United States v. Sorgnard , 396 F.3d 326 ( 2005 )

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit
1-28-2005
USA v. Sorgnard
Precedential or Non-Precedential: Precedential
Docket No. 03-4163
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 03-4163
UNITED STATES OF AMERICA, ex. rel.
Stephen Paranich, D.C.; STEPHEN PARANICH,
Appellants
v.
DEBORAH SORGNARD; M ATRIX BIOKINETICS, INC.;
RICHARD SORGNARD, Ph.D.; CLINICAL
ELECTROM EDICAL RESEARCH ACADEMY, CHTD.;
CERA INTERNATIONAL INC., and others to be
determined, jointly and severally; IRWIN LEASING
CORPORATION f/k/a ALLIED CAPITAL CORPORATION
Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. Civil No. 98-cv-02070)
District Judge: Honorable Christopher C. Conner
Argued September 27, 2004
Before: RENDELL, FUENTES and SMITH, Circuit Judges.
(Filed January 28, 2005)
Ian Stuart (ARGUED)
1700 Market Street, Suite 2632
Philadelphia, PA 19103
Counsel for Appellants
Cheryl H. Picker
443 Northfield Avenue
West Orange, NJ 07052
William R. Keller
Latona and Keller
8 West Market Street
930 Citizens Bank Center
Wilkes-Barre, PA 18701
Counsel for Appellant Stephen R. Paranich
Andrew J. Giorgione
200 Locust Street, Suite 400
Harrisburg, PA 17101
Marianne C. Koepf
Stephen Kaus (ARGUED)
Cooper, White & Cooper, LLP
201 California Street
San Francisco, CA 94111
Counsel for Appellee
2
OPINION OF THE COURT
RENDELL, Circuit Judge.
Doctor Stephen Paranich brought this qui tam action
against Irwin Leasing Corporation, formerly Affiliated Capital
Corporation, a company that finances the purchase of
equipment, under the False Claims Act (“FCA” or “Act”), 31
U.S.C. § 3729 et seq. Paranich alleges that Irwin fraudulently
induced him to file false Medicare reimbursement claims for
chiropractic treatments in which he used a medical device called
the Matrix. Irwin has consistently denied liability for any false
Medicare claims and further contends that Paranich is not a
proper relator in a qui tam action because the allegations he now
asserts had been publicly disclosed before his suit and because
he is not an original source as defined by the FCA.1 On Irwin’s
motion for summary judgment, the District Court agreed with
Irwin on both points and dismissed the complaint for lack of
subject matter jurisdiction. Although our reasoning differs
somewhat from that of the District Court, we will affirm its
dismissal because we conclude that Paranich is not a proper
relator under the FCA because his allegations were based on
public disclosures and he does not qualify as an “original
source.”
1
A qui tam plaintiff is commonly referred to as a “relator.”
See Hutchins v. Wilentz, Goldman, & Spitzer, 253 F.3d 176,
182 (3d Cir. 2001).
3
I. Factual Background
Matrix Biokinetics, Inc. is a Nevada corporation that sold
medical devices throughout the United States. On or about
January 1, 1994, Matrix began marketing and selling electrical
nerve stimulation devices known as the Matrix Pro Elec DT and
the Matrix Pro Elec DT2 (referred to collectively and severally
as the “Matrix device”). CERA International, Inc. is a research
and technical organization that conducted sales conferences for
the Matrix device. After attending a sales conference in late
1996, Paranich decided to acquire a Matrix device for the
treatment of patients at his medical clinic, Comprehensive
Medical Network (“CMN”). CMN subsequently arranged with
an independent sales representative to finance the purchase of
the device through leases with Irwin. On December 19, 1996,
and March 12, April 4, and June 10, 1997, CMN and Irwin
entered into four separate written agreements to lease four
Matrix devices.
The Matrix device works by pulsating electricity to the
nerves of a patient at various frequencies through electrodes
attached to the patient’s body. According to materials published
by CERA, when the Matrix device is used at high frequencies,
it operates as a neuron blockade, or “nerve block.” This electric
nerve block functionality has been viewed as an alternative to a
traditional chemical injection nerve block.
By June 1994, the U.S. Food and Drug Administration
had approved both models of the Matrix device for marketing
and sale in the United States. Ultimately, the FDA granted
clearance for sale of the devices under Section 510(k) of the
4
Food, Drug, and Cosmetic Act (“FDCA”), 21 U.S.C. § 360(k),
however, the devices were never approved for sale as nerve
block devices.
In January 1997, Paranich began submitting claims to
Medicare for reimbursement for procedures involving the
Matrix device. Under the Medicare system, claims for
reimbursement are submitted under standard uniform codes set
by the American Medical Association’s Current Procedural
Terminology (“CPT”) manual. Paranich was submitting claims
for treatments involving the Matrix device under the CPT code
for “nerve block injections,” which Medicare reimbursed at rates
of $150 to $350 per procedure.2 Although reimbursement for
procedures submitted under the codes for “electronic
stimulation” was at rates of $35 to $80 per procedure, Paranich
alleged that he was advised by Matrix and CERA to submit
claims for nerve block injections to maximize the
reimbursement. Medicare purportedly reimbursed Paranich at
the rates for nerve block injections.
In June 1997, Dr. Deborah McMenamin, a former
employee of CMN, contacted Special Agent Charles Hydock of
the U.S. Federal Bureau of Investigation to report that Paranich
was overbilling Medicare for M atrix device procedures.
2
The relevant CPT codes, 64400-64450, are labeled
“Introduction/Injection of Anesthetic Agent (Nerve Block),
Diagnostic or Therapeutic.” Paranich also occasionally billed
for Matrix device treatments under a code for “unlisted
procedures.”
5
Hydock then began an investigation of Paranich and CMN. On
October 22, 1997, Paranich was served with a grand jury
subpoena requiring CMN to produce, inter alia, all documents
relating to the Matrix devices, specifically including billing
documents. Paranich stopped billing under the nerve block
codes in February 1998.
After being served with the subpoena, Paranich’s lawyer,
Kenneth Haber, began investigating the Matrix device. During
an extensive investigation, which Haber conducted with limited
participation from Paranich, Haber discovered that Transamerica
Occidental Life Insurance Company, the carrier and
administrator for the Medicare program in Southern California,
had published a bulletin advising its providers not to bill Matrix
device procedures under the CPT codes for nerve block
injections.3 He also learned that in mid-1998, Transamerica
held hearings to determine the proper billing code and attendant
reimbursement rates for electrical nerve blocks. Haber learned
about the bulletin and hearings by October 1998, and, shortly
thereafter, he requested a report of the Transamerica hearings
from the government under the Freedom of Information Act
(“FOIA”).
Throughout the investigation, Haber was notably
cooperative with the government. He communicated with the
3
Citing Irwin’s statement of facts (discussed at infra note 5),
the District Court found that Transamerica published the bulletin
in October 1997. According to the record, the bulletin was
actually dated March 1998.
6
FBI and U.S. Attorneys’ offices, writing letters to each to
provide updates on the progress of the response to the subpoena.
In a letter to the U.S. Attorneys’ office dated April 3, 1998, he
outlined the alleged fraud perpetrated by Matrix and affiliated
companies as his investigation began to disclose this
information. The response to the subpoena included seventy
(70) boxes of billing records and other materials that were
turned over to the FBI.
On May 20, 1998, during the time Haber was conducting
his investigation and preparing a response to the subpoena, a
group of doctors in Southern California filed a suit against
Matrix alleging fraud with respect to billing codes that Matrix
had allegedly recommended to those doctors. This state court
fraud action, Heifets v. Matrix Electromedical, No. BC-191317
(Ca. Super. 1998), named Irwin as a defendant; however,
summary judgment was eventually entered in Irwin’s favor after
the Court concluded that Irwin was not responsible for Matrix’s
activities. Irwin was also named as a defendant in a similar suit,
Rubanenko v. Matrix Biokinetics, Inc., No. BC-196145 (Ca.
Super. 1998). Rubanenko was voluntarily dismissed in August
1998.
II. Procedural History
On December 21, 1998, Paranich filed the original
complaint in this action. See United States ex rel. Paranich v.
Sorgnard, 286 F. Supp. 2d 445 (M.D. Pa. 2003). In October
2000, Paranich amended the complaint to include Irwin as a
defendant, asserting that Irwin had induced him to file false
Medicare reimbursement claims for treatments involving the
7
Matrix device. Irwin moved for summary judgment with respect
to the FCA claim, denying liability and arguing that Paranich
was not a proper relator under the Act.4
The District Court analyzed whether it had subject matter
jurisdiction under the jurisdictional constraints of the FCA. See
United States ex rel. Fine v. MK -Ferguson Co., 99 F.3d 1538,
1543 (10th Cir. 1996) (“When a court’s subject matter
jurisdiction depends upon the same statute that creates the
substantive claims, the jurisdictional inquiry is necessarily
intertwined with the merits.”). Adopting Irwin’s statement of
facts for the most part, 5 the District Court ultimately determined
4
Default judgments were entered against Defendants Matrix
Biokinetics, Richard Sorgnard, and CERA International for
failure to answer or otherwise plead. Irwin Equipment Finance
Corporation and Irwin Finance Corporation successfully moved
to dismiss pursuant to Fed. R. Civ. P. 12(b)(6).
5
Under the local rules for the U.S. District Court for the
Middle District of Pennsylvania, a party moving for summary
judgment must attach to the motion “a separate, short and
concise statement of the material facts, in numbered paragraphs,
as to which the moving party contends there is no genuine issue
to be tried.” M.D. Pa. L.R. 56.1. The non-moving party is
required to submit a statement of facts to respond to the
numbered paragraphs set forth in the moving party’s statement,
noting those facts “as to which it is contended that there exists
a genuine issue to be tried.” Id. Both statements must reference
the record for support, and the moving party’s statement of facts
8
that the action did not meet the jurisdictional requirements of the
FCA because although his complaint was based on prior public
disclosures, Paranich did not qualify as an original source
because it was his attorney’s investigation that disclosed the
alleged fraud, and the information uncovered during the
investigation was not “independent” of the public disclosures.
With the dismissal of the FCA claim, the Court dismissed
Irwin’s remaining state law counterclaim for indemnity as
lacking independent subject matter jurisdiction. See 28 U.S.C.
§ 1367(c)(3) (“[A] district court[] may decline to exercise
supplemental jurisdiction over a claim . . . if . . . the district
court has dismissed all claims over which it has original
jurisdiction . . . .”).
III. Jurisdiction and Standard of Review
Paranich now appeals the District Court’s decision,
complaining that the Court erred in its finding that he was not an
“original source” of the information regarding the alleged fraud
under the FCA. We have jurisdiction to review this final
decision of the District Court under 28 U.S.C. § 1291. We
will be deemed to be admitted unless controverted by the non-
moving party. See id.
The District Court noted that Paranich’s statement of
facts did not respond to Irwin’s statement and was “replete with
unsupported factual assertions.” Paranich, 286 F. Supp. 2d at
447 n.3. Consequently, the Court adopted all of Irwin’s facts
that were not clearly disputed by Paranich with adequate
references to the record. See id.
9
exercise plenary review of a dismissal for lack of subject matter
jurisdiction. See United States ex rel. Stinson, Lyons, Gerlin &
Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1152
(3d Cir. 1991) (citing York Bank & Trust Co. v. Fed. Sav. &
Loan Ins. Corp., 851 F.2d 637, 638 (3d Cir. 1988)).
IV. Discussion
A. Introduction
We have, on several prior occasions, engaged in
extensive reviews of the history and background of the False
Claims Act. See, e.g., United States ex rel. Dunleavy v. County
of Del., 123 F.3d 734, 738 (3d Cir. 1997); Stinson, 944 F.2d at
1152-54; id. at 1162-68 (Scirica, J., dissenting). And we have
expended a fair amount of ink examining various aspects of the
Act’s jurisdictional bar provision.6 To resolve the instant
6
See, e.g., United States ex rel. Mistick PBT v. Hous. Auth.,
186 F.3d 376, 382-89 (3d Cir. 1999) (holding that regarding the
FCA jurisdictional bar provision, a response to an FOIA request
was a public disclosure and an action is based upon a public
disclosure if it sets out either the allegations advanced in the
action or all the essential elements of the action’s claims); id. at
389-403 (Becker, C.J., dissenting) (arguing for a narrower
interpretation of what constitutes a public disclosure and stating
that the majority opinion on the “critical issue” of the
construction of “based upon” was “manifestly incorrect”);
Stinson, 944 F.2d at 1154-61 (holding that under the FCA
jurisdictional bar provision the disclosure of discovery material
10
appeal, we need not reopen Pandora’s box with respect to
certain requirements of the Act, such as the contours of the
“public disclosure” requirement. Nor do we choose to resolve
the issue that the District Court addressed, namely, whether
Paranich’s knowledge was “direct” given the role his attorney
played in the investigation. This is because we see the instant
matter as turning on an issue we have not previously addressed,
namely, the requirement that the source must have provided
information to the government “voluntarily.”
In broad strokes, the FCA imposes penalties on persons
who knowingly submit fraudulent claims to the government. To
encourage the ferreting out of fraud against the government, the
FCA incentivizes private individuals aware of such fraud to
bring civil actions as relators against those submitting such
claims by allowing relators to collect a percentage of any
recovery. Prior to filing such a civil action, known as a qui tam
action, the relator must disclose the information regarding the
fraud to the government. The government then has sixty days to
intervene and take over the action. See 31 U.S.C. § 3730(b). If
the government does not do so, the relator may continue with the
to a party not under a court imposed limitation as to its use was
a public disclosure); id. at 1162-76 (Scirica, J., dissenting)
(arguing for a narrower interpretation of public disclosure
focusing on public accessibility); see also Mistick, 186 F.3d at
390, 391 (Becker, C.J., dissenting) (stating that Stinson was
“wrongly decided” and a “candidate, at some point in time, for
en banc consideration” for broad holding regarding what
constitutes a public disclosure).
11
action unless the FCA’s jurisdictional bar provision is triggered.
The jurisdictional bar provision operates to exclude qui tam
actions based upon allegations of fraud or fraudulent
transactions that have been publicly disclosed prior to their
filing. The provision was “designed to preclude qui tam suits
based on information that would have been equally available to
strangers to the fraud transaction had they chosen to look for it
as it was to the relator.” Stinson, 944 F.2d at 1155-56. This
provision does, however, contain a “savings clause,” preserving
suits brought by an “original source” of the information even
where there have been prior public disclosures.
The text of the jurisdictional bar provision reads:
(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, in a
congressional, administrative, or Government
[General] Accounting Office report, hearing,
audit, or investigation, or from the news media,
unless the action is brought by the Attorney
General or the person bringing the action is an
original source of the information.
(B) For purposes of this paragraph, “original
source” means an individual who has direct and
independent knowledge of the information on
which the allegations are based and has
voluntarily provided the information to the
Government before filing an action under this
12
section which is based on the information.
31 U.S.C. § 3730(e)(4). As enumerated elements, this section
divests courts of subject matter jurisdiction where:
(1) there was a “public disclosure”;
(2) “in a criminal, civil, or administrative hearing,
in a congressional, administrative, or Government
[General] Accounting Office report, hearing,
audit, or investigation, or from the news media”;
(3) of “allegations or transactions” of the fraud;
(4) that the relator’s action was “based upon”; and
(5) the relator was not an “original source” of the
information.
Cf. Dunleavy, 123 F.3d at 738. We will employ this catalog of
elements to structure our analysis, touching on certain aspects
more briefly than others.
B. Public Disclosure
Corresponding to the first two elements in our catalog, to
qualify as a public disclosure under the FCA, a disclosure must
(1) issue from a source or occur in a context specifically
recognized by the Act, and (2) be sufficient to support the
13
conclusion that the information contained therein is now public
within the meaning of the Act. See Mistick, 186 F.3d at 383;
Dunleavy, 123 F.3d at 744. Regarding the first requirement,
Section 3730(e)(4)(A) clearly provides three classes of sources
or contexts of disclosures: (1) criminal, civil, or administrative
hearings; (2) congressional, administrative, or Government
[General] Accounting Office reports, hearings, audits, or
investigations; and (3) the news media. In Dunleavy, we
subscribed to the prevailing view that this list is “an exhaustive
rendition of the possible sources.” Id.7 As to the second
requirement, i.e., the sufficiency of the disclosure as public
7
Accord United States ex rel. Doe v. John Doe Corp., 960
F.2d 318, 323 (2d Cir. 1992); United States ex rel. Williams v.
NEC Corp., 931 F.2d 1493, 1499-1500 (11th Cir. 1991) (noting
that Congress did not qualify list with “such as,” “for example,”
or like terms); United States ex rel. LeBlanc v. Raytheon Co.,
913 F.2d 17, 20 (1st Cir. 1990); 132 Cong. Rec. H9382-03
(1986) (“Before the relevant information regarding fraud is
publicly disclosed through various government hearings, reports
and investigations which are specifically identified in the
legislation or through the news media, any person may file such
an action as long as it is filed before the government filed an
action based upon the same information.”) (submitted by Rep.
Berman) (emphasis added); see also United States ex rel. Fine
v. Advanced Sciences, Inc., 99 F.3d 1000, 1004 (10th Cir. 1996)
(noting that “[Section 3730(e)(4)(A)] defines the sources of
allegations and transactions which trigger the bar but it does not
define the only means by which public disclosure can occur”)
(emphasis in original).
14
within the meaning of the Act, we have suggested that Section
3730(e)(4)(A) requires information to be public enough that it
“would have been equally available to strangers to the fraud
transaction had they chosen to look for it as it was to the
relator.” Stinson, 944 F.2d 1155-56. Whether a disclosure
is “public” is a determination influenced significantly by the
specific source or context of the disclosure and the particular
facts of each case. Given our precedent on this issue, we have
little difficulty finding that there were public disclosures in the
instant matter.
We agree with the District Court’s conclusion that “Irwin
has established public disclosure of the alleged fraud.”
Paranich, 286 F. Supp. 2d at 451. Under our precedent, the
Heifets and Rubanenko complaints and the FOIA report
undoubtedly qualified as public disclosures. In Stinson, we held
that Section 3730(e)(4)(A)’s class of “criminal, civil, or
administrative hearings” should be broadly interpreted to
include criminal, civil, or administrative litigation,
“encompass[ing] the full range of proceedings in a civil
lawsuit.” See Stinson, 944 F.2d at 1156, 1157. More
specifically, we held that the disclosure of discovery material to
a party who is not under any court imposed limitation as to its
use constituted a public disclosure within the context of a
criminal, civil, or administrative hearing. See id. at 1158.
Although this view is not universally held, see id. at 1168-69
(Scirica, J., dissenting) (arguing that public disclosure refers to
availability of information to the general public at the time of
disclosure); see also Mistick, 186 F.3d at 390 (Becker, C.J.,
dissenting) (decrying Stinson’s definition of public disclosure
for including discovery material given to a single person in
15
litigation between two private parties and not otherwise filed
with a court), the issue of whether a complaint in a civil action
qualifies as a public disclosure is potentially much less
controversial. Unlike discovery material, a complaint, if it is to
be operative, is necessarily filed with the court and, except in
rare instances, available and accessible to the public. These two
characteristics, filing with the court and public
availability/accessibility, would persuade even those in
disagreement with Stinson that a complaint is a public disclosure
under the FCA. See id. at 391 (Becker, C.J., dissenting)
(championing actual, not potential, public accessibility of court
files for public disclosure determination); Stinson, 944 F.2d at
1170-71 (Scirica, J., dissenting) (conceding that information
gleaned from browsing through public court files would
constitute a public disclosure). Indeed, other courts have arrived
at this conclusion, and even those critical of disclosures in
unfiled discovery materials seem willing to concede that
disclosures in filed materials would constitute public
disclosures.8 In any event, we are persuaded that a complaint in
8
See United States ex rel. McKenzie v. Bellsouth Telcoms.,
123 F.3d 935, 939 (6th Cir. 1997) (“‘Public disclosure’ also
includes documents that have been filed with a court, such as
discovery documents and a plaintiff’s complaint.”); Fed.
Recovery Servs. v. United States, 72 F.3d 447, 450 (5th Cir.
1995) (“‘Any information disclosed through civil litigation and
on file with the clerk’s office should be considered a public
disclosure of allegations in a civil hearing for purposes of
section 3730(e)(4)(A).’ . . . This includes civil complaints.”)
(quoting United States ex rel. Siller v. Becton Dickinson & Co.,
16
a civil action falls into the context of “criminal, civil, or
administrative hearings” and is sufficiently public within the
meaning of the Act to constitute a public disclosure.
As to the FOIA report obtained by Paranich’s counsel,
pursuant to Mistick, “the disclosure of information in response
to a FOIA request is a ‘public disclosure.’” 186 F.3d at 383.
This precedent could not be more clearly applicable; the FOIA
report Haber received was a public disclosure under the FCA.
C. Allegations or Transactions
Upon a determination that there has been a public
disclosure within the meaning of Section 3730(e)(4)(A), the next
21 F.3d 1339, 1350 (4th Cir. 1994) (holding further that “[a]
civil complaint is unquestionably a ‘public disclosure of
allegations’”)); United States ex rel. Springfield Terminal Ry. v.
Quinn, 14 F.3d 645, 652 (D.C. Cir. 1994) (“[D]iscovery
material, when filed with the court (and not subject to protective
order), is “publicly disclosed” in a “civil hearing” for purposes
of § 3730(e)(4)(A)’s jurisdictional bar.”); United States ex rel.
Kreindler & Kreindler v. United Technologies Corp., 985 F.2d
1148, 1158 (2d Cir. 1993) (holding that in absence of a court
ordered seal, the information in discovery material filed with the
court “was publicly disclosed because it was available to anyone
who wished to consult the court file”); United States ex rel.
Precision Co. v. Koch Indus., 971 F.2d 548, 554 (10th Cir.
1992) (“Allegations disclosed via civil litigation . . . fall within
the scope of public disclosure as contemplated by 3730.”).
17
inquiry, corresponding with the third element of our catalog, is
whether the public disclosure contains “allegations or
transactions” of the fraud upon which the qui tam action is
based. The Heifets and Rubanenko complaints contained both
allegations of fraud regarding Matrix’s billing policy and at least
enough information underlying those allegations to articulate a
legal claim, even if the claim had no merit as against Irwin.
Accordingly, we have little difficulty concluding that the
complaints contained “allegations or transactions” of fraud.
D. Based upon
The next step in our analysis, corresponding with the
fourth element in our catalog, is a determination of whether the
current action is “based upon” the public disclosure of the
allegations or transactions of fraud. We have held, consistent
with the majority of our sister courts of appeals, that the term
“based upon” means “supported by” or “substantially similar
to,” not “actually derived from.” Mistick, 186 F.3d at 385-88;
accord United States ex rel. Biddle v. Bd. of Trs. of the Leland
Stanford, Jr. Univ., 161 F.3d 533, 537-40 (9th Cir. 1998);
United States ex rel. Findley v. FPC-Boron Employees’ Club,
105 F.3d 675, 682-84 (D.C. Cir. 1997); Cooper v. Blue Cross &
Blue Shield, 19 F.3d 562, 567 (11th Cir. 1994); Koch Indus.,
971 F.2d at 552; United States ex rel. Doe v. John Doe Corp.,
960 F.2d 318, 324 (2d Cir. 1992). But see United States v. Bank
of Farmington, 166 F.3d 853, 863 (7th Cir. 1999) (holding that
“based upon” means actually derived from); Siller, 21 F.3d at
1348 (same). Furthermore, we have held that “a qui tam action
is ‘based upon’ a qualifying disclosure if the disclosure sets out
either the allegations advanced in the qui tam action or all of the
18
essential elements of the qui tam action’s claims.” Mistick, 186
F.3d at 388.
Regarding the complaints in the California cases, we
have noted above that the allegations contained in those
complaints concerned Matrix’s allegedly fraudulent billing
policy. Specifically, the Heifets complaint alleged that the
defendants:
[I]nduced Plaintiffs and other class members to
acquire the MATRIX Bioelectric Treatment
System and Device known as PRO ElecDT or
some other name, by misrepresenting to the class
members that MEDICARE will pay for treatments
given patients with this device. . . . In truth
MEDICARE now claims that the billings for
treatments rendered by the device were erroneous
and in violation of MEDICARE Law.
Complaint ¶ 6, Heifets v. Matrix Electromedical, No. BC-
191317 (Ca. Super. 1998) The Rubanenko complaint asserted
similar allegations. Complaint ¶¶ 6-10, Rubanenko v. Matrix
Biokinetics, Inc., No BC-196145 (Ca. Super. 1998) Both
complaints named Irwin (formerly known as Affiliated Capital
Corporation) as a defendant.9 Considering that these complaints
and Paranich’s action set out the same allegations against a
common defendant, we believe there is enough similarity to
9
The Heifets complaint was amended to add Irwin as a
defendant.
19
conclude that Paranich’s action was “substantially similar” to
the Heifets and Rubanenko complaints and, therefore, that the
action was “based upon” them.
We conclude, therefore, that at least with respect to the
complaints, all of the elements of the FCA’s jurisdictional bar
provision are present. Thus, the District Court was without
subject matter jurisdiction to hear the merits of Paranich’s action
unless he qualifies as an original source under Section
3730(e)(4)(B).
E. Original Source
Under Section 3730(e)(4)(B), for Paranich to be an
original source he must have had (1) direct and (2) independent
knowledge of the information on which the allegations are based
and (3) have voluntarily information to the Government before
filing the action. Because we ultimately find that Paranich fails
on the “voluntary” requirement, we do not need to discuss the
“direct” and “independent” requirements to resolve this matter.
We will, however, comment on these requirements because we
believe the District Court erred in focusing on Paranich’s limited
involvement in his attorney’s investigation and its finding that
Paranich’s knowledge was categorically not direct and
independent.
1. Direct
The first requirement for Paranich to qualify as an
original source is that his knowledge of the fraudulent conduct
must have been “direct.” We have interpreted direct to mean
20
“‘marked by absence of an intervening agency, instrumentality,
or influence: immediate.’” Stinson, 944 F.2d at 1160 (quoting
Webster’s Third New International Dictionary 640 (1976)).
Other courts have interpreted direct to mean “first-hand,”
Findley, 105 F.3d at 690, “seen with the relator’s own eyes,”
Wang ex rel. United States v. FMC Corp., 975 F.2d 1412, 1417
(9th Cir. 1992), “unmediated by anything but [the relator’s] own
labor,” id.; see also Fine, 99 F.3d at 1547; United States ex rel.
Devlin v. California, 84 F.3d 358, 360-61 (9th Cir. 1996), and
“[b]y the relator’s own efforts, and not by the labors of others,
and . . . not derivative of the information of others,” United
States ex rel. Hafter v. Spectrum Emergency Care, Inc., 190
F.3d 1156, 1162 (10th Cir. 1999).
The District Court concluded that Paranich did not
qualify as an original source because his knowledge, derived
from an investigation conducted by his attorney, was not his
own and, therefore, not direct. The Court reasoned further that,
because Haber’s information came after learning about the
Heifets and Rubanenko suits and Transamerica’s investigation,
Paranich’s knowledge was clearly derivative of these prior
public disclosures and not direct and independent.10
We disagree with the District Court’s application of the
“direct” knowledge requirement because it failed to consider
one very important fact: Paranich did have direct knowledge of
10
Although the District Court discussed the direct and
independent elements together, we will treat them as two
separate inquiries.
21
the billing scheme because he was involved in it. The first real
question, therefore, is did Haber’s investigation, which
uncovered most of the fraudulent aspects of the scheme, detract
from the “directness” of Paranich’s own information? See
generally Wang, 975 F.2d at 1417-18; Hafter, 190 F.3d at 1162;
Devlin, 84 F.3d at 360-61. Keep in mind that Haber was
presumably acting as Paranich’s agent, but he was not an
intervening agent, as such. Compounding the inquiry further is
the fact that the only remaining defendant in the action is Irwin
Leasing. Admittedly, Paranich did not have “direct” knowledge
of whatever role Irwin may have played in the scheme. But is
that necessary in order for the relator who has direct knowledge
of the overall scheme to state a claim against one who, as part of
the scheme, may have played a role in defrauding the
government? We choose not to answer these questions as the
latter was not alluded to in the District Court, and, as to the
former, the record fails to develop the nature of the agency
relationship or the level of Paranich’s actual involvement or
control over Haber’s investigation.11 While we do not accept the
11
We note that the cases the District Court relied on, and our
precedent in this area, are distinguishable in that here Paranich
did have some firsthand experience with the billing scheme in
that he actually billed Medicare for treatments involving the
machine and his attorney conducted the investigation on his
behalf, whereas in Mistick, the relator had only strictly
secondhand information of a fraud it did not directly observe,
and in Stinson, the attorneys were not directly involved in the
fraudulent activity and, rather, sought to be relators in their own
right based on information gained in the representation of a
22
District Court’s terse consideration of the thought that Paranich
had “direct” knowledge based solely on Haber’s having
conducted the investigation, we are not prepared to expand the
contours of this requirement in a vacuum.
2. Independent
The second requirement for Paranich to qualify as an
original source is that his knowledge of the fraudulent conduct
must have been “independent.” We have interpreted this
requirement to mean that knowledge of the fraud cannot be
merely dependent on a public disclosure. See Hafter, 190 F.3d
at 1160 (“[A] relator who would not have learned of the
information absent public disclosure d[oes] not have
‘independent’ information within the statutory definition of
‘original source.’”); accord Findley, 105 F.3d at 683
(“Independent knowledge is ‘knowledge that is not itself
dependent on public disclosure.’”) (quoting Quinn, 14 F.3d at
656); Devlin, 84 F.3d at 361 (“The fact that the relators had
evidence of the fraud prior to the public disclosure of the
allegations establis h es th at th ei r k n ow l ed g e w as
‘independent.’”). Furthermore, although a relator does not have
to be aware of a disclosure in order for it to be a public
disclosure, logically, the relator would have to know of a
disclosure in order for his information to be deemed dependent
client who was directly involved in the fraud.
23
on it. 12
Unlike the District Court, we do not find Paranich’s
knowledge to have been derived exclusively from the public
disclosures. Instead, as we have pointed out above, his initial
knowledge was, from his own experience, independent of such
disclosures. And Haber’s efforts were similarly independent of
the public disclosures. As early as April 1998, subsequent to the
October 22, 1997 serving of the subpoena but prior to the filing
of the California lawsuits, the issue of the Transamerica hearing
report, and Paranich and Haber’s awareness of the March 1998
Medicare bulletin, Haber wrote letters to the FBI and the U.S.
Attorneys’ offices outlining the alleged fraud perpetrated by
Matrix and affiliated companies. The letters are proof that
Paranich and Haber’s knowledge of the alleged fraud was
independent of the California lawsuits for the simple fact that
these letters predated the filing of those suits. Their knowledge
similarly predated and was therefore independent of the FOIA
report; Haber did not even request the FOIA report until October
12
Bear in mind that our interpretation of “independent” in the
original source exception is consistent with its common
denotation–“not dependent” or “not requiring or relying on
something else : not contingent.” Merriam Webster On-Line
Dictionary, at http://www.merriamwebster.com. Our
interpretation of this word is not affected by the type of statutory
construction we have applied to our interpretation of “based
upon.” See supra Part IV.D (interpreting “based upon” to mean
“supported by” or “substantially similar to,” not “actually
derived from”).
24
7, 1998, six months after he wrote the letters. Finally, the letters
seem to have predated Paranich and Haber’s awareness of the
March 1998 Medicare bulletin; the record suggests that
Paranich and Haber were not aware of this bulletin until in
or around October 1998.13 Even had Haber known of the
13
We must point out that the record is not entirely precise on
dating Haber’s awareness of the March 1998 Medicare bulletin.
The District Court’s fact finding regarding the bulletin and the
Transamerica hearings is imprecise. As discussed at supra note
3, the District Court incorrectly dated the bulletin as being
published in October 1997. See Paranich, 286 F. Supp. 2d at
449. Also, the Court states that “[w]hen attorney Haber learned
of the hearings in October 1998, he filed a request with the
government for the hearing report under the [FOIA].” Id.
(emphasis added). Importantly, there was no finding regarding
when Haber learned about the bulletin. In Irwin’s statement of
facts, the facts upon which the District Court primarily relied,
see supra note 5, Irwin states: “By October 1998, Atty. Haber
knew that Transamerica had published a bulletin in March 1998
that was sent to its members advising them not to bill Matrix
services under the CPT codes for nerve blocks.” (Def. Irwin
Leasing Corp.’s Statement of Facts in Supp. of Mot. for Summ.
J. ¶ 35, at 6) To support this statement, Irwin cites Haber’s
deposition (January 10, 2003, p. 106, ln. 11 to p. 107, ln. 18) and
Exhibit 17 (a fax of the bulletin from Mary C. Suffoletta, an
attorney at Haber’s firm, to Paranich, dated October 23, 1998),
the relevant portions of which are both included in the record
before us. This statement itself suggests that Haber learned of
the bulletin in October 1998, but actually reads that he learned
25
bulletin prior to writing the letters, the bulletin did not contain
any allegations that Matrix and other parties engaged in
deliberate misrepresentations; the bulletin merely explained that
the use of the Matrix should not be billed as nerve block
injections. Accordingly, we conclude that Paranich’s
knowledge of the fraudulent conduct was independent of the
public disclosures.
3. Voluntary
The last requirement for Paranich to qualify as an original
of it by then. In the deposition, Haber never clearly indicated
when he learned about the bulletin. Furthermore, the fax itself
is from Suffoletta to Paranich; it indicates only that Paranich
was made aware of the bulletin on October 23, 1998 (and that
Suffoletta was aware of the bulletin at least by this date), but
does not date Haber’s awareness. Informed as we are by the
record, we can guess that Haber was most likely not aware of
the bulletin when he wrote the April letter, which was at most a
month after the bulletin was published; it would not make much
sense for him to have been aware of it and not cite it in the letter
or, at the very least, for him to hold on to that information for
six months before having a colleague fax it to his client.
Although this reasoning appears sensible, it is, fundamentally,
supposition, which is not an appropriate basis for our analysis.
However, while this detail is material to a determination of
whether Haber’s knowledge of the alleged fraud was
independent of the bulletin, fortunately, this determination is not
critical to resolution of this issue.
26
source is that he must have “voluntarily” provided information
to the government before filing the action. Although our courts
have previously commented on the temporal requirement of
providing information to the government before the qui tam
action is filed, see, e.g., Stinson, 944 F.2d at 1168 (Scirica, J.,
dissenting); cf. United States ex rel. Merena v. SmithKline
Beecham Lab., Inc., 114 F. Supp. 2d 352, 358-62 (E.D. Pa.
2000), heretofore we have not engaged in an extended analysis
of what “voluntarily” means. Here, Paranich supplied
information after certain records had been subpoenaed by the
government. Accordingly, we must explore whether Paranich
provided materials voluntarily to the extent that, in addition to
the materials subpoenaed, Paranich’s attorney conducted an
investigation and provided additional information to the
government. While if only the subpoenaed information were
supplied there would be no question that the information was
not provided voluntarily, the question here is whether provision
of other material, without specific compunction, renders the
giving of information to have been “voluntary” for the purposes
of the FCA . Because some of our sister courts have had an
opportunity to explain what it means to provide information
“voluntarily,” we turn to the fruits of their labors for guidance.
In United States ex rel. Fine v. Chevron USA Inc., 72
F.3d 740 (9th Cir. 1995) (en banc), the Ninth Circuit was
presented with a qui tam action brought by a former employee
of the Office of the Inspector General at the U.S. Department of
Energy. The relator, an assistant manager of the Western
Region Audit Office, had left his job after his supervisors failed
to pursue every perceived violation he brought to their attention
and subsequently filed several qui tam actions based on audits
27
and investigations he had done during his employment. See
Fine, 72 F.3d at 742. Affirming the District Court, the majority
held that it was without jurisdiction because the claims were
based upon publicly disclosed allegations and the original source
exception did not apply because the relator had provided the
information to the government not voluntarily, but as part of his
job responsibilities as a government employee. See id. at 745.
To reach that conclusion, the majority relied on a
dictionary definition of “voluntary” supporting a common-sense
reading of the term: “‘[a]cting, or done, of one’s own free will
without valuable consideration; acting or done without any
present legal obligation to do the thing done or any such
obligation that can accrue from the existing state of affairs.’” Id.
at 744 (quoting Webster’s Third New International Dictionary
2564 (1981) (definition 1(g))). Under this definition, the
majority determined that the relator was not a volunteer because
he acted in return for valuable consideration, i.e., his salary, and
under an employment-related obligation to do the very acts he
claimed were voluntary. See id. at 743-44 (noting that “[the
relator] no more voluntarily provided information to the
government than we, as federal judges, voluntarily hear
arguments and draft dispositions”).
The relator, citing a floor statement by Senator Grassley,
the principal sponsor of the 1986 amendments to the FCA,
argued that the provision of information to the government
should be held to be voluntary unless compelled by a subpoena.
See id. The statement by Senator Grassley is provided below:
In the definition of “original source,” the
28
requirement that the individual “voluntarily”
informed the Government or news media is meant
to preclude the ability of an individual to sue
under the qui tam section of the False Claims Act
when his suit is based solely on public
information and the individual was a source of the
allegations only because the individual was
subpeonaed [sic] to come forward. However,
those persons who have been contacted or
questioned by the Government or the news media
and cooperated by providing information which
later led to a public disclosure would be
considered to have “voluntarily” informed the
Government or media and therefore considered
eligible qui tam relators.
132 Cong. Rec. 20,536 (Aug. 11, 1986). The majority rejected
the relator’s narrow interpretation of this statement, finding that
the statement did “not purport to describe the only situation in
which the voluntary disclosure requirement would bar a qui tam
suit following a public disclosure.” Fine, 72 F.3d at 744 (stating
further that “a single floor statement could not convince us to
adopt so tortured a construction of a commonly understood
word”) (citing Chrysler Corp. v. Brown, 441 U.S. 281, 311
(1979) (“The remarks of a single legislator, even the sponsor,
are not controlling in analyzing legislative history.”)). Lastly,
the relator argued that the majority had to construe his
disclosures as voluntary lest it create a rule that barred all
federal employees from being original sources in violation of a
1989 Executive Order directing employees to “‘disclose waste,
fraud, abuse, and corruption to appropriate authorities.’” Id.
29
(quoting Exec. Order No. 12,674, 54 Fed. Reg. 15,159, § 101(k)
(Apr. 14, 1989)). The Court summarily rejected this argument,
stating that the fact that the relator was employed specifically
to disclose fraud was important to the determination that his
disclosures were not voluntary.14 See id.
14
Besides the majority opinion, Fine generated one dissent
and three concurrences. The dissenting opinion argued that
there was nothing in the FCA or its legislative history suggesting
that a federal employee, or, specifically, an Inspector General,
could not bring a qui tam action. See Fine, 72 F.3d at 749
(Leavy, J., dissenting). The dissent further argued that the
majority’s view that the provision of information when one has
a legal duty to do so renders the performance of that duty
nonvoluntary was contorted because a legal duty does not affect
one’s choice to perform. See id. at 750 (Leavy, J., dissenting).
That this interpretation of voluntary relied too much on the
actor’s state of mind, a highly unusual and objectively
unverifiable factor on which to hinge a federal court’s subject
matter jurisdiction, was pointed out in one of the concurring
opinions. See Fine, 72 F.3d at 746 (Kozinski, J., concurring).
The concurring opinions also referred to the policies underlying
the FCA, noting that the Act had been amended to provide
incentives for disclosure to those who would otherwise have no
reason to speak out, not to force the government to pay for
information to which it was already entitled, see id. (Kozinski,
J., concurring), and that allowing federal employees to pursue
private claims based on their official investigations could result
in agents of the United States gaining a personal financial stake
in the outcome of their efforts, resulting in persons whose job it
30
In United States ex rel. Barth v. Ridgedale Electric, Inc.,
44 F.3d 699 (8th Cir. 1995), the Eighth Circuit also interpreted
the voluntary provision requirement in light of the policy
underlying qui tam actions. In that case, the relators, an
electrical worker (“Barth”) and an electrical workers’ union
(“Union”), brought an action against an electrical contractor and
its president for submitting false certifications of contract
compliance and fraudulent payroll reports to the government
for work on a federally funded electrical construction project.
Barth, 44 F.3d at 701. Barth’s provision of information was
actually initiated by an HUD investigator and the provision of
information was more than two years after the alleged fraudulent
activities. See id. at 704. The District Court had dismissed the
action for lack of subject matter jurisdiction because the Union’s
knowledge of the false claims was not sufficiently “direct” and
Barth’s provision of information to the government was not
sufficiently “voluntary” to qualify as an original source under
the FCA. See id. Affirming the decision of the District Court,
the Eighth Circuit reasoned that qui tam actions were designed
to encourage private individuals cognizant of fraud on the
government to bring such information forward at the earliest
possible time and that one who was providing information only
in response to a government inquiry was not doing so
voluntarily within the meaning of the Act. See id. In other
words, rewarding an individual for “merely complying with the
government’s investigation [wa]s outside the intent of the Act.”
is to discover and report fraud benefitting from down playing
the importance of their discoveries, see id. (Hawkins, J.,
concurring).
31
Id.
Lastly, in United States ex rel. Stone v. AmWest Savings
Association, 999 F. Supp. 852, 857 (N.D. Tex. 1997), the
District Court for the Northern District of Texas, citing both
Fine and Barth, interpreted voluntary to mean “uncompensated”
or “unsolicited,” not “uncompelled.” The Court concluded that
the relator in that case did not voluntarily provide information
to the government because he did so (1) seven months after
leaving employment with the defendant as its president and
CEO and (2) only after securing criminal immunity for
providing statements about the defendant’s questionable
business dealings in the course of a government fraud
investigation of the defendant. See Stone, 999 F. Supp. at 858.
After reviewing the cases discussed above, we conclude
that a putative relator does not, consistent with the policy
underlying qui tam actions, “voluntarily” provide information to
the government where the government has identified the
putative relator as being involved in the fraudulent activity and
has initiated contact with a subpoena demanding information
fundamental to the putative relator’s action. In such a case, as
with cases involving federal employees charged with
investigating fraud, and with cases involving complacent,
reluctant, or delinquent informants, the incentive of a qui tam
action as an anti-fraud device is lost and the putative relator’s
further participation in the government’s investigation is
necessarily fueled by other forms of self-interest. Information
not specifically compelled but nonetheless brought forward as
a result of the government’s pointed contact should not be
deemed “voluntarily” provided. Indeed, as Senator Grassley
32
noted in the Congressional hearings cited by the Court in Fine,
the case in which a putative relator’s provision of information
is specifically not voluntary would be where it is compelled by
a subpoena. See 132 Cong. Rec. 20,536 (Aug. 11, 1986)
(statement of Sen. Grassley) (excluding from class of potential
qui tam relators individuals whose suits are based solely on
public information and were sources of allegations only because
they were subpoenaed to come forward); see also, e.g., Stinson,
944 F.2d at 1168 n.1 (Scirica, J., dissenting) (noting that those
who provide information pursuant to a subpoena do not do
so voluntarily) (citing statement by Senator Grassley); United
States ex rel. Ackley v. IBM, 76 F. Supp. 2d 654, 666 (D. Md.
1999) (“‘Voluntarily’ means not in response to a subpoena.”)
(citing statement by Senator Grassley). It seems to undermine
the voluntary provision requirement to allow a relator to extract
the benefit of a qui tam action where his participation in the
investigation was precipitated by a subpoena and sustained by
self-interest, with all indications suggesting that the relator
would not have come forward otherwise.
As applied to the instant case, once Paranich was served
with a subpoena, his cooperation with the government and
further investigation of any fraudulent conduct on the part of
Irwin was simply not voluntary. Although Paranich was not
compelled by the subpoena to outline or research Matrix’s fraud,
his investigation was initiated by the subpoena and motivated by
a desire to shift the focus of the fraud investigation from himself
to another party (i.e., Irwin). (See Haber Dep. 220:10-20)
Indeed, to this end, Paranich has at several points during this
litigation highlighted the fact that in response to the
government’s “vague and non-targeted” subpoena he produced
33
“seventy (70) boxes of billing records.” Paranich no doubt
stresses this point in these terms both to display his enthusiastic
cooperation with the government’s investigation and to prove
that his discovery of the fraud was all his own, unassisted by the
subpoena. While this shading of the facts is well suited to steer
us away from the conclusion that the subpoena was a public
disclosure or that Paranich’s action was based upon the
information contained therein, it also serves to steer us toward
our conclusion that Paranich was not a voluntary originator of
this investigation. This conclusion is solidified by counsel’s
admission at oral argument that each of the seventy boxes was
submitted in response to the subpoena and none was voluntarily
provided to the government based on Paranich’s own further
investigation. Paranich simply cannot acknowledge that
everything he turned over to the government was pursuant to the
subpoena and then, in the same breath, persuasively argue that
his provision of information to the government was voluntary.
The materials produced by Haber’s further investigation
and supplied in Haber’s two letters to the government stand on
no better footing. While the letters were clearly not in response
to the subpoena, as such, they were produced as a result of the
government’s focus on Paranich and in an attempt to obtain a
favorable outcome, as Haber himself specifically stated in his
deposition.15 In short, while it may be an appropriate legal
15
Haber stated the following in his January 10, 2003
deposition:
Q [Mr. Kaus]: This is a letter dated January 30,
2001 from M r. Haber to M r. Latona and Mr.
34
strategy for the subject of a subpoena in a fraud investigation to
cooperate with the government and provide additional
information in an attempt to shift attention to a properly
implicated third party, it is contrary to the policies underlying
qui tam actions to allow that individual, already conscripted into
aiding the government, to be with clothed with the imprimatur
of being an “original source,” with a potential of pecuniary gain,
as against the third party.
V. Conclusion
In sum, we conclude that the jurisdictional bar of the
FCA applies in this case because Paranich does not qualify as
Keller; correct?
A [Mr. Haber]: That’s correct.
Q: And it says in paragraph two, [“]Stephen also
probably did not explain that developing this case
on his behalf was part of our strategy to avoid his
prosecution by the government[.] In doing so[,]
we made him more valuable to the government as
a relator than as a defendant[.”] First of all you
said that; right?
A: That’s correct.
Q: Second of all, you meant it; right?
A: Yes, I did.
(Haber Dep. 220:10-20)
35
an original source because his provision of information to the
government was not voluntary within the meaning of Section
3730(e)(4)(B). Consequently, the District Court was without
subject matter jurisdiction to hear Paranich’s action.
For the reasons set forth above, we will AFFIRM the
order of the District Court dismissing Paranich’s action as
jurisdictionally barred.
36