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Seventh Circuit Says County Is A Person Under FCA And Is Not Immune From FCA Damages Scheme

 
 

HLD, v. 30, n. 3 (March 2002)

Seventh Circuit Says County Is A Person Under FCA And Is Not Immune From FCA Damages Scheme

Dr. Janet Chandler brought a qui tam action in federal district court under the False Claims Act (FCA), 31 U.S.C. �� 3729 et seq., against the Hektoen Institute for Medical Research (Hektoen) and Cook County, Illinois (County), alleging misconduct in the handling of a $5 million research grant obtained from the National Institute of Drug Abuse. The grant, initially awarded to the Cook County Hospital (CCH) but later transferred to its affiliate Hektoen, was to fund a program called "New Start," which involved studying treatments for drug-dependant pregnant women. According to Chandler, who served as New Start's project director from September 1993 to January 1995, CCH and Hektoen were violating the terms of the grant and federal regulations governing human subject research.

The County moved to dismiss the action, arguing it was not a "person" within the meaning of the FCA. See 31 U.S.C. � 3729(a). The district court denied the motion and further held that the FCA's treble damages provision was not punitive and therefore municipalities' traditional immunity from punitive damages was not implicated. Subsequently, the County filed a motion to reconsider in light of the U.S. Supreme Court's decision in Vermont Dep't of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000) (holding that states are not persons for purposes of the FCA and that the FCA's treble damages provision was punitive), see HLD v.29, n. 6, at p. 37. Although it found nothing in Stevens to alter its original position that the County was a person under the FCA, the district court nonetheless granted the motion to dismiss, concluding that the County was immune from the imposition of punitive damages under Stevens. Chandler appealed.

The Seventh Circuit reversed. First, the appeals court concluded that the County was a "person" within the meaning of the FCA. The appeals court cited the structure and purpose of the 1986 amendments to the FCA as support for its conclusion. The appeals court observed that the legislative history of the 1986 amendments also indicated that Congress intended the FCA to apply to public entities. "Given that states are excluded from the definition of 'person' within the FCA, the only public entities remaining are municipal corporations and other political subdivisions of states which are not arms or agencies of state government," the appeals court reasoned. Thus, the appeals court concluded that Congress intended to include counties within the FCA meaning of "person."

Next, the appeals court rejected the County's argument that, after the Supreme Court in Stevens determined the FCA's damages scheme was punitive in nature, the statute could not be applied to counties because of municipalities' traditional, common law immunity from punitive damages. In doing so, the appeals court distinguished the FCA's punitive damages regime from that discussed by the Supreme Court in Newport v. Fact Concerts, 453 U.S. 247 (1981), declining to disregard the presumption that municipalities were immune from punitive damages with regard to a suit brought under 42 U.S.C. � 1983. The appeals court noted that "[u]nder the FCA, at least a portion of the recovery will come from the monies taken by the municipality through its false claims, whereas under sec. 1983 both the compensatory and punitive damages come directly from the tax base." According to the appeals court, "in the FCA context, the taxpayers themselves have been enriched by the fraudulent conduct of the municipality. Presumably, any ill-gotten gains from the federal government produced more services or lower taxes." Moreover, the appeals court pointed out that "the FCA does not need to borrow a common-law conception of damages," as does � 1983, because "Congress has provided a clear and consistent remedy for all violations of the FCA." While the FCA's treble damages provision "is indeed a significant enhancement and punitive in nature," the appeals court explained, "it is nevertheless a response specifically determined by Congress as necessary for the effective operation of the FCA." The appeals court also declined to rule that the County could be sued under the FCA but held to a lower measure of damages. In the court's view, it was bound to "either apply the entire statute to municipal entities or declare them to be exempt under the FCA."

Finally, the appeals court specifically noted its disagreement with the Fifth Circuit's position in United States ex rel. Garibaldi v. Orleans Parish Sch. Bd., 244 F.3d 486 (5th Cir. 2001) (holding that, after Stevens, local government entities may not be subjected to liability under the FCA), see HLD v. 29, n.6, at p. 37. "In our view, such a reading of Stevens cannot be squared with the essential rationale of that opinion nor with the established doctrinal differences, long recognized in our jurisprudence, between the status of the states of the Union and municipal entities," the appeals court said. Thus, the appeals court reversed the lower court's judgment dismissing the County from the suit.

On a separate issue, consolidated on appeal, the Seventh Circuit reviewed a discovery order by the lower court directing the County to turn over unredacted patient records to Chandler under a protective order limiting disclosure to her three attorneys and a paralegal for a ten-day viewing period. The appeals court concluded that, because the ruling "runs afoul of federal privacy regulations and violates important private rights and public policies," mandamus would issue requiring the district court to vacate its discovery order and enter a new protective order consistent with the appeals court's opinion.

United States ex rel. Chandler v. Cook County, Nos. 00-44110, 01-1810, 2002 WL 75859 (7th Cir. Jan. 22, 2002) (24 pages).

Health Lawyers thanks Timothy P. Blanchard, of McDermott, Will & Emery, in Los Angeles, California, for sending us a copy of this decision.

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