Thursday, August 10, 2006
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Court Reinstates Whistleblower Suit Over Alleged Bid-Rigging
By TINA BAY, Staff Writer
Prospective informers seeking to bring a qui tam action pursuant to the federal or state false claims acts need not provide the government with information pertaining to the fraud allegations prior to the information’s public disclosure, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
Reversing summary judgment orders by U.S. District Judge David O. Carter of the Central District of California, the panel reinstated a suit by Roman Zaretsky and Robert Yardley alleging that Johnson Controls, Inc. rigged bids on government jobs in violation of both the Federal False Claims Act and California False Claims Act.
Yardley-Zaretsky, Inc., of which Zaretsky and Yardley were president and vice president, respectively, was an independent distributor of control systems Johnson manufactured that monitored and coordinated the air environment in large buildings and building complexes.
Zaretsky claimed that Johnson threatened to terminate Yardley-Zaretsky and a related company, George Yardley Co., if they bid against Johnson on certain government jobs, including jobs at the Long Beach Veterans Administration Hospital and UC Riverside.
In August 2002, Yardley-Zaretsky and George Yardley Co. filed a state antitrust action, which they voluntarily dismissed and replaced with a demand for arbitration.
Qui Tam Action
Subsequently, Zaretsky and Yardley in their individual capacities sent letters to officials at the Long Beach VA, the U.S. attorney general’s office, UC Riverside and the California attorney general’s office stating that they would file a qui tam complaint under the state and federal false claims statutes in two weeks, unless government officials contacted them in the interim.
The qui tam provision of the federal False Claims Act allows private citizens to file a lawsuit in the name of the U.S. government charging fraud by government contractors, and to share in any money recovered.
When government officials did not respond to Zaretsky’s and Yardley’s letters, they filed their qui tam complaint in district court in November 2002.
Johnson promptly moved for summary judgment in part on the ground that the district court lacked subject matter jurisdiction under 31 U.S.C. Sec. 3730(e)(4) of the federal act and a similar provision of the state act. Because the qui tam action was based on a public disclosure—-the filing of the previous state court complaint—-it was statutorily barred, Johnson argued, and neither Zaretsky nor Yardley qualified under the “original source” provision of Sec. 3730(e)(4).
Sec. 3730(e)(4) says that a qui tam action may be brought only by an “original source” of a public disclosure, or an individual who has direct and independent knowledge of the information on which the fraud allegations are based, and who has voluntarily provided the information to the government before filing the action.
In granting Johnson’s summary judgment motion, Carter held that to qualify as an “original source” under the federal act, a prospective informer must provide the government with the pertinent information prior to the public disclosure, but only if the public disclosure occurs through a private lawsuit brought by the prospective informer.
Notice Requirement
Zaretsky and Yardley failed to satisfy this requirement, because they notified government officials only before filing their qui tam action and not before the earlier public disclosure in state court, Carter ruled.
Such a special rule was needed, the judge reasoned, to prevent a prospective informers from using the threat of a qui tam action as leverage in private settlement negotiations of a private lawsuit filed before giving information to the federal government.
Judge Marsha S. Berzon, writing for the appellate panel, said that Carter’s “special rule” for disclosure through lawsuits had no statutory basis, and that the only notice requirement for qualifying as an “original source” is that an individual provide information to the government prior to filing suit-—not prior to the public disclosure.
“The special problems the district court perceived with lawsuits as opposed to other forms of public disclosure are related not to the ‘disclosure’ aspect of lawsuits—-that a complaint is a public document—-but to their ultimate dispute-resolution function, a function that could be pursued through private mediation or arbitration not giving rise to any public disclosure,” Berzon wrote.
Moreover, she said, the proposed rule undermined the statute’s twin goals of encouraging informers to come forward with information on fraudulent activities and weeding out parasitic lawsuits.
“The proposed requirement discourages qui tam suits, as it establishes yet another roadblock to obtaining jurisdiction for such suits,” Berzon wrote.
The panel reached a similar conclusion with respect to the state false claims statute, which Berzon explained was identical to the federal act.
Zaretsky and Yardley were represented on appeal by Marc J. Schneider, of the Newport Beach firm Stradling Yocca Carlson & Rauth.
Schneider told the MetNews that his clients were very happy with the court’s decision and were looking forward to moving ahead with their case.
“We feel the Ninth Circuit made the right decision. It was in line with both the statutory language and the policy underlying the statute,” Schneider said. “I think it’s an important decision with respect to the statute.”
Counsel for Johnson could not be reached for comment.
The case is Zaretsky v. Johnson Controls, Inc., 04-55536.
Copyright 2006, Metropolitan News Company