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FCA Qui Notes
May 17, 2019

Tenth Circuit Materially Adds to Original Source Jurisprudence in Case About Background Investigations

Qui Notes: Unlocking the False Claims Act

Under the public disclosure bar, False Claims Act (FCA) relators are prevented from pursuing allegations that are already in the public domain—unless the relator is deemed to be an "original source" of the information. In 2010, Congress amended the FCA to define original source as a person who "has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions" (provided that person also had given the government that information before suing). But the issue of what information constitutes a material addition is a mystery that the courts struggled with for some time now. The post-2010 "materially adds" standard requires relators to bring something to the table—but what that "something" should be has proven difficult for courts to define given the inherently vague language of the statute.

The jurisprudence on the "materially adds" standard caught a big break just a few weeks ago when the Tenth Circuit closely examined it in United States ex rel. Reed v. Keypoint Government Solutions, 2019 WL 1907853 (10th Cir. April 30, 2019). The alleged fraud in Reed accused a federal contractor of cutting corners in conducting background investigations by falsifying corrective action reports where its employees had exceeded a permissible level of telephone interviews. The court held that prior public disclosures about fraud in conducting background checks (including about the two other "main players" in the background-investigation industry) was sufficient to "set the government on the trail" of defendant's alleged fraud. But the court then had to examine whether relator, a former quality control analyst for defendant, materially added to the public information to qualify as an original source.

After canvassing decisions from sister circuits, the Reed court concluded that "materially adds" means that a relator must "disclose new information that is sufficiently significant or important that would be capable of 'influenc[ing] the behavior of the recipient' – i.e., the government." Reed (quoting U.S. ex rel. Winkelman v. CVS Caremark Corp., 827 F.3d 201, 211 (1st Cir. 2016)). The court specifically rejected the standard of the Seventh Circuit in Cause of Action v. Chicago Transit Authority, 815 F.3d 267 (7th Cir. 2016), which found that a relator did not "materially add" because his allegations were "substantially similar" to those in the prior public disclosure. The Tenth Circuit in Reed found that the standard left little room for application of the original source exception—one only considers the original source exception where there is substantial similarity between the information in the public domain and that in a relator's complaint.

The Reed court adopted some guideposts for the "materially adds" standard from the First Circuit's Winkelman case—stating that whether a relator's information is significant depends on the level of detail in the public disclosures. It also asserted that merely including additional "detail or color" to the elements of a scheme that has already been publicly disclosed does not materially add. Applying the standard to the facts, the Tenth Circuit reversed the district court's holding that the original source exception did not apply.

Applying this standard to the facts, the Tenth Circuit reversed the district court's holding that relator was not an original source. The court found that details the relator provided about the telephone scheme were not contained in the prior public disclosures. The court also found that the relator's information provided direct evidence of defendant's scienter, noting that scienter was often difficult to prove. The relator's information included responses by defendant's management to her complaints that suggested that defendant knew it was violating background check requirements. Thus, the relator had added materially to the prior disclosures.

Interestingly, the Tenth Circuit also held that simply naming a specific defendant as a wrongdoer did not materially add to the public disclosures, many of which related to the private contractor background check industry as a whole. Nor did the relator materially add to public disclosures simply because she conducted her own investigation or because her information was based on personal knowledge—both factors that could have supported original source status under the old "direct and independent knowledge" standard. Rather, the court found the relator's information "expanded the scope of the fraud" that had been revealed in the public disclosures. Ultimately, the court remanded to the district court to determine whether the relator's information was independent—an issue not determined in the first instance below.

The Reed case provides a useful guide to those litigating original source issues revolving around the "materially adds" standard. While the inquiry may ultimately be very fact specific, it is helpful to have an articulated standard that adds some clarity to the meaning of "materially adds."

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.