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You Better Be An “Original Source”

The False Claims Act prohibits persons (for example, government contractors) from making false or fraudulent claims for payment to the United States government. The Act allows civil actions to be brought by the Attorney General or a private person in the name of the United States. Private citizens may be awarded 15 – 30% of the damages the government recovers. This reward acts as an incentive for private citizens to find, report, and attempt to alleviate fraud and abuse. To avoid a frenzy of lawsuits being filed following every news report, the FCA bars a private citizen’s lawsuit if the basis for the lawsuit is already publicly known, unless the person was an “original source.” An original source is a person who (1) has direct and independent knowledge of the facts underlying the cause of action and (2) voluntarily provided the information to the government before filing the FCA lawsuit.

James Stone worked for Rockwell International Corp. as an engineer from 1980 to March 1986. Stone worked at the Rocky Flats nuclear weapons plant near Golden, Colorado, pursuant to a government contract. In the early 1980s, Rockwell investigated the possibility of disposing of toxic pond sludge by mixing it with cement to form concrete blocks (“pondcrete”). In 1982, Stone reviewed the proposed “pondcrete” process and advised Rockwell that he believed the process would not work. Stone opined that the pondcrete would be unstable, later deteriorate, and ultimately release toxic waste into the environment. Stone’s prediction was based on what he perceived to be a flaw in the equipment used to create the pondcrete.

The pondcrete process worked well for several years, but as Stone predicted, eventually the pondcrete failed, though not for the reason Stone anticipated. The pondcrete failed when a foreman changed the toxic sludge to cement ratio of the mixture. This change took place long after Stone was employed, and Stone had no personal knowledge of the change.

About one year after Stone’s employment ended, Stone went to the FBI to report various environmental crimes he believed occurred during his employment. The FBI used Stone’s information to obtain a search warrant for the Rocky Flats facility. Three days after the FBI’s search, there was intense media coverage of the environmental violations alleged in the affidavit underlying the search warrant. Shortly thereafter, Stone filed a qui tam lawsuit under the False Claims Act on behalf of himself and the United States. Stone alleged that Rockwell concealed environmental, safety, and health issues from the Department of Energy throughout the 1980s.

Stone went to the FBI with his allegations before the public knew about the Rocky Flats problems. Stone, however, brought his qui tam lawsuit after the media reported the alleged violations to the public. Because the basis for the lawsuit was publicly known when Stone filed, Stone had to prove he was an “original source.”

Stone’s case went to trial. The jury awarded damages of nearly $1.4 million, which was trebled by the trial court. Rockwell challenged the result, stating that Stone’s lawsuit was based on public information and Stone was not an original source. Winding its way up to the Tenth Circuit, back down, and up again, the case finally landed in front of the United States Supreme Court.

The Supreme Court ruled 6-2 that Stone was not an original source. Justice Scalia, writing for the majority, explained that Stone did not have direct and independent knowledge of the information upon which his allegations were based. Scalia noted that Stone’s information was based on his years of employment and his prediction that the pondcrete would fail. The lawsuit and jury’s verdict, however, were based on events occurring between April 1987 and September 1988. Stone did not work for Rockwell during these years. Stone had no personal knowledge of anything happening at Rockwell during these years. And, although Stone predicted the pondcrete would fail, he did not correctly identify the cause of the failure. The pondcrete, in fact, only failed when a foreman changed the ratio of the toxic sludge to cement mixture. This change occurred long after Stone was employed, and was wholly unrelated to Stone’s earlier prediction. The Court was careful to differentiate personal knowledge of a fact from a prediction of a future event. The Court did not decide if a prediction would qualify as direct and independent knowledge. Instead, the Court focused on the cause and effect underlying Stone’s prediction. Stone’s status as an original source failed because his only knowledge was based on a prediction of a future event and that prediction was based on an erroneous cause and effect analysis. The Court emphasized that the private person’s misunderstanding of why a defect occurred would not be problematic when the person actually knew a defect existed. But, Stone neither knew the defect existed, nor did he correctly predict the cause of the failure.

Justice Stevens, in a dissent joined by Justice Ginsburg, noted that a person is an original source when he has knowledge of the information underlying the publicly disclosed allegations, not the information underlying the allegations in the complaint. Justice Breyer did not take part in the case.

Impact

The original source requirement is critical to deter suits by after the fact relators based upon information that has been publicly disclosed . The Rockwell decision mandates that only whistleblowers with actual knowledge can institute qui tam cases based on public information. The ruling is important to government contractors because, in clarifying the meaning of “original source,” the decision should discourage claims by so-called “parasitic relators” − who overstate or fabricate their role in uncovering fraud and waste despite the fact that they do not expose any previously unknown wrongdoing.

Government contractors believe this decision is an important victory that will cause whistleblowers to think twice before they file False Claims Act lawsuits. The whistleblower must truly have information that is independent (not from the press or some other source) and direct (personal knowledge reasonably related to the cause of action). Although not all fishing expeditions will be stopped, this decision helps contractors avoid frivolous lawsuits and thwarts plaintiffs who care more about the reward than the bad act.

On the other hand, the policy question raised by Rockwell is whether “genuine relators” may also be discouraged by the Court’s interpretation of “original source.” In this case, the FBI’s search warrant and subsequent investigation was made possible by the fact that Stone came forward with legitimate information about environmental violations at Rocky Flats. Requiring that the information provided by citizens not only lead to the fraud being uncovered but also ultimately form the basis of the evidence used to reach a jury verdict of fraud is likely to have a chilling effect on potential whistleblowers in the future. An individual who is considered an original source who files a fraud suit on behalf of the government against a company that does business with the government receives a portion of any award. Many commentators believe the Supreme Court’s decision will not affect the result that Rockwell must pay the $4.2 million award, it just means that the whistleblower, Stone, will not receive any monetary compensation for his role in uncovering the fraud and penalizing Rockwell. If legitimate whistleblowers are deterred by this decision, the concern is that it will be easier for government contractors to commit, and get away with, fraud.