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U.S. Supreme Court Rules Municipalities Are 'Persons' Under FCA


HLD, v. 31 n. 5 (May 2003)

U.S. Supreme Court Rules Municipalities Are "Persons" Under FCA

Dr. Janet Chandler brought a qui tam action under the False Claims Act (FCA), 31 U.S.C. �3729 et seq., in federal district court 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-dependent 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 initially denied the motion but changed its position after the Supreme Court's decision in Vermont Dep't of Natural Res. v. United States ex rel. Stevens , 529 U.S. 765 (2000), which held that states are not persons for purposes of the FCA. See HLD v. 29, n. 6, p. 37. In so doing, the district court concluded that the County, like a state, could not be subject to treble damages under the FCA, which the Stevens Court characterized as "essentially punitive" rather than remedial. On appeal, the Seventh Circuit distinguished Stevens and reversed. See HLD, v. 30, n. 3, p. 34.

In a unanimous opinion authored by Justice David H. Souter, the Supreme Court affirmed. According to the Court, the meaning of the term "person" has remained unchanged since the FCA was passed in 1863, when it was widely understood to encompass corporations, including municipal ones. According to the Court, "municipal corporations and private ones were simply two species of 'body politic and corporate,' treated alike in terms of their legal status as persons capable of suing and being sued." Moreover, the Court observed, "[w]hatever municipal corporations may have been doing in 1863, in 2003 local governments are commonly at the receiving end of all sorts of federal funding schemes and thus no less able than individuals or private corporations to impose on the federal fisc and exploit the exercise of the federal spending power." Thus, the Court found nothing in the history or the text of the FCA to indicate that Congress intended to exclude municipalities from the class of "persons" covered by the statute.

The Court also rejected the County's argument that the 1986 amendments to the FCA, in which Congress raised the ceiling on damages recoverable under � 3729(a) from double to treble, repealed municipal liability. "Although we did indeed find the punitive character of the treble damages provision a reason not to read 'person' to include a State," the Court said, "it does not follow that the punitive feature has the force to show congressional intent to repeal implicitly the existing definition of that word, which included municipalities." In the Court's view, treble damages have a compensatory component that serves remedial purposes in addition to punitive objectives. The Court noted that some liability beyond the amount of the fraud is usually necessary to fully compensate the government's expenses associated with the fraudulent claims. Qui tam actions under the FCA can divert as much as 30% of the government's recovery to a private whistleblower, the Court observed. In addition, the rough difference between double and triple damages may also serve as a financial incentive to encourage relators to bring qui tam actions. Treble damages may be necessary for full recovery even in FCA actions that do not involve a qui tam relator, the Court said, because the statute has no separate provision for prejudgment interest or consequential damages. "Thus, although Stevens recognized the FCA's treble damages remedy is still 'punitive' in that recovery will exceed full compensation in a good many cases, the force of this punitive nature in arguing against municipal liability is not as robust as if it were a pure penalty in all cases," the Court wrote.

The Court also noted that treble damages do not equate with classical punitive damages, "which leaves the jury with open-ended discretion over the amount" it awards against municipal defendants. Under the FCA, the jury returns a verdict for actual damages and the court then determines any multiplier and sets any separate penalty. "This very case shows how FCA liability may expose only local taxpayers who have already enjoyed the indirect benefit of the fraud, to the extent that federal money has already been passed along in lower taxes or expanded services," the Court said. Accordingly, the Court held, the "term 'person' in � 3729 included local governments in 1863 and nothing in the 1986 amendments redefined it."

Cook County v. United States ex rel. Chandler, No. 01-1572 (U.S. Mar. 10, 2003) (14 pages).

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