Blog

With the heightened pleading standard established by the Supreme Court in Twombly and Iqbal, it must follow that Plaintiffs are entitled to some accommodation in the manner and methods used to muster the facts now required to properly plead a case. Apparently this is not so.

In issuing its 5-3 decision (Justice Kagan did not take part in the decision) in Schindler Elevator Corp. v United States, No. 10-188 (May 16, 2011), the Court held that a whistleblower litigating under the Federal False Claims Act (FCA) does not have standing if his or her claims are based on information secured from a Freedom of Information Act (FOIA) request. The FCA precludes whistleblowers from basing claims on government “reports” and in Schindler, the Court had to decide whether the Government’s response to a FOIA request constituted a government report. Justice Thomas opined that because a response to a FOIA request provides information, it must therefore be a “report” within the meaning of the statute. While this may be good news for college students seeking support for the proposition that a one page document suffices as a term paper or report, it is indeed a blow to whistleblowers seeking redress from private contractors that cheat the government.

The whistleblower in Schindler, Daniel Kirk, a Vietnam veteran, claimed that his employer, a government contractor, failed to honor a veterans job preference, which in turn violated a government contract. In support of efforts to prove his claims, Schindler’s wife secured information from the Department of Labor (DOL) through a FOIA request. Mrs. Kirk’s efforts, according to the Court’s opinion, proved fatal to the complaint.

The False Claims Act’s public disclosure bar is designed to preclude the filing of parasitic lawsuits or lawsuits based on public information readily known to the government. Specifically, the statute bars suits based on government audits and reports. If a government agency issues a report documenting fraudulent conduct by a contractor, it would make sense that a private citizen should not be able to use that report, file a lawsuit, and claim a bounty for bringing attention to that which is already known. But a response to a FOIA request is different. First, as a document generated at the behest of a private citizen, it would never be revealed if the private citizen did not know to ask for it. Second, the document may only provide raw data or information absent any analysis and its relevance may only be understood by the individual seeking the information. As Justice Ginsburg noted in her dissent, quoting the Opinion of the Second Circuit which was reversed, the Department of Labor’s responses “did not synthesize the documents or their contents with the aim of itself gleaning any insight or information, as . . . It necessarily would in conducting a ‘hearing” or ‘audit.’ ”

The truth is that Daniel Kirk, the relator in Schindler, was doing exactly what the Court in Iqbal and Twombly required of him; he was mustering very precise facts in order to plead a case. And though he may have filled his complaint with some facts secured from the government itself, there is no evidence that the government was able to put the pieces together absent his aide.

With so much public money being injected into the private sector these days and with insufficient oversight of contractors, does this case — like other recent Supreme Court decisions — merit corrective legislation? As Justice Ginsburg noted in her dissent: “[a]fter today’s decision, which severely limits whistleblower’s ability to substantiate their allegations before commencing suit, that question is worthy of Congress’ attention.

Last October, representatives from Pfizer Inc., Tyco International Ltd., Citigroup Inc. and other major companies met with officials from the Securities and Exchange Commission to share their views on rules implementing the Dodd-Frank whistleblower law. Not surprisingly, they want the rules watered down.

What these companies have in common is that they each have been involved in a massive corporate scandal that victimized consumers or shareholders. Had a whistleblower come forward early, their wrongful conduct could have been averted.

Despite their checkered past, these corporations apparently have no shame in seeking to limit the government’s ability to catch future wrongdoers. Having this rogues’ gallery advise the SEC on policing corporate misdeeds is akin to Dillinger, Capone and Babyface Nelson meeting with J. Edgar Hoover to share their views on criminal law enforcement.

In practically every financial scandal that has rocked the corporate world, whistleblowers have been ignored or punished for their attempts to ward off catastrophe. Recognizing the critical role that whistleblowers can play in preventing harm before it reaches catastrophic proportions, Congress passed special whistleblower provisions in the Dodd-Frank law. Those new provisions include bounties for whistleblowers who provide valuable information to the SEC that leads to the recovery of sanctions against wrongdoers. The SEC has issued proposed regulations to implement the new law.

It is those regulations that have set off a flurry of corporate lobbying. Claiming that they can police themselves and do not need whistleblowers reporting wrongdoing to the government, corporations are now lobbying hard to cut back on Dodd-Frank. In particular, they want the SEC to structure regulations that require whistleblowers to use internal corporate compliance programs first.

The essence of their argument is that big corporations can police themselves and provide adequate forums for employees to report wrongdoing. This position may be true, for say, a report of an employee who is stealing from the cash register of a big-box store. But this does not make sense where the company is following a corporate policy of stealing from consumers or cheating shareholders or investors. A corporation simply cannot police itself when its senior officials are the culprits.

By definition, securities fraud requires intentional conduct at the most senior levels of a corporation. Therefore, a whistleblower who must use internal compliance procedures faces a hopeless task of relying on an internal process that in all likelihood was designed as an impediment to anyone reporting pervasive wrongdoing.

Pfizer PFE -0.92% , Tyco TYC -1.29% and Citigroup C -5.99% are poster children for the proposition that internal compliance cannot address pervasive fraud or fraud committed at the senior levels of a corporation.

As a result of wrongful conduct that was not halted by its internal compliance program, Citigroup recently settled fraud claims with the SEC for $75 million, and was bailed out by taxpayers to the tune of $45 billion. Its wrongful conduct diminished the value of the corporation between October 2007 and January 2009 by more than $225 billion. Tyco paid $3 billion to settle shareholder claims, and its former chief executive and chief financial officer are in prison. Tyco shareholders lost $130 billion in value during a six-month period in 2002.

In 2009, Pfizer paid the largest criminal fine ever — $2.3 billion — to settle claims of Medicare and Medicaid fraud with the federal and state governments. The pharmaceutical giant not only had a vaunted internal compliance program, but also was already subject to two federal government corporate integrity agreements, which were the result of past derelictions of law. Pfizer had twice managed to convince federal and state officials that internal compliance should be left to the company. The third time around, multiple whistleblowers had no choice but to go to federal officials with claims that the company had illegally marketed multiple drugs including at least one to children.

How strong were the whistleblowers’ claims against Pfizer? In a ruling against Pfizer in the case, U.S. District Court Judge Jed Rakoff noted that “to put it bluntly, the allegations of the Complaint evidence misconduct of such pervasiveness and magnitude, undertaken in the fact of the board’s own express formal undertakings to directly monitor and prevent such misconduct, that the inference of deliberate disregard by each and every member of the board is entirely reasonable.”

Undoubtedly, they had a hard time getting the company to right its wrongful conduct through internal procedures, especially where it was making $171 billion (during the period of alleged wrongdoing) from the drugs encompassed by the whistleblower claims. Pfizer was doing so well that just from 2007-2008 its CEO, Jeffrey Kindler, took home almost $28 million.

The lesson of these cases is clear. Where the highest officials in the corporation perpetrate the wrongdoing, internal compliance cannot work. From Enron to Pfizer, consumers, shareholders and the economy as a whole have suffered too much harm from promises of unworkable compliance programs. The SEC must stand up for whistleblowers and ignore the complaints of these egregious offenders.

RIPPING OFF THE U.S. government has reached epidemic proportions. The Department of Justice estimates that fraud costs the Medicare system alone between $30-$60 billion annually. But instead of fines and jail time, fraudsters are frequently rewarded with more government business. And if the U.S. Chamber of Commerce and its allies have their way, these fraudsters will gain enhanced legal protection.

The U.S. Supreme Court recently heard oral arguments in a critical case testing the right of citizens to bring suit in the name of the United States in order to recover damages from corporations or individuals that have cheated the government. By taking up the case known as Schindler Elevator, the high court is looking into whether a private citizen can secure information from a Freedom of Information Act request and use that information to form the basis of a qui tam or False Claims Act whistleblower lawsuit. The chamber also wants the court to rule that ignoring government contract requirements that the contractor deems unimportant should not be considered cheating the government.

The whistleblower in Schindler brought his case under the False Claims Act, which has proven to be an enormous benefit to the U.S. government and taxpayers. It effectively deputizes the eyes and ears of private citizens. And it provides added incentive to individuals to police corporate malfeasance by requiring the government to pay bounties from proceeds recovered through False Claims Act litigation.

A slew of recent cases demonstrate the benefit of whistleblower litigation. Settlements of suits totaling hundreds of millions of dollars with Pfizer, GlaxoSmithKline, and Bristol- Myers were all cases initiated by whistleblowers.

From pharmaceutical fraud to defective military hardware, over $20 billion has been recovered since 1986 through cases started by whistleblowers under the False Claims Act. In each case the wrongdoer violated, or caused to be violated, a contract or regulation that conditioned on receipt of government funds. And lest anyone think the law can be gamed, Congress put in express limits on is usage: no whistleblower suit can be based on news media coverage, a congressional hearing or government audits or reports.

In the Schindler case, a Vietnam veteran, who alleged that his employer was not according proper affirmative action consideration to veterans, used information from such a FOIA request to confirm what he believed were violations of government contract requirements.

The Supreme Court is being asked by big businesses to expand the congressional limits so that whistleblower suits based on information secured through a Freedom of Information Act request would be barred by statute. This makes no sense and is contrary to the express terms of the law. If the whistleblower knows enough to request the information and has the ability to demonstrate how the government has been defrauded, there is no reason to preclude litigation which will expose fraud on the government and restore dollars to the Federal Treasury.

Moreover, the Chamber of Commerce, along with the American Hospital Association and the Pharmaceutical Manufacturers and Research Association, also are using the Schindler case to argue that whistleblower suits based on an implied certification theory – where the contractor upon receipt of government money impliedly certifies compliance with the contract terms – should not be allowed to proceed at all.

Curiously, the Chamber of Commerce – whose web site purports to favor promotion of American jobs – disagrees with an application of the False Claims Act which would allow for enhanced compliance with, for example, “Buy American” obligations that are written into government contracts. In its “friend of the Court” brief in Schindler, the triumvirate of big business protectors deemed such obligations that are conditions of receiving taxpayer dollars “legal technicalities.”

While many of their members undoubtedly subsist on hefty government paydays, they complain that “contractors . . . are required to submit certifications related to everything from how they dispose of hazardous materials to their affirmative action plans and they frequently enter into contracts requiring compliance with other statutory and regulatory provisions.” One example provided in their brief is a certification that Medicare providers abide by “Medicare laws and regulations.” Imagine that!

The Chamber and its friends do not dispute that these are indeed obligations; they merely question the audacity of a law that would cause them to honor their commitments. By their lights, it is okay to place what they perceive to be merely technical legal requirements into a government contract as long as taxpayers have no direct ability to enforce those obligations.

Doing business with the government is a privilege and not a right. Compliance with government contracts and regulations is part of the deal. Those who enjoy this privilege should live up to its terms whether it means using products made in America, maintaining safe working conditions for employees, paying workers a living wage, or complying with environmental laws and regulations. In simple terms, those enjoying the benefit of government funds must honor all of their commitments to the government.

It’s clear from the Chamber’s arguments in Schindler that big business interests are looking for loopholes in their obligations to the government as well as to taxpayers. That makes the importance of the False Claims Act and other whistleblower laws all the more important in supporting honest practices and compliance with government contracting laws.