by SUSAN BORRESON
Any whistle-blower who stands to make a buck by exposing fraud against the federal government might want to start looking for a friendlier venue to pursue the suit than the 5th U.S. Circuit Court of Appeals.
In a remarkable ruling, the 5th Circuit on Nov. 15 became the first appellate court to find the qui tam provision of the False Claims Act unconstitutional, turning more than 100 years of jurisprudence on its head.
The court is already considered by some lawyers to be one of the most hostile circuits in the country in qui tam cases. And some lawyers say its opinion in Joyce Riley v. St. Luke’s Episcopal Hospital, et al., if upheld, could decimate the litigation and ruin fraud enforcement.
"It ignores the bravery of people who come forward to try to expose fraud in an effort to essentially carry the banner of the fraud-feasor, while tearing down a statute that’s been around for [more than] 120 years," says Houston lawyer Jim Perdue Jr., who represents Riley. "The barbarian’s at the gate."
For the health care companies and defense contractors who have paid huge sums in qui tam cases since the law was strengthened in 1986, the ruling offers the first real chance to limit the scope of the law.
"For a period of time, qui tam has enjoyed sort of an aura of invincibility," says Fulbright & Jaworski partner William Boyce, who with co-counsel Warren Huang represents Baylor College of Medicine, a defendant in Riley.
"This is a very significant breach of the wall of defense that’s been built up around qui tam," says Boyce, who argued the case before the 5th Circuit on behalf of all eight defendants.
In a 2-1 decision, the court ruled that qui tam actions where the federal government does not intervene unconstitutionally infringe on the executive branch’s power to litigate on behalf of the United States. Writing for the majority, Judge Jerry Smith said the qui tam provision violates the separation of powers doctrine and the take care clause of Article II of the Constitution.
But in a rare move, on the same day it issued the order, the entire court sua sponte agreed to rehear the case en banc because the opinion represents a split from other circuits. Under the court’s local rules, that means the panel’s opinion is vacated and has no precedential value. Arguments on rehearing are set for Jan. 18.
The defense still likes it chances on rehearing.
"I think Jerry Smith commands a lot of respect from those people," says Solace Southwick, of Houston’s Mayor, Day, Caldwell & Keeton, who represents two defendants. "I would expect him to get a pretty big group on board with him." The case will doubtless draw as much intense interest on rehearing as it did before the three-judge panel, which accepted eight amicus briefs.
Huge Incentives
The qui tam law, passed in 1863 to fight fraud by government contractors during the Civil War, allows a private party to sue for fraud on the government’s behalf and collect a bounty, or share of the recovery.
Incentives are huge for whistle-blowers, who are entitled to 15 percent to 25 percent of any recovery if the Department of Justice intervenes in the case, and may get an even bigger chunk of the recovery, as much as 30 percent, if the DOJ declines intervention.
The Department of Justice is required to investigate the allegations, but may or may not intervene. If the DOJ intervenes, the department directs the litigation. If the DOJ declines intervention, the relator can still pursue the case.
In her suit, Riley, a former registered nurse in the heart transplant unit at St. Luke’s in Houston, alleged the hospital defrauded Medicare and the U.S. military’s health insurance program by artificially upgrading patients to intensive care and providing unnecessary care. The Justice Department did not intervene in the case.
The suit also alleged the hospital allowed Dr. Branislav Radovancevic, who was trained in Yugoslavia but not licensed to practice medicine in Texas, to treat patients and charged the government for his services. Baylor, along with the other defendants, assisted in the fraud, the suit alleged.
Boyce, along with Michael Mengis and Boyd Smith, of Houston’s Vinson & Elkins, who represent Radovancevic and St. Luke’s, strongly deny the allegations.
U.S. District Judge Kenneth Hoyt of Houston in 1997 dismissed Riley’s suit and declared the law unconstitutional on grounds rejected by the 5th Circuit majority. Hoyt ruled that Riley had no standing under Article III of the Constitution to pursue a claim as an uninjured party.
But in a concurrence, Judge Harold DeMoss Jr. agreed with Hoyt that Riley had no standing to pursue a claim, a finding that also alarmed some lawyers. Judge Carl Stewart dissented from the majority on every point.
John Phillips, of Phillips & Cohen in Washington, D.C., whose firm handles qui tam litigation exclusively, says the decision would jeopardize fraud enforcement by the Justice Department, which has repeatedly acknowledged its heavy reliance on qui tam cases to ferret out fraud.
"The qui tam law is so embedded in the government’s fraud enforcement structure that to rip it loose from that, to basically say it doesn’t exist anymore, would seriously undermine their efforts," Phillips says.
But defense lawyers say the statute remains a viable tool to fight fraud. Even though the Justice Department intervenes in only about 25 percent of qui tam cases filed, those cases account for most of the almost $3 billion recovered as of fiscal 1999.
"Having said that, if Riley means what it says, every single qui tam case in which the government has not intervened should be thrown out of court," Boyd Smith says.
In a footnote, Judge Smith cited an October 1998 Justice Department press release stating that the recovery in cases where the DOJ does not intervene totaled "only $60 million" and that intervention cases represent the most meritorious qui tam claims. But Phillips says those numbers are out-of-date. As of two weeks ago, recovery in non-intervention cases totaled close to $300 million and is growing, Phillips says.
Perdue Jr. says the opinion is astounding because the Justice Department, which even though it declined to intervene in Riley’s case still filed a brief defending the law, rejected the argument that the statute infringes on its power.
"The more I read it, the more shocked I am at how result-oriented the analysis seems to be," says Perdue, of The Perdue Law Firm.
A spokeswoman for the Justice Department in Washington, D.C., says the department will continue its vigorous defense of the constitutionality of the statute, but declines further comment.
Although the Riley opinion is not precedent, Wes Loegering, who represents an oil company in a huge qui tam case in Lufkin involving royalty payments, says the decision could still drive down settlements by defendants in pending qui tam cases where the government has not intervened. Other lawyers, like John E. Clark, of San Antonio’s Goode Casseb Jones Riklin Choate & Watson, say they may file qui tam suits in other circuits.
"Now, these are much more in the nature of nuisance suits, and costs of defense will be a much better benchmark for resolution of those cases, as opposed to evaluation of theoretical damages or penalties, which often drive these cases," says Loegering, a litigation partner in Dallas’ Hughes & Luce.
But Michael Havard, of Beaumont’s ProvostHUmphrey, who represents the relators in the oil royalty case, says he doubts the ruling will endanger his case or any settlements. His clients have already settled with some defendants — even ones against whom the government has not intervened — and collected millions.
Say Havard, "We’ve had several bumps in this litigation, and have managed to overcome them all."
Copyright 1999, Texas Lawyer. All rights reserved.