In that case, the relators brought several False Claims Act cases against government contractors, alleging that they committed fraud through a kickback and improper pricing scheme. In one of the cases, the government intervened and adopted the relators’ complaint and ultimately settled the action for $48 million. As part of the settlement, the relators’ action was dismissed with prejudice. The district court awarded relators approximately $8 million of the settlement, but the government appealed, claiming that the relators were not entitled to a share of the recovery.
Significantly, the relators in that case carried much of the burden of the litigation, reviewing and analyzing hundreds of thousands of documents for the government before it decided to intervene. After settling the action, the government moved to dismiss the relators’ complaint on a pleading technicality and then appealed the district court’s award of funds to the relators, arguing that the claims that were settled were unrelated to the relators’ action and that the relators’ complaint failed to allege the fraud with particularity.
With respect to the particularity argument, the court held that the question of whether the relators’ complaint plead fraud with particularity had nothing to do with determining whether they were entitled to a share of settlement proceeds resulting from the action, as provided in the act. The court was also struck by the fact that the government actually adopted the relators’ complaint once it intervened, rendering the government’s claims of a deficient pleading less than believable. As for the government’s argument that the settlement was unrelated to the relators’ claims, the court held that where the settlement is conditioned on the dismissal of the action the settlement funds constitute “proceeds of the action” under the False Claims Act. It noted that “[t]he government cannot compromise a relator’s action by having it dismissed with prejudice and then claim the funds it received as a direct consequence are not ‘proceeds of the action.’”
Relators should not have to fight both defendants and the government to obtain their statutory entitlement, and this decision is an important affirmation of the importance of relators to the process of investigating and litigating False Claims Act cases.
Reetuparna (Reena) Dutta is a senior associate in the Business Litigation Practice at Hodgson Russ LLP. You can reach her at rdutta@hodgsonruss.com.
