United States ex rel. Newell v. City of St. Paul , 728 F.3d 791 ( 2013 )

United States Court of Appeals
For the Eighth Circuit
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Nos. 12-2984, 12-3894
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United States of America, ex rel Fredrick Newell
lllllllllllllllllllll Plaintiff - Appellant
v.
City of St. Paul, Minnesota
lllllllllllllllllllll Defendant - Appellee
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Appeals from United States District Court
for the District of Minnesota - St. Paul
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Submitted: June 13, 2013
Filed: August 28, 2013
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Before LOKEN, BRIGHT, and BYE, Circuit Judges.
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LOKEN, Circuit Judge.
Fredrick Newell brought this action under the False Claims Act, 31 U.S.C.
§§ 3729-3733 (“FCA”), on behalf of the United States against the City of St. Paul.
Newell alleged that, from 2003 through 2009, the City obtained grants from the U.S.
Department of Housing and Urban Development (“HUD”) by falsely certifying
compliance with Section 3 of the Housing and Urban Development Act of 1968 and
its applicable regulations. See 12 U.S.C. § 1701u; 24 C.F.R. § 135 (collectively
“Section 3”). The government declined to intervene in Newell’s “qui tam”1 action.
The district court2 granted the City’s motion to dismiss, concluding the court lacked
subject matter jurisdiction because Newell was not an original source of fraud
allegations that were based on publicly disclosed information. The court later denied
Newell’s motion for relief from the judgment under Rule 60(b). Newell appealed
both orders. We consolidated the appeals and now affirm.
I. Public Disclosure Bar
The qui tam provisions of the FCA, enacted in 1863 to combat fraud by Civil
War defense contractors, authorize private citizens (called relators) to sue on behalf
of the government and, as a bounty, share in any recovery. The public disclosure bar
was part of the 1986 FCA amendments “intended to encourage private enforcement
suits by legitimate whistleblowers while barring suits by opportunistic qui tam
plaintiffs who base their claims on matters that have been publicly disclosed by
others.” Hays v. Hoffman, 325 F.3d 982, 987 (8th Cir.), cert. denied, 540 U.S. 877(2003). The statutory bar in effect in 2009, when Newell filed this action, provided:
(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.
1
See Vermont Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S.
765, 769 n.1 (2000).
2
The Honorable Donovan W. Frank, United States District Judge for the
District of Minnesota.
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31 U.S.C. § 3730(e)(4)(A). When this bar applies, the district court lacks subject
matter jurisdiction to afford the relator FCA relief. Rockwell Int’l Corp. v. United
States, 549 U.S. 457, 467-70 (2007).3
Newell is the owner of three construction companies that have unsuccessfully
attempted to secure work on HUD-funded projects in the City. In April 2008, he filed
an administrative complaint with HUD alleging that the City was violating Section
3 and falsely certifying compliance to obtain HUD grants. In May 2009, with that
complaint pending, Newell brought this qui tam action under the FCA. The
complaint was sealed while the government investigated the allegations and decided
whether to intervene. See 31 U.S.C. § 3730(b)(2). In the meantime, HUD conducted
a Section 3 compliance audit and determined that the City had violated Section 3.
In February 2010, HUD and the City entered into a Voluntary Compliance
Agreement that “fully and finally” resolved Newell’s administrative complaint but not
the City’s potential FCA liability. In February 2012, the government declined to
intervene in the qui tam action. Newell then filed an amended complaint, and the
City moved to dismiss under Rule 12(b)(1), contending that the public disclosure bar
stripped the court of jurisdiction to consider Newell’s fraud allegations.4 The district
3
Section 3730(e)(4)(A) was amended in 2010. It now provides that, if the
public disclosure bar applies: “The court shall dismiss an action or claim under this
section, unless opposed by the Government.” The parties agree that this case is
governed by the statute in effect when the action was filed. See Graham Cnty. Soil
& Water Conserv. Dist. v. United States ex rel. Wilson, 130 S. Ct. 1396, 1400 n.1
(2010).
4
The City also sought dismissal under Rule 12(b)(6), contending that its alleged
non-compliance with Section 3 does not give rise to FCA liability as a matter of law.
The district court did not consider this issue; because we agree the court lacked
subject matter jurisdiction, neither do we. See generally United States ex rel. Vigil
v. Nelnet, Inc., 639 F.3d 791, 795-96 (8th Cir. 2011).
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court granted the City’s motion to dismiss, concluding that Newell’s FCA claims
were based upon “allegations or transactions” that were publicly disclosed and he
does not qualify as an “original source of the information.” Newell appeals both
rulings. As the party invoking federal jurisdiction, he has the burden of establishing
the court’s FCA jurisdiction. See Hays, 325 F.3d at 987.
A. Public Disclosure. Congress enacted Section 3 to “ensure that the
employment and other economic opportunities generated by Federal financial
assistance for housing and community development programs shall, to the greatest
extent feasible, be directed toward low- and very low-income persons, particularly
those who are recipients of government assistance for housing.” 12 U.S.C.
§ 1701u(b). To that end, HUD regulations require that Section 3 grant recipients
provide, “to the greatest extent feasible,” training and employment opportunities for
low-income persons and for businesses employing such persons in connection with
projects funded by HUD community development grants. See 24 C.F.R. §§ 135.1 -
135.92. Grant applicants must certify that they will comply with Section 3
requirements, see 24 C.F.R. § 135.9(a), and grantees must submit annual reports to
HUD documenting compliance, see 24 C.F.R. § 135.90.
Newell’s FCA fraud claim is straightforward: From 2003 through 2009, he
alleges, the City received $62 million in HUD grants by certifying compliance with
Section 3 requirements; during those years, the City knowingly failed to comply with
those requirements; therefore, the City’s certifications were knowingly false, entitling
the government to treble damages and Newell to his relator’s share. The
jurisdictional bar to an FCA claim arises “only when the essential elements
comprising the fraudulent transaction have been publicly disclosed so as to raise a
reasonable inference of fraud.” United States ex rel. Hixson v. Health Mgmt. Sys.,
Inc., 613 F.3d 1186, 1188 (8th Cir. 2010) (quotations omitted). Stated differently, to
raise the bar, public disclosures must reveal “both the true state of facts and that the
defendant represented the facts to be something other than what they were.” Minn.
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Ass’n of Nurse Anesthetists v. Allina Health Sys. Corp., 276 F.3d 1032, 1044 (8th
Cir.), cert. denied, 537 U.S. 944 (2002). Thus, the issue is whether both the true state
of facts (the City’s non-compliance) and the misrepresentation of facts (the City
certifying compliance to HUD) were publicly disclosed within the meaning of
§ 3730(e)(4) before Newell brought his qui tam action in May 2009.
In 2005, Newell obtained an internal memorandum by Edward McDonald, a
former City employee, that included detailed allegations of the City’s noncompliance
with Section 3 requirements. Newell publicized the McDonald memorandum at a
City Council hearing in August 2005, reading the relevant Section 3 portions into the
record. Newell also joined a civil rights lawsuit against the City in 2006 during
which the entire McDonald memorandum was publicly filed. See Thomas v. City of
Saint Paul, D. Minn. Civ. No. 06-2860, Dkt. No. 33-1. In June 2006, Newell sued the
City in federal court, alleging numerous violations of Section 3 and seeking
compensatory and injunctive relief. He obtained documents relating to the City’s
Section 3 compliance from HUD by filing Freedom of Information Act (“FOIA”)
requests and submitted the FOIA requests as evidence of the City’s noncompliance
to support his motion for a preliminary injunction in that action. In February 2007,
the district court denied Newell’s motion and dismissed the suit for lack of standing
because he had not suffered injury traceable to the City. See Nails Const. Co. v. City
of Saint Paul, Civ. No. 06-2657, 2007 WL 423187, at *2-3 (D. Minn. Feb. 6, 2007).
Newell’s allegations of chronic Section 3 noncompliance in the Nails complaint were
nearly identical to those in his 2009 qui tam complaint. We agree with the district
court that Newell’s allegations of Section 3 non-compliance were publicly disclosed
in the McDonald memorandum and the Nails litigation (among other public sources
of that information).
Newell’s allegation that the City’s falsely certified Section 3 compliance in
applying for and obtaining HUD grants was publicly disclosed when he obtained the
City’s Section 3 compliance documents from HUD under FOIA. See Schindler
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Elevator Corp. v. United States ex rel. Kirk, 131 S. Ct. 1885, 1896 (2011) (agency
responses to FOIA requests by a relator are “reports within the meaning of the public
disclosure bar”). In addition, while publicizing the McDonald memorandum at a
public City Council hearing in 2005, Newell asserted that the Mayor of St. Paul
certified “that he would fulfill the requirements of the Section 3, yet Section 3 is
ignored.” Accordingly, both the true state of facts and the alleged misrepresentation
of facts were publicly disclosed before Newell filed his qui tam action.
On appeal, Newell virtually concedes these public disclosures but argues that
his fraud allegations were not “based upon” these sources because he was aware of
the City’s noncompliance before the McDonald memorandum was released, the FOIA
responses “only furthered [his] existing independent knowledge of the City’s
violations,” and he did not assert a claim of fraud in the Nails litigation. These
arguments are without merit because they conflate distinct § 3730(e)(4) issues. A qui
tam action is “based upon” public disclosures when the allegations in the action and
those in the public disclosures are substantially similar, regardless of whether the
relator may have had independent knowledge of the fraud. See Nurse Anesthetists,
276 F.3d at 1045-47; Glaser v. Wound Care Consultants, Inc. 570 F.3d 907, 915 (7th
Cir. 2009) (joining the “majority view” of eight other circuits). Whether Newell
obtained the publicly disclosed information independent of the McDonald
memorandum and the FOIA responses goes to whether he was an original source, not
to whether his qui tam claims were based upon that information.
B. Original Source. Newell argues the district court erred in concluding he
was not an original source of the information on which his fraud allegations were
based. An “original source” is “an individual who has direct and independent
knowledge of the information.” § 3730(e)(4)(B); see Hays, 325 F.3d at 990. That
means direct and independent knowledge of the information on which his fraud
allegations are based, not the information on which the publicly-disclosed allegations
were based. Rockwell, 549 U.S. at 470-71. “Independent knowledge” is “knowledge
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not derived from the public disclosure.” Nurse Anesthetists, 276 F.3d at 1048.
“Direct knowledge” is first-hand knowledge; “a person who obtains secondhand
information from an individual who has direct knowledge of the alleged fraud does
not himself possess direct knowledge and therefore is not an original source under the
[FCA].” United States ex rel. Barth v. Ridgedale Elec., Inc., 44 F.3d 699, 703 (8th
Cir. 1995); see In re Natural Gas Royalties, 562 F.3d 1032, 1045 (10th Cir.), cert.
denied, 558 U.S. 880 (2009).
We agree with the district court that Newell failed to establish he had direct and
independent knowledge of the information underlying his fraud allegations. Newell,
a private citizen, obviously had no direct or independent knowledge of the City’s
alleged “misrepresentation of facts” -- that is, the false certifications of Section 3
compliance and failures to file required Section 3 annual reports. Those allegations
were based on publicly-disclosed information, most likely HUD’s FOIA responses.
A relator does not have to have personal knowledge of all elements of a false
claim cause of action. “If the relator has direct knowledge of the true state of the
facts, [he] can be an original source even though [his] knowledge of the
misrepresentation is not first-hand.” Nurse Anesthetists, 276 F.3d at 1050. But
Newell’s fraud allegations are nonetheless barred because he failed to establish direct
and independent knowledge of the “true state of the facts” -- that is, the City’s alleged
chronic noncompliance with Section 3 requirements. Newell’s declaration in
opposition to the City’s motion to dismiss demonstrated that his knowledge of the
City’s noncompliance, in particular its failure to collect and maintain Section 3 data,
was derived almost entirely from current and former City employees. Tyrone Terrill
and Tom Sanchez informed Newell that the City did not collect or maintain Section
3 compliance data. The McDonald memorandum lamented the City’s lack of Section
3 procedures and its failure to place “recruited employees” on projects funded by
Section 3-covered grants.
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Newell points to his attendance at a June 2000 meeting concerning the City’s
HUD-funded lead-abatement projects as evidence that he witnessed the alleged
noncompliance first-hand. At that meeting, City representatives informed him that
the City “would not be adding additional contractors to their existing remodeling
contractor list” and that “the City would use HUD funds that it received to train the
City’s existing remodeling contractors.” But the City’s failure to add Newell to its
list of contractors in June 2000 does not establish even a single instance of
noncompliance with Section 3, much less the sort of chronic noncompliance that
would permit an inference that the City’s annual certifications that it would comply
were knowingly or recklessly false. Accord Vigil, 639 F.3d at 795. Only with the
information Newell later learned from City employees and from other publicly
disclosed sources could he credibly allege an actionable FCA violation. Newell’s
previous experience in attempting to secure Section 3-covered work and his interest
in the subject matter simply do not qualify him as an original source for purposes of
the public disclosure bar. See In re Natural Gas Royalties, 562 F.3d at 1045 (“The
fact that a relator has background information or unique expertise allowing him to
understand the significance of publicly disclosed allegations and transactions is also
insufficient.”); accord Hays, 325 F.3d at 990 (rejecting a catalyst theory).
For the above stated reasons, we affirm the district court’s decision that it
lacked subject matter jurisdiction under 31 U.S.C. § 3730(e)(4).
II. The Rule 60(b) Issue
More than two months after the district court issued its Memorandum Opinion
and Order dismissing the qui tam action for lack of jurisdiction, while that ruling was
pending on appeal, Newell filed a motion for Rule 60(b) relief from the final
judgment, alleging that the government had declined to intervene because of a secret
“global settlement” between the Department of Justice and the City in which his qui
tam action was used as a bargaining chip to induce the City not to take an action in
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an unrelated Fair Housing Act litigation that could jeopardize the government’s
recovery of $750 million in various unrelated lawsuits.5 The district court denied the
motion without an evidentiary hearing. On appeal, abandoning other theories argued
to the district court, Newell argues the district court abused its discretion in denying
Rule 60(b) relief because the secret settlement, unlike a discretionary decision not to
intervene in a qui tam action, enabled the government to obtain an “alternate remedy”
that entitles him to a share of the settlement proceeds under § 3730(c)(5) of the FCA.
See Jones v. Swanson, 512 F.3d 1045, 1049 (8th Cir. 2008) (standard of review). At
a minimum, he urges us to remand for discovery concerning the nature and extent of
the agreement between the government and the City.
We reject this novel contention because none of Newell’s allegations
concerning a secret agreement between the government and the City had anything to
do with the basis for the district court’s entry of its adverse final judgment -- that it
lacked subject matter jurisdiction over Newell’s qui tam action because of the public
disclosure bar. After the government declined to intervene, Newell continued to
litigate his qui tam claims. Had he prevailed, he would have been awarded a larger
percentage of the recovery than if the government had intervened. See 31 U.S.C.
§ 3730(d)(2); Roberts v. Accenture, LLP, 707 F.3d 1011, 1015-16 (8th Cir. 2013).
A district court does not abuse its discretion in denying a Rule 60(b) motion when the
moving party fails to show that the alleged misrepresentations or newly discovered
evidence “would probably produce a different result.” McCormack v. Citibank, N.A.,
100 F.3d 532, 542 (8th Cir. 1996) (quotations omitted).
We also reject Newell’s contention that Rule 60(b) relief is warranted because
the government obtained an “alternate remedy.” Section 3730(c)(5) provides:
5
The motion did not specify the subpart(s) of Rule 60(b) on which Newell
relied. On appeal, he cites Rule 60(b)(2), (3), and (6), which grant discretion to
relieve a party from a final judgment on grounds of newly discovered evidence, fraud
or misconduct by an opposing party, or “any other reason that justifies relief.”
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[T]he Government may elect to pursue its claim through any alternate
remedy available to the Government, including any administrative
proceeding to determine a civil money penalty. If any such alternate
remedy is pursued in another proceeding, the person initiating the action
shall have the same rights in such proceeding as such person would have
had if the action had continued under this section.
In this case, the government did not “elect to pursue” the FCA claims Newell asserted
against the City in “another proceeding.” Newell’s Rule 60(b) contention is that the
government used the City’s potential treble damage exposure in his qui tam action as
leverage to persuade the City to take action that enabled the government to recover
far more in unrelated, non-FCA cases. As defined in § 3730(c)(5), the term “alternate
remedy” does not include the government’s settlement of unrelated claims against
unrelated parties in unrelated lawsuits. Accord United States ex rel. LaCorte v.
Wagner, 185 F.3d 188, 192 (4th Cir. 1999) (“To the extent these [settled] claims are
unrelated to [relators’] earlier action, they have no rights because they are not bona
fide relators with respect to those claims.”).
Moreover, even if the government pursued and obtained an “alternate remedy,”
Newell would not be entitled to a share of that remedy because his FCA claims were
subject to dismissal under the public disclosure bar. As the plain language of
§ 3730(c)(5) makes clear, if the government pursues an alternate remedy in another
proceeding, the qui tam relator has the “same rights” in that proceeding as he would
have if the action had continued under the FCA. Here, as Newell’s FCA claim is
jurisdictionally barred, he “may not receive any share of the proceeds attributable to
that claim.” United States ex rel. Merena v. SmithKline Beecham Corp., 205 F.3d 97,
106 (3d Cir. 2000); see United States ex rel. Adrian v. Regents of Univ. of Cal., 337
Fed. App’x 379, 381 (5th Cir. 2009) (affirming the denial of Rule 60(b) relief for this
reason). Newell argues that Merena -- a case in which the government intervened and
settled the FCA claim -- is distinguishable because, here, the government obtained the
alleged alternate remedy before the district court dismissed his qui tam claims under
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the public disclosure bar. We conclude it is immaterial that the government obtained
an alternate remedy and declined to intervene before the City raised the public
disclosure bar. Newell assumes that if the government recovers anything, whether
after intervention or by alternate remedy, the relator gets a share. That is not
necessarily true, as in some cases the government settles and then sues the relator to
block his recovery. Cf. Rockwell, 549 U.S. at 478; United States ex rel. Poteet v.
Medtronic, Inc., 552 F.3d 503, 516-19 (6th Cir. 2009). Newell cites no case in which
a relator subject to the public disclosure bar was nonetheless entitled to a share of the
government’s “alternate remedy.” United States ex rel. Bledsoe v. Community Health
Sys., Inc., 342 F.3d 634, 647-51 (6th Cir. 2003), on which Newell principally relies,
did not consider this issue.
For these reasons, we conclude the district court did not abuse its discretion in
denying Newell’s Rule 60(b) motion. We affirm the judgment of the district court
and its Memorandum Opinion and Order dated November 26, 2012. We deny
Newell’s motion to take judicial notice.
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