A Unanimous Supreme Court Decision Means Whistleblowers Can Go After Counties, Not Just Companies

Last year's corporate scandals made heroes of corporate and government "whistleblowers" who reveal illegal conduct. Indeed, Time Magazine chose as its Persons of the Year for 2002 three such whistleblowers - Cynthia Cooper of WorldCom, Coleen Rowley of the FBI, and Sherron Watkins of Enron.

Interesting, each woman's whistleblowing was directed, at least initially, to the organization to which she belonged. Cooper told WorldCom's board that the company's bookkeeping had wrongfully covered up billion-dollar losses. Rowley wrote a post-9/11 memo to FBI Director Robert Mueller faulting the bureau's response to her field office's request for an investigation of Zacarias Moussaoui. Watkins wrote a letter to Ken Lay decrying accounting impropriety in 2001. (The letter was later disclosed in Congressional hearings, but was not written for that purpose.)

What has received less attention, however, is another road that whistleblowers can take in certain circumstances. Instead of complaining internally, they can sue secretly. And if they win, they can get up to 30 percent of the judgment, as well as compensation for the costs of suing.

This other kind of whistleblowing was the subject of the unanimous Supreme Court decision in Cook County v. United States ex rel. Chandler, issued on March 10. That decision made clear that whistleblowers who sue under the False Claims Act can go after not only private companies who lie to the feds, but also counties that do the same.

How Suits Brought By Whistleblowers Under the False Claims Act Work

The False Claims Act (FCA) is a federal civil statute. It imposes liability on "[a]ny person" who "knowingly presents, or causes to be presented, to an officer or employee of the United States Government . . . a false or fraudulent claim for payment or approval." Basically, it says it's illegal for anyone to cheat the government out of money.

The whistleblower in the Cook County case, Dr. Janet Chandler, claimed that the county hospital where she worked had defrauded the government of a $5 million grant. She alleged that the hospital did so by violating the grant's governing conditions and regulations, and also by submitting false reports of "ghost" research subjects. (Dr. Chandler also alleged the hospital had illegally fired her for reporting these facts to other doctors there, and to the government agency that had issued the grant.)

Under the FCA, the government can sue on its own behalf. But obviously, the government won't always know when someone is trying to cheat it For this reason, the FCA also allows whistleblowers to sue on behalf of the government.

It works this way: The whistleblower files his or her suit, which is kept under seal for 60 days; only the Justice Department and the court are informed of its existence. Then the Justice Department decides whether to intervene and litigate the suit for itself.

If the Justice Department does decide to litigate, then the whistleblower (known, in legal parlance, as the "qui tam relator") can still get 15-25 percent of the judgment or settlement, depending on how much the whistleblower helps out along the way. If it does not decide to litigate, then the whistleblower can go it alone and try to get 25-30 percent. (There's one exception: If the court determines it was actually the government's or media's information, not the whistleblower's, that prompted the suit, then the whistleblower gets from 0-10 percent.) The whistleblower can also get reasonable expenses, costs, and attorney's fees.

How much is the judgment or settlement likely to be? Under the FCA, the judgment will be a civil penalty of $5,000-$10,000 for each violation; double damages if the defendant is cooperative, and treble damages if not; plus the costs of litigation.

Does the FCA's Reward for Whistleblowers Make Sense?

All this may seem very strange at first glance. If the hospital did indeed defraud the government out of $5 million, as Dr. Chandler claims, and it has to pay the full judgment, then it will have to pay the penalties, plus $10 million if it cooperates, or $15 million if it does not. Dr. Chandler would then be entitled to 30 percent of this amount - which could come to more than $3 million.

Arguably, yes. First, remember that due to the double/treble damages penalty, if the full judgment is paid, then the government is going to get its $5 million back no matter what, since Dr. Chandler's amount can come out of the extra created by the doubling or tripling. In addition, remember that Dr. Chandler will only get the money if fraud is proven, and that without her, that proven fraud never might have been discovered. Her career may also have been hurt, as she was fired for her initial whistleblowing to the other doctors.

Finally, if the double/treble damages remedy -which allows both the government and the whistleblower to be paid - seems extreme, remember that we're dealing with conduct done "knowingly." The FCA targets not sloppy bookkeeping, but outright fraud designed to accomplish what is, for all intents and purposes, theft.

What about the "injustice" of Dr. Chandler's possibly getting a multimillion dollar "windfall," as a result of her happening to be the one to discover this alleged fraud?

First, it may not really be a windfall. Though Dr. Chandler happened to be in a position to discover the alleged fraud, she did not merely happen to be the person to blow the whistle - if indeed her allegations are correct, she was the one who was courageous enough to do so.

Second, there are other legal contexts - most notably, that of punitive damages - in which the law allows the plaintiff a windfall to create incentives to punish wrongdoers. As a result, a plaintiff who has suffered a modest injury as a result of extreme corporate wrongdoing may end up taking home millions in punitive damages, beyond the compensatory damages that are calculated to address the plaintiff's actual injury.

While some jurisdictions have capped punitive damages, and courts may strike down huge disparities between punitive and compensatory damages, punitive damages still remain part of our system. That's because society has judged that making sure the defendant gets its just deserts is more important than worrying about whether the injured plaintiff wins too great an award.

The same logic can be used to justify giving Dr. Chandler a large award if she wins her case. After all, think of how much good Cooper and Watkins did for the country. In addition, think of how much more good they might have done if they had been able to come forward earlier than they did, and to sue. (Indeed, if WorldCom or Enron had had any federal contracts on which they misrepresented their financial status, then Cooper or Watkins might have been able to use the FCA itself.)

What the Supreme Court Had To Decide

In the Cook County suit, the Supreme Court was faced with a technical question: When the FCA refers to "any person," does that include counties (which technically are "municipal corporations")?

It had also made clear, in Vermont Agency of Natural Resources v. United States ex. rel Stevens, that the phrase did not refer to the States, for complex reasons.

So was a municipal corporation closer to a private corporation, or closer to a State? The three federal circuits to have considered the question split, 2-1, on the answer.

This "Circuit split" made it appropriate for the Supreme Court to resolve the case. Thus, it was not surprising that the Court took the case. But it was surprising, I believe, that the Court resolved it 9-0.

The Court's conservative Justices are famous for not being big fans of lawsuits against the States. For somewhat similar reasons, they're not big fans of lawsuits against municipalities either. Indeed, it might even be fair to say that they are not big fans of civil plaintiffs generally. This question was obviously one on which reasonable minds could differ; after all, two Circuits had ruled the other way. So why wasn't it a split decision at the Supreme Court?

The answer may be that Justices are people, too, and that the hard-earned lessons of 2002 weren't lost on them either. Without whistleblowers, the government may not ever know anything is wrong - or if it does, may learn after it is too late, when catastrophe can no longer be averted. For instance, if a corrupt company defrauds both the government and others, then goes bankrupt, the money may never be able to be fully recovered. Whistleblowers ensure that wrongdoing, negligence, or shady practices are discovered before it is too late.