Relators Can Bring Federal FCA Claims . . . in State Court?
As if the False Claims Act did not already give companies that do business with the government enough to worry about, they now have to consider the prospect of qui tam actions under the federal FCA being filed in state court. Because, at least according to the Third Circuit's recent decision in United States ex rel. Charte v. American Tutor, Inc., state courts have concurrent jurisdiction over federal FCA claims.
The issue in Charte was whether to apply New Jersey's "entire controversy doctrine" to bar a federal FCA action because the relator failed to assert her FCA claims as part of a related dispute with the defendants in state court. Although the Third Circuit ultimately declined to apply the doctrine on equitable grounds, along the way, it held that the relator could have brought her federal FCA claims in state court. The FCA provides that an action "may be brought in any judicial district" where a defendant "resides, transacts business, or in which any act proscribed by [the FCA] occurred." 31 U.S.C. § 3732(a). The Third Circuit reasoned that "the broad term 'judicial district' . . . include[s] state courts." Charte, 2019 WL 3772148, at *6.
The case law support for this rather surprising conclusion? Two district court decisions from the early 1990s, which held that the FCA contains no "explicit statutory directive" limiting FCA claims to federal court and thus the presumption in favor of concurrent jurisdiction between state and federal courts applied. See United States ex rel. Paul v. Parsons, Brinkerhoff, Quade & Douglas, Inc., 860 F. Supp. 370, 374-75 (S.D. Tex. 1994) (holding that judgment in prior state court action precluded federal FCA claims because they could have been brought as part of state court action); United States ex rel. Hartigan v. Palumbo Bros., Inc., 797 F. Supp. 624, 631-33 (N.D. Ill. 1992) (abstaining from considering federal FCA action pending disposition of related state court fraud claims).
These decisions are highly questionable. Under 28 U.S.C. § 1355, "district courts shall have original jurisdiction, exclusive of the courts of the States, of any action or proceeding for the recovery or enforcement of any fine, penalty, or forfeiture . . . incurred under any Act of Congress." (emphasis added). The FCA, of course, provides for the imposition of "a civil penalty." See 31 U.S.C. § 3729(a)(1). And the Federal Civil Penalties Inflation Adjustment Act pursuant to which FCA penalties are calculated makes clear that it applies to "civil action[s] in the Federal courts." 28 U.S.C. § 2461 note. In addition, the FCA's procedural provisions (such as nationwide service of process) all speak to what happens in federal court.
At the end of the day, much of this debate may be academic. Rarely will federal FCA actions actually be litigated in state court because defendants can remove them to federal court based on federal question jurisdiction. But allowing federal FCA claims to be brought in state court could have other consequences. Take the public disclosure bar, for example. Say a relator brings a federal FCA claim in state court, the government declines to intervene, and the relator elects not to pursue the case. The complaint is then unsealed when the action is dismissed and the allegations are public. But the public disclosure bar would not prevent a copycat relator from filing a subsequent FCA suit based on those same allegations because the disclosures were not made "in a Federal criminal, civil, or administrative hearing." See 31 U.S.C. § 3730(e)(4) (emphasis added). And how will DOJ react to essentially being haled into state court without any waiver of sovereign immunity?
These are all questions that the Third Circuit appears not to have considered. Whether they ever have to be answered depends on whether we actually see any federal FCA actions being filed in state court. Stay tuned.
© 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.