs during the winter shutdowns, and the construction of the third
waste-water retention pond. The final report and audit concluded that costs for
the wood-chip cell, the decontamination pad, and waste-water pond were
unallowable and that Oregon had a valid claim for reimbursement of the winter
standby costs.
The parts of Fine’s Complaint at issue here concern five cost areas: the
waste-water retention pond liner, the deleted wood-chip encapsulation cell, the
reconstruction of the decontamination pad, the use of equipment at other job sites
claimed to be idle during the winter standby, and the use of estimates, rather than
actual costs, for winter standby equipment rentals.
The first three referenced allegations in Fine’s Complaint are substantially
identical to the costs relating to these projects questioned and found to be
unallowable in the final report and audit. In fact, Fine’s allegations concerning
these specific items are for the exact dollar amounts found to be unallowable in
the final report and audit sent to Oregon. As a result, these three allegations are
“based upon” the publicly disclosed final report and audit and are thus subject to
the jurisdictional bar.
The other two areas where Fine alleges fraud, both relating to specific
winter standby costs, are also based upon the publicly disclosed final report and
audit. Nevertheless, Fine makes three arguments why his Complaint is not based
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upon the public disclosure: (1) he became aware of the alleged fraud prior to the
public disclosure; (2) his Complaint contains more specific allegations than the
public disclosure; and (3) his Complaint is the first time “allegations” of fraud are
made. As a result, Fine maintains his Complaint is not subject to the
jurisdictional bar. These arguments are unpersuasive.
Fine’s first contention seeks adoption of the “derived from” standard
applied by the Fourth Circuit in United States ex rel. Siller v. Becton Dickinson &
Co., 21 F.3d 1339, 1349 (4th Cir.), cert. denied, — U.S. —, 115 S. Ct. 316(1994). He premises his argument on his involvement in the Lakeview site audit
prior to the public disclosure: his Complaint was based on that prior involvement
and thus could not be “derived from” the public disclosure.
Fine fundamentally misconstrues the nature of the “based upon” analysis
laid out in Precision: “based upon” means “supported by.” Precision, 971 F.2d
at 552. The inquiry is whether the relator’s complaint is “substantially identical”
to the allegations contained in the public disclosure. Id. at 553-54. This
approach is consistent with the goal of Congress in the False Claims Act to
encourage those with knowledge of fraud to come forward. See S. Rep. No. 345,
99th Cong., 2d Sess. 2, reprinted in 1986 U.S.C.C.A.N. 5266, 5266. But where
public disclosure of the fraud has already occurred, no incentive for a private qui
tam suit is needed. See United States ex rel. Stinson, Lyons, Gerlin &
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Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1155-56 (3d Cir. 1991)
(holding that section 3730(e)(4) prevents qui tam suits based upon information
that would have been equally available to others had they chosen to look for it);
see also United States ex rel. Doe v. John Doe Corp., 960 F.2d 318, 324 (2d Cir.
1992) (holding that where public disclosure has occurred, the district court is
stripped of jurisdiction over the suit, regardless of where the relator obtained the
information, unless the relator qualifies as an original source).
Fine’s second argument concerns the specificity of his Complaint compared
to the specificity of the public disclosure. His contention is really twofold: (1)
the Complaint contains allegations of fraud in specific transactions not mentioned
in the public disclosure; and (2) the Complaint alleges fraud concerning only part
of the winter standby costs questioned and found to be unallowable in the final
report and audit.
In Precision, this court rejected the argument that the jurisdictional bar
applies only to those suits based “solely” upon the public disclosure. 971 F.2d at
552. This court concluded that the addition of the word “solely” to section
3730(e)(4)(A) would dramatically alter the plain meaning of the False Claims Act
by greatly expanding federal jurisdiction. Id. This court reasoned that such a
judicial gloss would only encourage artful pleading by relators, who would add
extra claims not supported by the public disclosure to avoid the jurisdictional bar.
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Id. The resultant pleading niceties would allow relators to benefit from publicly
disclosed allegations or transactions for which they were not the original source.
Regarding the winter shutdown costs, Fine attempts to escape the operation
of the jurisdictional bar by alleging fraud concerning less than all the amounts
found to be unallowable in the publicly disclosed final report and audit. Although
his allegations are more narrow and specific in scope, they are substantially
identical to and supported by the publicly disclosed allegations and transactions.
As a consequence, the winter shutdown cost allegations are factually, legally, and
truly based upon the publicly disclosed final report and audit.
Lastly, Fine argues that his Complaint is not “based upon” the publicly
disclosed final report and audit because it does not contain allegations of fraud or
fraudulent transactions. Fine focuses on the conclusions of the final report and
audit, which are worded in terms of “unallowable” or “unreasonable” costs, and
contends these conclusions do not constitute allegations of fraud. He maintains
his Complaint constitutes the first allegations of fraud.
Comparing the conclusions of the final report and audit concerning
unreasonable and unallowable costs with the allegations in Fine’s Complaint, we
hold that the two are substantially identical. See Precision, 971 F.2d at 553-54.
The final report and audit concludes that certain cost items exceeded reasonable
amounts by specific dollar amounts. Fine’s Complaint does the same, with the
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semantic difference that he calls these amounts false claims. That Fine first used
the label “false claims” is immaterial. The district court was thus correct in its
conclusion that Fine’s Complaint was based upon publicly disclosed allegations
and that Fine was then subject to the original source inquiry.
C. “Original Source”
Even though a qui tam filing may be based upon a statutorily defined public
disclosure, it is not jurisdictionally barred if the relator is an original source. The
requirements for original sources are set out in 31 U.S.C. § 3730(e)(4)(B). The
False Claims Act provides that an original source is an individual who has direct
and independent knowledge of the information on which the allegations are based
and has voluntarily provided the information to the Government before filing a
qui tam action based on the information. Id. This court in Precision determined
that two jurisdictional requirements are evident in this language. First, the qui
tam relator must have “direct and independent knowledge of the information on
which the allegations are based.” Precision, 971 F.2d at 553. Second, the qui
tam relator must have “voluntarily provided” the information to the government
prior to filing suit. Id.Other courts have held that direct and independent knowledge is “‘marked
by [the] absence of an intervening agency.’” United States ex rel. Stinson, Lyons,
Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1160 (3d Cir.
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1991) (quoting Webster’s Third New Int’l Dictionary 640 (1976)). Furthermore,
the Ninth Circuit characterizes direct and independent knowledge as “unmediated
by anything but [the relator’s] own labor.” United States ex rel. Wang v. FMC
Corp., 975 F.2d 1412, 1417 (9th Cir. 1992). Moreover, independent knowledge is
knowledge which is not secondhand knowledge. See Prudential, 944 F.2d at 1154(holding Congress intended “to encourage persons with first-hand knowledge of
fraudulent misconduct to report fraud”).
Fine argues that his participation in the audit of the Lakeview site qualifies
him as an original source under section 3730(e)(4)(B). Fine contends that he was
the individual who directed the scope of the audit conducted by ADC, Ltd.; that
he was the individual who identified the use of equipment rental cost estimates as
a false claim, rather than merely an unallowable cost; and that he was the
individual responsible for referring reports of MK-Ferguson’s and Industrial
Contractors’ activities to the Investigations Division at the Office of the Inspector
General. 2
2
Fine also argues that he is an original source because of his participation
in making the public disclosure. The Second Circuit requires the original source
to be involved in the public disclosure. See United States ex rel. Dick v. Long
Island Lighting Co., 912 F.2d 13, 16 (2d Cir. 1990). Fine maintains that the
Ninth Circuit has gone a step further and held that participation in the public
disclosure is itself solely sufficient to establish that the individual is an original
source. We, however, are skeptical of Fine’s reading of Ninth Circuit precedent.
See United States ex rel. Wang v. FMC Corp., 975 F.2d 1412, 1419 (9th Cir.
1992) (holding that an individual who is involved in disclosing an allegation
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But Fine also admits that he was not the individual actually performing the
investigations on the Lakeview site. The audit was instead carried out by field
investigators at ADC, which was retained by the Office of the Inspector General.
Fine himself had no contact with Oregon personnel involved in the Lakeview
project and little with MK-Ferguson employees. Fine acknowledges that all the
factual information in his Complaint came from ADC personnel and materials.
He concedes that his contribution to the final report and audit produced by the
Office of the Inspector General was limited to taking the facts presented by ADC
and writing the report in layman’s language. Finally, Fine admits that his
independent investigations consisted solely of placing ads in newspapers
soliciting information from those with knowledge of fraud.
Fine’s allegations are derivative of the facts uncovered by the field
auditors. He did not himself discover the allegedly fraudulent practices at the
Lakeview site and was not an observer of the purported fraud. Fine has merely
changed the labels “unreasonable” and “unallowable” costs from the final report
“might qualify as its original source”). More importantly, this court in Precision
declined to adopt the Second Circuit’s additional requirement that the original
source be a source to the entity making the public disclosure. United States ex
rel. Precision Co. v. Koch Indus, Inc., 971 F.2d 548, 553 n.4 (10th Cir. 1992),
cert. denied, 507 U.S. 951 (1993). Even acknowledging Fine’s role in making the
public disclosure, because this court concludes below that Fine’s knowledge is
not direct and independent, he cannot be an original source under the False
Claims Act.
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and audit to “false” and “fraudulent” claims in his Complaint. Moreover, his own
investigations are only a continuation of the audit conducted by ADC and cannot
be considered independent under section 3730(e)(4)(B). See Precision, 971 F.2d
at 554 (holding that an investigation which was merely a continuation of, or
derived from, a previous investigation was not sufficiently independent).
That Fine had some involvement in preparing the final report and audit of
the Office of the Inspector General does not necessarily qualify him as an original
source. Fine’s secondhand knowledge of the alleged fraud at the Lakeview site is
not “direct and independent,” based as it is on the work of others. Fine’s suit is
the type of opportunistic suit, where the relator contributes no significant
information of his own, that Congress sought to discourage in the 1986
Amendments to the False Claims Act. United States ex rel. Fine v. Sandia Corp.,
70 F.3d 568, 571 (10th Cir. 1995). For these reasons, Fine does not have “direct
and independent knowledge” of the publicly disclosed allegations and transactions
upon which his Complaint is based and he cannot be an original source. 3 The
district court thus lacked subject matter jurisdiction under section 3730(e)(4) and
the Complaint was properly dismissed.
3
Because Fine fails to satisfy the “direct and independent knowledge”
element of the “original source” analysis, this court need not consider whether
Fine “voluntarily provided” this information to the government as required under
section 3730(e)(4)(B). See Precision, 971 F.2d at 554.
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III.
Both MK-Ferguson and Industrial Contractors cross-appeal the district
court’s denial of their motions for attorneys’ fees. See MK-Ferguson, 861 F.
Supp. at 1554. This court reviews the entitlement to attorneys’ fees subject to an
abuse of discretion standard. Supre v. Ricketts, 792 F.2d 958, 961 (10th Cir.
1986). Under the abuse of discretion standard, the decision of a trial court will
not be disturbed unless the appellate court “has a definite and firm conviction that
the lower court made a clear error of judgment or exceeded the bounds of
permissible choice in the circumstances.” Moothart v. Bell, 21 F.3d 1499, 1504
(10th Cir. 1994) (citation and internal quotation marks omitted).
The False Claims Act provides for the award of attorneys’ fees where the
claim was “clearly frivolous, clearly vexatious, or brought primarily for purposes
of harassment.” 31 U.S.C. § 3730(d)(4). MK-Ferguson and Industrial
Contractors advance two main reasons for assessing their attorneys’ fees against
Fine. First, they argue that the district court so clearly lacked subject matter
jurisdiction that Fine’s suit constitutes frivolous and vexatious litigation. Second,
they argue that Fine has engaged in a pattern of vexatious litigation against a
number of government contractors.
Although they are accumulating in number, decisions construing the False
Claims Act in the Tenth Circuit are not legion. That the district court lacked
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subject matter jurisdiction in this case was not clearly apparent under the holding
in Precision or the decisions of other circuits at the time. The district court
determined that an award of attorneys’ fees was not appropriate. This court
cannot conclude that the district court’s denial of attorneys’ fees constituted a
clear error of judgment or exceeded the bounds of permissible choice. As a
consequence, the district court did not abuse its discretion and this court will not
disturb the denial of attorneys’s fees. See Moothart, 21 F.3d at 1504.
IV.
The district court correctly dismissed Fine’s Complaint for lack of subject
matter jurisdiction under 31 U.S.C. § 3730(e)(4). It did not abuse its discretion in
denying an award of attorneys’ fees to the cross-appellants. The judgment of the
district court is therefore AFFIRMED in all respects.
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Nos. 95-2011 & 95-2021, United States ex rel. Fine v. MK- Ferguson Co.
HENRY, Circuit Judge, dissenting.
I respectfully dissent.
Qui tam actions have been described by some not generally favorable to
them as follows:
The term [“qui tam”] derives from the Latin phrase “qui tam pro
domino rege quam pro se imposo sequitur,” meaning “he who brings
the action as well for the king as himself.” The original idea was
simple: where an entity has defrauded the federal government, a
private party should be able to bring suit against the malefactor and
share in the government’s recovery . . . .
James T. Blanch et al., Citizen Suits and Qui Tam Actions 4 (Roger Clegg &
James L.J. Nuzzo eds., 1996).
It is not surprising that qui tam suits would develop nor is it surprising that
they may work. A society such as ours surely understands market motivations.
When the government--through inattention or because of overtaxed investigative
and prosecutorial resources--cannot or does not attempt to recover for fraud, qui
tam actions allow private citizens to bring claims on behalf of the government and
share in any bounty recovered.
But what the Congress giveth, some of the courts seem to taketh away. The
various circuits have adopted different rules covering the four-part test which
must be met to provide federal qui tam jurisdiction. The test, as related by the
majority, is as follows:
(1) whether the alleged “public disclosure” contains allegations or
transactions from one of the listed sources; (2) whether the alleged
disclosure has been made “public” within the meaning of the False
Claims Act; (3) whether the relator’s complaint is “based upon” this
“public disclosure”; and, if so, (4) whether the relator qualifies as an
“original source” under section 3730(e)(4)(B).
Slip op. at 13.
My difference with the majority results from its application of United
States ex rel. Ramseyer v. Century Healthcare Corp., 90 F.3d 1514 (10th
Cir.1996), to the facts at hand. Ramseyer takes a practical approach that
recognizes Congress’s intent to create a workable system to uncover fraud against
the government. The qui tam provisions of the False Claims Act must both
“‘encourage private citizens with first-hand knowledge [of fraud] to expose [it]’”
while at the same time “‘avoid civil actions by opportunists attempting to
capitalize on public information without seriously contributing to the disclosure
of the fraud.’” Ramseyer, 90 F.3d at 1519-20 (quoting United States ex rel.
Precision Co. v. Koch Indus., 971 F.2d 548, 552 (10th Cir. 1992), cert. denied,
507 U.S. 951 (1993)). The dual purposes of qui tam noted in Ramseyer, 90 F.3d
at 1519-20, and Precision, 971 F.2d at 552, must be balanced against each other.
I believe Ramseyer struck the proper balance in the following passage:
As to the second of these purposes, we do not believe that an actual
disclosure rule will encourage parasitic lawsuits. Information to
which the public has potential access, but which has not actually
been released to the public, cannot be the basis of a parasitic lawsuit
because the relator must base the qui tam suit on information
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gathered from his or her own investigation. If a specific report
detailing instances of fraud is not affirmatively disclosed, but rather
is simply ensconced in an obscure government file, an opportunist
qui tam plaintiff first would have to know of the report’s existence in
order to request access to it. With regard to such materials, which
are at best “only potentially in the public eye,” we agree with the
District of Columbia Circuit that “no rational purpose is served--and
no ‘parasitism’ deterred--by preventing a qui tam plaintiff from
bringing suit based on their contents.”
Ramseyer, 90 F.3d at 1520 (quoting United States ex rel. Springfield Terminal
Ry. v. Quinn, 14 F.3d 645, 653 (D.C. Cir. 1994) (emphasis added)).
In striving to reach the proper balance, the majority concludes that the
disclosure of the audit report to the state of Oregon amounts to a “public
disclosure” under 31 U.S.C. § 3730(e)(4)(A). I believe this result is in error for
two reasons: first, I believe Ramseyer’s logic suggests that the mere disclosure
from a federal agency to a state government may not always amount to a public
disclosure; and second, though the state of Oregon was not a party to the contract
between the Department of Energy and MK-Ferguson Company, it had prior
knowledge of the fraud and was liable for ten percent of the ultimate cost of the
fraud, and hence was not, in Ramseyer’s terms, “‘a stranger to the fraud.’” See
Ramseyer, 90 F.3d at 1520 (quoting United States ex rel. Doe v. John Doe Corp.,
960 F.2d 318, 322-23 (2d Cir. 1992)).
My first point, that the Department of Energy’s providing the audit report
to the state of Oregon is not a public disclosure follows directly from Ramseyer:
-3-
“Only when there is a positive act of disclosure to the public can the government
‘no longer throw a cloak of secrecy’ around the allegations, for at that point the
information has been ‘irretrievably released into the public domain.’” 90 F.3d at
1520 (quoting John Doe Corp., 960 F.2d at 322). As Ramseyer noted, not
requiring a positive act of disclosure would reinstate the pre-1986 jurisdictional
bar of qui tam actions “‘based on evidence or information the Government had
when the action was brought.’” Id. (quoting 39 U.S.C. § 3730(b)(4) (1982)
(superseded)). “Congress sought to replace this restrictive jurisdictional
prerequisite in part because of its concern that the government was not pursuing
known instances of fraud.” Id. (quoting United States ex rel. Fine v. MK-
Ferguson Co., 861 F. Supp. 1544, 1551 (D. N.M. 1994)). Thus, Ramseyer
concluded that the mere accessibility to a report in government files by the
general public via a Freedom of Information Act request does not constitute a
public disclosure for the purposes of federal qui tam jurisdiction.
Merely, providing the state of Oregon with a lengthy audit report is
likewise not a public disclosure. In this matter, the state of Oregon has entered
into an agreement with the United States government through the Department of
Energy to clean up the Lakeview site. Although the audit did not state any
restrictions on its dissemination, there is no evidence that the state of Oregon took
positive steps to release it to the public nor is there any reason to believe that
-4-
other correspondence between the federal agency and the state government
concerning their partnership was actively made public. The mere fact that the
state of Oregon has the audit report in a file cabinet somewhere subject to public
disclosure under the state “Public Records Act,” see Org. Rev. Stat. § 192.410-
.505, does not constitute an affirmative disclosure to the public. These materials
are “at best ‘only potentially in the public eye.’” See Ramseyer, 90 F.3d at 1520(quoting Springfield Terminal Ry., 14 F.3d at 653).
Finally, the second point: Ramseyer suggests the disclosure must be to
some member of the public with no prior knowledge of the fraud. The majority
characterizes Oregon as “a stranger to the fraud.” Slip. op. at 16 (citing
Ramseyer, 90 F.3d at 1520 (quoting John Doe Corp., 960 F.2d at 322-23)). I
believe that the facts suggest that the state of Oregon had prior knowledge of the
alleged fraud and moreover, is no stranger thereto. Oregon conducted three
separate audits of its own after questioning some of the additional costs claimed
by MK-Ferguson under its contract with the Department of Energy. It was
Oregon’s audits that instigated the Department of Energy investigation resulting
in the federal audit report, which the majority holds was “publicly disclosed”
through its transfer to the state of Oregon. Furthermore, Oregon has entered into
a agreement as prescribed by the Uranium Mill Tailings Radiation Control Act,
Pub. L. No. 95-604, 92 Stat. 3021 (1978) (codified as amended at 42 U.S.C. §§
-5-
7901-42 (1995)), whereby it is responsible for ten percent of the costs of
remediation at designated cites, including the Lakeview site that MK-Ferguson
was hired to cleanup. Although MK-Ferguson’s contract was with the
Department of Energy and the state of Oregon was not a party thereto, to the
extent MK-Ferguson has defrauded the Department of Energy through false
claims under the contract, the state of Oregon is ultimately responsible for ten
percent of the additional costs. Thus, to my mind, Oregon had prior knowledge of
the fraud and was not a stranger to the effects of the fraud.
Although scholars have challenged the constitutionality of qui tam actions,
that question is not presented in this case. Though the statute may need to be
revised, see Blanch et al., supra, at 5 (noting “that a more straightforward
‘bounty’ system, without a role for the whistleblower in actually conducting a
lawsuit, would address these constitutional concerns [arising from qui tam
suits]”), qui tam actions now exist as a sometimes effective tool aimed at
diminishing fraud against the federal government and its taxpayers. Judicial
constructions should not overly limit this Congressionally provided tool. As I
believe Ramseyer supports the conclusion that the mere providing of an audit
report to a state government, which has instigated the audit, does not constitute a
public disclosure, I would allow Mr. Fine’s qui tam suit to proceed.
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