II. Prefiling Release of Claims
Kiewit first moves dismiss the complaint on the ground that DeCarlo released Kiewit from all liability pursuant to the stipulation of settlement and the release in the Mass Electric action. Kiewit reasons, and DeCarlo does not contest, that the present qui tam action falls within the scope of the release, as DeCarlo discharged all claims which were or could have been brought in the Mass Electric case. DeCarlo has reasserted in this action many of the same underlying allegations presented in the earlier case, and the Court finds the release sufficiently broad to encompass the present claims.
In response, however, DeCarlo urges the Court to adopt a rule rendering the prefiling release of a qui tam claim void as a matter of public policy where the agreement was entered into without the assent of the United States. In the alternative to finding that such a public policy exception does not exist, Kiewit asks that, in cases where a valid release is given by a relator, the Court establish a "middle ground" by barring a subsequent qui tam action in those cases in which the government ultimately declines to intervene.
A. Public Policy Exception
The question whether the release of a subsequent qui tam action is void as a matter of public policy is one of first impression in this circuit. Recently, however, the Ninth Circuit Court of Appeals held that a qui tam action survives a general release for reasons of public policy. See United States ex rel. Green v. Northrop Corp., 59 F.3d 953 (9th Cir. 1995), cert. denied, U.S. , 116 S. Ct. 2549 (1996).
In Northrop, the plaintiff claimed that Northrop wrongfully discharged him upon learning that he had uncovered evidence that Northrop was overbilling the United States on a military contract. The parties ultimately negotiated a settlement with Northrop receiving a general release, settling "once and forever, all of the matters which have arisen between them . . . ." Subsequently, however, the plaintiff filed a complaint against Northrop under the qui tam provisions of the False Claims Act containing the same allegations that Northrop had submitted false claims to the United States. The United States investigated the allegations in the complaint, as required by the False Claims Act, but declined to intervene in the suit.
Thereafter, Northrop moved to dismiss the qui tam action, arguing that the claim was barred by the settlement of plaintiff's earlier claims. As a preliminary matter, the Ninth Circuit found the enforceability of a prefiling release entered into without the United States' knowledge or consent to be governed first by the intent of Congress in enacting the False Claims Act. The court observed that, while the False Claims Act explicitly permits a plaintiff to settle a qui tam claim after its filing, see 31 U.S.C. § 3730(b)(1) (permitting settlement where "the court and the Attorney General give written consent to the dismissal and their reasons for consenting"); 31 U.S.C. § 3730(d)(2) (recognizing a relator's right to "settle the claim" where the United States has chosen not to intervene), the statute is silent on the issue of pre-filing qui tam settlements.
The Ninth Circuit found that Congress's failure to explicitly address the enforceability of prefiling releases did not suggest that such releases were therefore enforceable. Northrop urged the court to observe the canon of statutory construction which holds that, where Congress has enacted a "comprehensive legislative scheme including an integrated system of procedures for enforcement" the courts must presume a remedy was deliberately omitted from a statute. Northwest Airlines, Inc. v. Transport Workers Union of Am., AFL-CIO, 451 U.S. 77, 97, 101 S. Ct. 1571, 67 L. Ed. 2d 750 (1981); see also Karahalios v. National Fed'n of Fed. Employees, 489 U.S. 527, 533, 109 S. Ct. 1282, 103 L. Ed. 2d 539 (1989). The court rejected this analysis, however, reasoning that this canon of interpretation is relevant to determine whether a plaintiff has an implied cause of action, but is not used to determine whether plaintiff may relinquish a remedy that it expressly created.
Rather, the court found that Congress's failure to address this issue constituted a "gap" in the statutory scheme. The court rejected the application of state law, finding that such reliance would lead to inconsistency and frustrate the objectives of the False Claims Act. Accordingly, the court turned to federal common law to examine the scope of a relator's authority to settle a qui tam action after its filing.
Seeking a uniform federal common law rule, the Ninth Circuit applied the test articulated by the Supreme Court in Town of Newton v. Rumery, 480 U.S. 386, 392, 107 S. Ct. 1187, 94 L. Ed. 2d 405 (1987), as developed further in Davies v. Grossmont Union High Sch. Dist., 930 F.2d 1390, 1396 (9th Cir.), cert. denied, 501 U.S. 1252, 115 L. Ed. 2d 1057, 111 S. Ct. 2892 (1991). Under this test, "a promise [will be found] unenforceable if the interest in its enforcement is outweighed in the circumstances by a public policy harmed by enforcement of the agreement." Town of Newton v. Rumery, 480 U.S. at 392; accord Davies v. Grossmont Union High Sch. Dist., 930 F.2d at 1396. The court found that qui tam actions under the False Claims Act serve a substantial public interest in creating incentives for individuals to supplement government enforcement by exposing private sector fraud upon the United States. The Ninth Circuit reasoned that permitting prefiling settlements would discourage a plaintiff from filing a qui tam action by creating perverse economic incentives. Specifically, while successful qui tam relators under the False Claims Act receive a maximum of thirty percent of the total recovery, settlement before filing ensures full monetary recovery. As a result, a relator would be willing to accept a substantially smaller amount to settle a claim than to preserve the right to file a qui tam action in which the government would retain most of the proceeds. The Ninth Circuit determined that this scenario harms the public interest in uncovering fraud and thwarts congressional intent in protecting that interest. United States ex rel. Green v. Northrop Corp., 59 F.3d at 967 (finding "preservation of the incentive effect in the prefiling period, therefore, [to be] a concern infused with the public interest").
2. Federal Common Law
The Court finds the Ninth Circuit's reasoning in Northrop persuasive. A threshold determination is whether in "filling in" the interstices left open in a federal statutory scheme the federal courts should fashion federal common law
or resort to state law. It is well-established that federal common law governs the validity of purported releases of liability in connection with federal causes of action. Dice v. Akron, Canton & Youngstown R.R. Co., 342 U.S. 359, 361, 72 S. Ct. 312, 96 L. Ed. 398 (1952); Locafrance U.S. Corp. v. Intermodal Sys. Leasing, Inc., 558 F.2d 1113, 1115 (2d Cir. 1977). But see Montellier v. United States, 315 F.2d 180, 184 (2d Cir. 1963) (state law applies to validity and effect of release under Federal Tort Claims Act). The very fact that federal law governs, however, does not mandate that district courts must fashion a uniform national rule. Olin Corp. v. Consolidated Aluminum Corp., 807 F. Supp. 1133, 1140 (S.D.N.Y. 1992). Rather, the Court must determine whether, although federal law governs, state law should be incorporated to provide the content of that federal law. See Burks v. Lasker, 441 U.S. 471, 477, 99 S. Ct. 1831, 60 L. Ed. 2d 404 (1979); United States v. Kimbell Foods, 440 U.S. 715, 727-28, 99 S. Ct. 1448, 59 L. Ed. 2d 711 (1979). State rules of decision frequently provide an adept way to give content to, and apply, the governing federal law. See Kimbell Foods, 440 U.S. at 728.
The principle consideration in determining whether to incorporate state law or fashion a uniform federal standard is congressional intent. Olin Corp. v. Consolidated Aluminum Corp., 807 F. Supp. 1133, 1140 (S.D.N.Y. 1992). Here, however, neither the text nor the legislative history of the False Claims Act sheds light on whether a prefiling release of a qui tam action is enforceable or whether the False Claims Act's drafters intended federal courts to develop federal common law or incorporate state law in this area. In the absence of a clear congressional directive, the Court must decide whether formulating a uniform federal rule is appropriate under the three-part test enunciated by the Supreme Court in United States v. Kimbell Foods, 440 U.S. 715, 728-29, 99 S. Ct. 1448, 59 L. Ed. 2d 711 (1979). Kimbell Foods directs the Court to assess whether (1) the issue requires "a nationally uniform body of law"; (2) "application of state law would frustrate specific objectives of the federal programs"; and (3) "application of a federal rule would disrupt commercial relationships predicated on state law." Id.
Here, all three factors militate in favor of a consistent federal rule. With respect to uniformity, as mentioned in Northrop, there is a reasonable likelihood that state law would overemphasize the interest favoring final, ironclad and enforceable general releases. United States ex rel. Green v. Northrop Corp., 59 F.3d at 961. Although individual states might reach a permissible result in such cases, there is a substantial risk that a "significant conflict" would arise "between an identifiable 'federal policy or interest and the [operation] of state law,'" Boyle v. United Technologies Corp., 487 U.S. 500, 507, 108 S. Ct. 2510, 101 L. Ed. 2d 442 (1988) (quoting Wallis v. Pan American Petroleum Corp., 384 U.S. 63, 68, 86 S. Ct. 1301, 16 L. Ed. 2d 369 (1966)); O'Melveny & Myers v. FDIC, 512 U.S. 79, 114 S. Ct. 2048, 129 L. Ed. 2d 67 (1994) (finding such a conflict to be a "precondition for recognition of a federal rule of decision"). Moreover, a uniform rule would serve to prevent parties, through use of choice of law clauses, from selecting as governing law the law of a state that is most likely to uphold a release. Cf. Locafrance U.S. Corp. v. Intermodal Sys. Leasing, Inc., 558 F.2d 1113, 1115 (2d Cir. 1977) ("Federal statutory rights could be easily defeated if state law could be used to control the incidents of those rights and the defenses to them.").
Second, the application of state law would frustrate the purpose of the federal False Claims Act. In revising the Act in 1986, Congress expressed its concern that the "widespread fraud" directed toward the government could be successfully combatted only by "a coordinated effort of both the Government and the citizenry." S. Rep. No. 345, 99th Cong., 2d Sess. 2-3 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5267-68.
As a result, Congress sought to "increase incentives, financial and otherwise, for private individuals to bring suits on behalf of the Government." Id. at 23, quoted in 1986 U.S.C.C.A.N. at 5288-89. Thus, a relator who properly brings a claim will receive a percentage of the recovery even if the government chooses to intervene and conduct the action itself, 31 U.S.C. § 3730(d)(1), or pursue its claim in an administrative proceeding, 31 U.S.C. § 3730(c)(5). The extent of recovery is directly tied to the importance of the relator's participation in the action and the relevance of the information brought forward. 31 U.S.C. § 3730(d)(1) (where the government chooses to conduct the action the relator receives "at least 15 percent but no more than 25 percent of the action or settlement of the claim, depending upon the extent to which the person substantially contributed to the prosecution of the action"). This facet of the Act's structure evidences a congressional intent to provide a larger incentive for relators "best able to pursue claims that the government could not, and bring forward information the government could not obtain." United States ex rel. Green v. Northrop Corp., 59 F.3d at 964. In crafting provisions that specify the relator's recovery and in amending the jurisdictional provisions, Congress attempted to "walk a fine line between encouraging whistle-blowing and discouraging opportunistic behavior." United States ex rel. Springfield Terminal Ry. v. Quinn, 304 U.S. App. D.C. 347, 14 F.3d 645, 651 (D.C. Cir. 1994). The Court finds that enforcing a prefiling release of a qui tam claim would undermine this incentive structure by inducing potential relators to settle claims before alerting the government to fraudulent conduct. See generally United States ex rel. Kelly v. Boeing Co., 9 F.3d 743, 760 (9th Cir. 1993) (describing the "intertwined" nature of the relator's private interest and the public's interest in successful enforcement of the Act), cert. denied, 510 U.S. 1140, 114 S. Ct. 1125, 127 L. Ed. 2d 433 (1994). Moreover, enforcing prefiling qui tam settlements frustrates a second, related purpose of the False Claims Act, namely the deterrence of fraud and the recovery of treasury funds lost to fraud. See United States ex rel. Siller v. Becton Dickinson & Co., 21 F.3d 1339, 1346 n.6 (4th Cir.), cert. denied, U.S. , 130 L. Ed. 2d 278, 115 S. Ct. 316 (1994); United States ex rel. Kelly v. Boeing Co., 9 F.3d at 760.
Third, the Court holds that the application of a uniform rule will not disrupt commercial relationships predicated on state law. Such a rule would neither run the risk of arbitrary application nor would it "undercut the reliability of [a] system which plays a crucial role in commercial dealings." See United States v. Kimbell Foods, 440 U.S. 715, 739 n.42, 99 S. Ct. 1448, 59 L. Ed. 2d 711 (1979). Accordingly, the Court finds that federal common law must serve as the rule of decision, and thus control the validity of the prefiling release at issue in the instant case.
3. Public Interest
Applying federal common law, the Court agrees with the Ninth Circuit that the Rumery test must be employed. In Rumery, the Supreme Court held that "a promise is unenforceable if the interest in its enforcement is outweighed in the circumstances by a public policy harmed by enforcement of the agreement." Town of Newton v. Rumery, 480 U.S. 386, 392, 107 S. Ct. 1187, 94 L. Ed. 2d 405 (1987). In that case, the Supreme Court found enforceable an agreement by which a prosecutor agreed to waive criminal charges against the plaintiff in exchange for his agreement to waive all civil rights claims against the prosecutor. The Supreme Court found that the case involved "merely private rights" and did not implicate a "broad public interest that outweighed Rumery's voluntary decision to enter into an otherwise valid agreement." Id. at 396-97.
In the present case, in contrast, serious public interests are at stake, to wit, the interest of the taxpayers and the government in recouping lost proceeds, and the public interest in the disclosure of fraudulent activity. See Stamford Bd. of Educ. v. Stamford Educ. Ass'n, 697 F.2d 70, 73 (2d Cir. 1982) (noting the importance of voiding agreements which tend to injure the public good or contravene some established societal interest); Kashfi v. Phibro-Salomon, Inc., 628 F. Supp. 727 (S.D.N.Y. 1986) (refusing to enforce a personal services contract between a Delaware corporation and a foreign government on the ground that it contravened United States public policy).
Kiewit relies on Coleson v. Inspector Gen. of the Dep't of Defense, 721 F. Supp. 763 (E.D. Va. 1989), for the proposition that a judicial preference favoring the finality and settlement of litigation outweighs the public's interest in enforcing the False Claims Act. Coleson is inapposite, however, as that case was not a qui tam action prosecuted on behalf of the government, but involved the anti-retaliation provisions of 31 U.S.C. § 3730(h). See Coleson v. Inspector Gen. of the Dep't of Defense, 721 F. Supp. at 765. As such, Coleson does not address the governmental and public policies implicated in the instant case.
In addition, any generalized interest in settlement is heavily outweighed by the costs of "eviscerating the incentives created by the [False Claims Act]." United States ex rel. Green v. Northrop Corp., 59 F.3d at 969. Moreover, as pointed out by the Ninth Circuit in Northrop, the imposition of additional costs to settlement may actually further the purposes of the False Claims Act:
Presumably, the defendants who will be deterred most from settling non-[False Claims Act] claims because of the possibility of a qui tam suit are those who face the greatest exposure under the Act. These defendants, of course, are the very defendants who are most likely to have committed fraud in the first place, and a central objective of the qui tam provisions is precisely to augment the incentives for employees of such entities to come forward. Therefore, if refusal to enforce the Release in this case increases defendants' costs, this actually might have the salutary effect of further deterring defendants from engaging in fraud, which, in the long-run, might render the costs [defendants] foresee insubstantial.
United States ex rel. Green v. Northrop Corp., 59 F.3d at 969 (citations omitted). For these reasons, the Court finds that federal common law does not recognize the effect of the parties' prior settlement on the present action.
B. Subsequent Government Intervention
Kiewit argues, in the alternative, that public policy interests should not render void the prefiling settlement of qui tam actions at least where, as here, the government declines to intervene in the litigation. Kiewit theorizes that "where a valid and sufficient release is given by a qui tam plaintiff, the relator [should] be barred thereby from maintaining a subsequent qui tam action in which the government has declined to intervene." Such a policy would, for the settling relator, leave the question of whether a release is ultimately enforceable in the hands of the government.
This reasoning is flawed in several respects. First, the government's decision not to participate in the qui tam action is not equivalent to a consent to voluntarily dismiss a claim against a defendant with prejudice. Non-intervention does not necessarily signal governmental disinterest in an action, as it is entitled to most of the proceeds even if it opts not to intervene.
Second, a relator would be less likely to bring suit after a release if the action could be subsequently invalidated by the government's decision not to intervene. Although it ultimately declined to intervene in the present case, the government only learned of the present allegations of fraud as a result of the filing of the qui tam complaint. If the prevailing rule were that prefiling releases entered into without the government's knowledge or consent were enforceable, DeCarlo likely would not have filed his qui tam complaint, the government would not have had the opportunity to decline, and Congress's intention to deter fraudulent activity would have been effectively diluted. See United States ex rel. Green v. Northrop Corp., 59 F.3d at 966.
III. Subject Matter Jurisdiction
Kiewit next argues that the Court lacks subject matter jurisdiction on the ground that DeCarlo was not an "original source" of the information within the meaning of sections 3730(e)(4)(A) and (B) of the False Claims Act. See United States ex rel. Kreindler & Kreindler v. United Technologies Corp., 985 F.2d 1148, 1157 (2d Cir.), cert. denied, 508 U.S. 973, 113 S. Ct. 2962, 125 L. Ed. 2d 663 (1993). Section 3730(e)(4) provides, in relevant part:
(A) No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, . . . unless . . . the person bringing the action is an original source of the information.