Articles Posted in Court Decisions

In a decision handed down on July 26, 2012 in WEC Carolina Energy Solutions, LLC v. Miller, the United States Court of Appeals for the Fourth Circuit ruled that the Computer Fraud and Abuse Act (“CFAA”), a federal law which primarily consists of criminal penalties directed at computer hackers, does not apply to employees who capture electronic information from computers to which their employers allowed them access in the course of their employment. The ruling is an important victory for all whistleblowers who seek to gather evidence of fraud or other illegal conduct on the part of their employers. While the CFAA is primarily a criminal statute, it allows the victims of computer hacking to privately seek injunctive and monetary relief.

The facts of the Miller case involve allegations of unfair competition rather than whistleblowing. Nonetheless, the decision will have  very important implications for whistleblowers gathering data to document fraud. In Miller, an employee of WEC Carolina Energy Solutions, Mike Miller, resigned his post and accepted an offer from a competitor; allegedly, Miller shared WEC proprietary information at the behest of the competitor firm. WEC sued for, inter alia, violating the CFAA. The relevant statutory language states that a CFAA violation occurs when information is taken from a computer “without authorization.” In 2007, the Chicago-based Seventh Circuit held that an employee who erased information on a company laptop prior to returning it breached a duty of loyalty to the employer, terminating the relationship upon which the “authorization” of use of the computer was based. An en banc panel of the Ninth Circuit, however, held just this year that “without authorization” should be interpreted narrowly in a manner consistent with the plain meaning of the statute. According to the Ninth Circuit’s reading, “without authorization” means that the employee did not have permission to use the computer from which the information was taken. With its ruling in Miller, the Fourth Circuit joins the Ninth in adopting the narrower reading of the “without authorization” language of the CFAA.

Whistleblowers in the Ninth and Fourth Circuits  are thus able to utilize information obtained from their former employers’ computers so long as they had authorization, without fear of liability under the CFAA. Because fraudulent conduct is highly difficult for investigative authorities to detect, the government often relies on information from whistleblowers in prosecuting fraud claims. Under the qui tam provisions of the False Claims Act (“FCA”), a federal whistleblower statute, private whistleblowers (known as relators) may sue on behalf of the government for fraud. When a relator files an FCA complaint, the government reviews the allegations and may elect to intervene in the litigation. Whether or not the government intervenes, relators may bring their claims privately. If successful, relators stand to recover between 15% and 30% of any final judgment or settlement. Individuals and contractors face FCA liability when they knowingly or recklessly submit false claims for payment to the government or fail to return overpayments from the government. Passage of the Fraud Enforcement and Recovery Act (FERA) in 2009 and the Dodd-Frank Bill and the Patient Protection and Affordable Care Act (PPACA) in 2010 have resulted in major changes to the FCA. Taken together, the recent changes to the law have increased the number of actionable claims under the FCA and strengthened the law’s protections against employer retaliation.

In an opinion released on July 12th in  United States ex rel. Osheroff v. Tenet Healthcare Corporation, the United States Federal Court for the Southern District of Florida rejected an argument that facts and information disclosed online constitute a “public disclosure” for the purposes of the False Claims Act (“FCA”).

The False Claims Act is a federal whistleblower statute that allows private whistleblowers (known as “relators”) to sue on behalf of the government for false claims submitted to the government in connection with payment. In many cases, a claim is false because submission of the claim impliedly certifies compliance with other federal laws; therefore, a claim submitted by an individual or corporation that is not in compliance with other federal laws can be a false claim resulting in FCA liability. In the Osheroff case, a relator alleged that Tenet Healthcare Corporation and related companies leased offices to referring physicians at below-market rates in violation of the federal Anti-Kickback Statute (AKS) and the Stark Law. Thus, Medicare and Medicaid claims submitted by Tenet for services rendered to patients referred by said physicians would be false claims in violation of the FCA.

Tenet argued in its motion to dismiss that because the relator’s complaint was based upon online real estate information initially disclosed by the news media, the claim was barred by the statute’s public disclosure bar. The court was unpersuaded by this argument, reaffirming that the plain language of the public disclosure bar does not preclude the claim. The relevant language of the statute precludes “an action based upon the public disclosure of allegations or transactions…” Thus, public disclosure of mere information does not bar a complaint under the FCA. As the court observes: “Relator’s action is based upon an alleged fraud that was first discerned through Relator’s synthesis and analysis of otherwise apparently innocuous, garden-variety real estate/financial information…”

Increased attention in recent years on fraud and abuse in the arenas of lending and finance has led to a burgeoning wave of litigation and recoveries under the federal False Claims Act (“FCA”). In its recent opinion handed down on June 18th, 2012, United States ex rel. Oberg v. Kentucky Higher Educ. Student Loan Corp., the United States Court of Appeals for the Fourth Circuit joined the Ninth, Fifth, and Tenth Circuits in an opinion that may have important implications for whistleblowers seeking to file claims under the Act.

Although the False Claims Act contains two procedural hurdles, a first-to-file bar and a public disclosure bar, a host of amendments to the FCA have served to increase whistleblowers’ access to the courts and to facilitate the successful prosecution of more cases. Under the qui tam provisions of the FCA, private whistleblowers (known as relators) may sue on behalf of the government for fraud. The Fourth Circuit opinion in Oberg, however, addressed an even more fundamental question: what constitutes a “person” subject to suit for the purposes of the FCA? States are immune from liability under the statute, but courts have been asked to decide the question of whether or not certain government-owned corporations are subject to sufficient government control to be considered entities immune from suit. In the Oberg case, the qui tam suit was brought by Dr. Jon H. Oberg, a former researcher with the U.S. Department of Education who alleged that several student lenders submitted fraudulent claims to the federal government, resulting in $1 billion in excess subsidies.  The defendants, who according to the Fourth Circuit opinion are “corporate entities created by their respective states to improve the availability of higher educational opportunities by financing, making, and/or guaranteeing student loans,” claimed immunity from suit as “state agencies.” Oberg, on the other hand, argued that any corporation, state-affiliated or not, is a “person” subject to suit under the FCA.

The Fourth Circuit reversed the finding of a federal district court in favor of the defendants, holding that the lower court must engage in an “arm of the state” analysis under the Eleventh Amendment (which has been interpreted to grant sovereign immunity to the states).  Such an analysis would consider several factors, including whether any judgment against the entity would be paid by the state, the degree of autonomy exercised by the entity, whether the entity is involved with state concerns as opposed to non-state or local concerns, and how the entity is treated under state law. After Oberg, the Fourth Circuit joins a growing consensus among circuit courts that entities with only highly attenuated links to state or federal government may not raise the shield of immunity as a defense to liability under the FCA.