Searcy v. Philips Electronics North America Corp. , 117 F.3d 154 ( 1997 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 96-40515
JASON R. SEARCY, Trustee for the Bankruptcy
Estate of C&P Business World, Inc.; ET AL,
Plaintiff,
versus
PHILIPS ELECTRONICS NORTH AMERICA
CORPORATION; ET AL,
Defendant.
_______________________
LLOYD T. BORTNER, on behalf of the
United States of America,
Plaintiff-Appellee,
versus
PHILIPS ELECTRONICS NORTH AMERICA
CORPORATION; ET AL,
Defendants,
PHILIPS ELECTRONICS NORTH AMERICA
CORPORATION; PHILIPS ELECTRONICS NV,
Defendants-Appellees,
versus
UNITED STATES OF AMERICA,
Appellant.
Appeal from the United States District Court
For the Eastern District of Texas, Beaumont
June 30, 1997
( )
Before REYNALDO G. GARZA, HIGGINBOTHAM, and JONES, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
Today we must decide whether the False Claims Act gives the
government the power to veto a settlement after it has declined to
intervene in both the trial and appellate courts. We find the last
sentence of 31 U.S.C. § 3730(b)(1) unambiguous in its declaration
that courts may not grant a voluntary dismissal in a False Claims
Act suit unless the U.S. Attorney General consents to the
dismissal. Thus, we must vacate the settlement order and voluntary
dismissal and remand to the district court.
I.
According to the complaint, Philips Electronics North America
Corp. and Philips Electronics illegally concealed from the U.S.
government a 1985 executive decision to withdraw from the U.S.
market and to abandon their local U.S. dealers. The U.S.
government relied on Philips’s continuing presence in the U.S.
market when it bought and leased automation equipment worth
millions of dollars. Lloyd T. Bortner, Jr., learned of Philips’s
allegedly deceptive policy when he was serving as a manager for a
Philips division called Philips Information Systems Co. He brought
a suit on behalf of the government under the False Claims Act,
which prohibits “knowingly present[ing], or caus[ing] to be
presented, to an officer or employee of the United States
Government or a member of the Armed Forces of the United States a
false or fraudulent claim for payment or approval.” 31 U.S.C. §
3729(a)(1). The district court eventually consolidated Bortner’s
qui tam action with a private suit against Philips brought by five
former Philips dealers.
2
As required by 31 U.S.C. § 3730(b)(2), Bortner served the
Attorney General with the complaint and evidence under seal so that
the government could decide whether to take over the action. In
keeping with § 3730(b)(3), after 60 days the government moved for
and received a 90-day extension of time in which to investigate
Bortner’s allegations. When it asked for a second 90-day
extension, however, the court denied its request. On January 26,
1995, the government decided not to exercise its right to
intervene. The court unsealed the documents so that Bortner could
prosecute the action. The government reminded Bortner’s counsel as
a matter of course that it was not a party and that discovery of
government documents would have to proceed by subpoena under Fed.
R. Civ. P. 45.
During nearly a year of discovery, Bortner forwarded court
documents to the government. Bortner and Philips made two
unsuccessful, court-ordered efforts at mediation. After three days
of trial, on February 1, 1996, they reached a settlement in which
the court would enter a judgment of $1 million dollars against
Philips. Pursuant to § 3730(d)(2), Bortner would get 30% of the
award, in addition to $300,000 in attorneys’ fees.
The government, however, objected to the settlement. Because
it had investigated only the claims that Bortner actually brought,
it protested a release from “all claims and counterclaims asserted
in any pleading or other filing in this action, or which could have
been asserted by the parties in this action, arising out of the
transactions and occurrences that are the subject matter of this
3
action.” The government was unsuccessful in its efforts to
convince Philips to accept a release only from claims actually
stated in the final complaint. In an objection filed with the
court and at a show-cause hearing, the government asserted that
§ 3730(b)(1) gives it the power to veto the settlement. It did
not, however, request to intervene for good cause under
§ 3730(c)(3). The district court overruled the objection and
approved the settlement. One week later, Philips paid the
government $700,000. The government filed a notice of appeal,
again without moving to intervene.
II.
Regardless of whether the government opts to control or
intervene in a case, the False Claims Act requires that actions “be
brought in the name of the Government.” 31 U.S.C. § 3730(b)(1).
Under the statutory structure, relators such as Bortner sue both
“for the person and for the United States Government.” Id. Thus,
as Bortner seems to concede, the United States is a real party in
interest even if it does not control the False Claims Act suit.
See United States ex rel. Milam v. University of Texas M.D.
Anderson Cancer Center, 961 F.2d 46, 48-49 (4th Cir. 1992).
The government draws the further conclusion that it is
automatically a party for purposes of appeal. At least one court
interpreting the Act as amended in 1986 has taken this position
where the question was whether the appellant should get the benefit
of Fed. R. App. P. 4(a)(1)’s special 60-day period for filing a
notice of appeal in a suit in which the United States is a party.
4
See United States ex rel. Haycock v. Hughes Aircraft Co., 98 F.3d
1100, 1102 (9th Cir. 1996) (“[T]he government’s nominal party
status combined with the majority financial interest in the outcome
suffices to make it a party for purposes of the sixty day notice of
appeal rule.”), cert. denied, ___ U.S. ___, 117 S. Ct. 1693 (1997).
According to the Ninth Circuit, litigants who are unsuccessful in
the district court should not be penalized for reading Rule 4(a)(1)
in light of the statute’s purpose of vindicating the interests of
the United States. Cf. United States ex rel. Petrofsky v. Van
Cott, Bagley, 588 F.2d 1327, 1329 (10th Cir. 1978) (holding that,
under the pre-1986 version of the Act, the government is not a
party for the purposes of Rule 4(a)(1) because its interest ends
once it decides not to prosecute the action itself), cert. denied,
444 U.S. 839 (1979).
But viewing the government as a party for the purposes of Rule
4(a)(1) does not compel us to treat it as a party for all appellate
purposes. The Act forces the government to decide at the outset
whether it wants to become an active litigant or to let the relator
represent its interests. 31 U.S.C. § 3730(b)(2). It further
allows the government to intervene at any time on a showing of good
cause. 31 U.S.C. § 3730(c)(3). In short, its structure
distinguishes between cases in which the United States is an active
participant and cases in which the United States is a passive
beneficiary of the relator’s efforts. When the government chooses
to remain passive, as it has here, we see no reason to treat it as
5
a party with standing to challenge the district court’s action as
of right.
Bortner argues that non-parties simply cannot appeal, and thus
that the government cannot prosecute an appeal without first
intervening. Read out of context, a few cases seem to announce
such a rule. See, e.g., Marino v. Ortiz, 108 S. Ct. 586, 587
(1988) (per curiam) (“[B]ecause petitioners were not parties to the
underlying lawsuit, and because they failed to intervene for
purposes of appeal, they may not appeal from the consent decree
approving that lawsuit’s settlement . . . .”); Edwards v. City of
Houston, 78 F.3d 983, 993 (5th Cir. 1996) (en banc) (“It is well-
settled that one who is not a party to a lawsuit, or has not
properly become a party, has no right to appeal a judgment entered
in that suit.” (citing Marino)).
We have enforced the rule with respect to nonnamed members of
class actions. See Flanagan v. Ahearn, 90 F.3d 963, 990 (5th Cir.
1996), petition for cert. filed, 65 U.S.L.W. 3611 (U.S. Feb. 27,
1997); Walker v. City of Mesquite, 858 F.2d 1071, 1074 (5th Cir.
1988) (“[T]he better practice . . . is for nonnamed class members
to file a motion to intervene and then, upon the denial of that
motion, appeal to this Court.” (citing Marino)). But the structure
of class actions differs from the structure of qui tam actions. As
the Walker court noted, allowing nonnamed class members to appeal
a final judgment could frustrate the Rule 23 mechanism by making
class actions unwieldy and less productive. 858 F.2d at 1074.
Class actions involve many unnamed class members, and giving each
6
a right to appeal could result in a confusing and unmanageable
appellate process. Furthermore, a nonnamed class member can
protect his interest by mounting a collateral attack. Litigation
conducted en masse presents different problems and calls for
different rules than litigation conducted on behalf of a single
entity such as the United States government.
Outside of the class-action context, the rule on non-party
appeals is not as rigid as Bortner and Philips contend. Although
we dismissed a would-be non-party appellant in EEOC v. Louisiana
Office of Community Services, 47 F.3d 1438, 1442-43 (5th Cir.
1995), we inquired whether “the non-parties actually participated
in the proceedings below, the equities weigh in favor of hearing
the appeal, and the non-parties have a personal stake in the
outcome.” See also United States v. Chagra, 701 F.2d 354, 358-60
(5th Cir. 1983) (allowing non-party reporters to appeal an order
closing a courtroom to the media in the wake of the assassination
of a federal judge). Professors Wright and Miller devote a long
section of their treatise to the topic and encapsulate the law by
stating that “[a]ppeal is likely to be available . . . if the
would-be appellant can show significant involvement with the
judgment, plausible reasons for not becoming involved earlier, a
risk that its interests will not be adequately protected by the
parties, and a lack of untoward interference in the affairs of the
parties.” 15A Federal Practice and Procedure 2d § 3902.1, at 102
(1992).
7
We find that the Louisiana Office of Community Services test
provides the appropriate standard here. The government has
satisfied all three prongs of that test. First, it participated in
the district court proceedings by investigating and monitoring the
case and by arguing against the settlement at a hearing.
Second, the equities favor the government because it is
relying on a good-faith argument that Congress has instructed the
courts — including the courts of appeals — not to approve
settlements when the government doesn’t consent. Bortner condemns
the government for failing to take advantage of the Act’s provision
that “the court, without limiting the status and rights of the
person initiating the action, may nevertheless permit the
Government to intervene at a later date upon a showing of good
cause.” 31 U.S.C. § 3730(c)(3). Our question is not, however,
whether the government was prudent given the uncertainty about its
rights under the Act. Our question is whether Congress has given
to the government the right to block settlements even if it is not
a formal party to the district court or circuit court proceedings.
As we will explain, we agree with the government that the False
Claims Act grants it the power to withhold consent to voluntary
settlements. In light of this governmental right, it would be odd
to preclude appellate remedies based on the government’s failure to
intervene. If, as we conclude, the district court was mistaken in
determining that the government has no veto power, the government
should be able to correct that error by raising its veto power in
an appeal to this court, even if it chooses not to intervene.
8
Bortner also argues that the government lacks standing and
thus fails the third prong, which requires a personal stake in the
outcome. We disagree. Although Bortner supposes that the
settlement binds only Bortner and Philips, the language in the
district court’s order approving the settlement may not be so
narrow. The settlement stretches to “all claims and counterclaims
asserted in any pleading or other filing in this action, or which
could have been asserted by the parties in this action, arising out
of the transactions and occurrences that are the subject matter of
this action.” By binding “the parties in this action,” the order
could be interpreted to include the government for claim-preclusion
purposes. See Valerie R. Park, Note, The False Claims Act, Qui Tam
Relators, and the Government: Which Is the Real Party to the
Action?, 43 STAN. L. REV. 1061, 1084-87 (1991) (arguing that because
the government has an opportunity to investigate and control False
Claims Act suits, it should be subject to claim preclusion when a
relator prosecutes a False Claims Act action on its behalf). Cf.
Westerchil Constr. Co. v. United States, 16 Cl. Ct. 727, 732 (1989)
(refusing to give a Miller Act suit preclusive effect against the
government because the Miller Act does not give the United States
any “participatory or supervisory authority”). We are unsure why
Philips would resist a settlement with more modest preclusive
language unless it hoped to buy peace from future suits by the
United States or relators based on the same transactions. Indeed,
Philips asserts in its brief that if this case had been decided by
the jury, future claims by the United States would be barred to the
9
same extent as claims by Bortner himself. We do not have occasion
to decide what sorts of claims the Bortner-Philips settlement might
preclude. It is enough to determine that the government has a
stake in the outcome because of a legitimate concern that giving
Philips the benefits of full claim preclusion could prevent
prosecutions not only under the False Claims Act, but also under
other statutes.
In sum, the unique structure of the False Claims Act gives the
government an adequate level of participation in the district court
proceedings, a good-faith reliance on a statutory right, and a
concrete stake in the outcome. Thus, the government’s appeal is
properly before us even though the government is not a party that
ordinarily could challenge as of right the district court’s final
order.
III.
The government asks us to sanction an absolute veto power over
voluntary settlements in qui tam False Claims Act suits. The
statutory language appears to grant just that: “The action may be
dismissed only if the court and the Attorney General give written
consent to the dismissal and their reasons for consenting.” 31
U.S.C. § 3730(b)(1).
Most cases have only flirted with the issue. In Minotti v.
Lensink, 895 F.2d 100, 104 (2d Cir. 1990), the court remarked that
“[o]nce the United States formally has declined to intervene in an
action . . . , little rationale remains for requiring consent of
the Attorney General before an action may be dismissed.” But that
10
case involved an involuntary dismissal for the relator’s failure to
comply with the defendants’ discovery requests. In spite of its
dicta, the Minotti court held that “the provision requiring consent
of the Attorney General prior to dismissal of a private action
. . . continues to apply only where the plaintiff seeks voluntary
dismissal of the action.” Id. at 103. Accord United States ex
rel. Fletcher v. Fahey, 121 F.2d 28, 29 (D.C. Cir.), cert. denied,
314 U.S. 624 (1941); United States ex rel. S. Prawer & Co. v. Fleet
Bank of Maine, 855 F. Supp. 419, 423 (D. Me. 1993). Before us, the
government forthrightly acknowledges that requiring the
government’s consent to an involuntary dismissal would raise
separation-of-powers concerns. A district court has made the
sweeping statement that “Congress did not intend to give the United
States a veto power over actions in which it has previously
declined to intervene.” United States ex rel. Pedicone v. Mazak
Corp., 807 F. Supp. 1350, 1352 (S.D. Ohio 1992). But its reasoning
turned on the fact that the government failed to comply with
§ 3730(b)(4)’s requirement that it either proceed with the action
or notify the court of its decision not to proceed. Id. These
cases did not confront the situation presented today and do not
bind us.
At the appellate level, only the Ninth Circuit has taken a
definitive position on whether the last sentence of § 3730(b)(1)
grants the government the power to veto voluntary settlements
11
without intervening.1 That court initially seemed prepared to give
teeth to § 3730(b)(1). In United States ex rel. McGough v.
Covington Technologies, 967 F.2d 1391, 1397 (9th Cir. 1992), it
determined that § 3730(b)(1) requires governmental consent to a
voluntary settlement where the relator has failed to notify the
government of the settlement terms. By failing to communicate his
settlement plans to the government, the relator denied the
government the opportunity to intervene and thus failed to
represent the government’s interests adequately.
But the court changed course in United States ex rel.
Killingsworth v. Northrop Corp., 25 F.3d 715 (9th Cir. 1994). In
Killingsworth, the government asked to intervene for purposes of
appeal after the district court refused to let it block a False
Claims Act settlement. According to the government, the relator
was short-changing the government by settling both a False Claims
Act suit and a private wrongful termination suit at the same time
and shifting most of the recovery into the wrongful termination
settlement in order to reduce the percentage of the overall amount
that would ordinarily go to the government. The court allowed the
intervention for purposes of appeal, but it held that “the
1
One district court anticipated the Ninth Circuit. The
Eastern District of Tennessee ruled in a brief opinion that
Ҥ 3730(b)(1) when read in the context of the statute as a whole,
is intended to ensure that legitimate claims brought by a qui tam
plaintiff are not dismissed before the United States has been
notified of the claims and has had an opportunity to decide whether
the United States should take over the conduct of the action.”
United States ex rel. Stenson, Lyons v. Provident Life & Accident
Ins. Co., 811 F. Supp. 346, 347 (E.D. Tenn. 1992). Consequently,
the court rejected the government’s effort to impose conditions on
a voluntary settlement.
12
government’s consent to dismissal is only required during the
initial sixty-day (or extended) period in which the government may
decide whether to [proceed with the action].” Id. at 723. It
distinguished McGough by explaining that the government knew about
the settlement and chose not to exercise its right to intervene for
good cause in the trial-court proceedings. The government in our
case concedes that the result in Killingsworth is directly contrary
to its position. It can do nothing but ask us to reject the Ninth
Circuit’s reasoning.
We find Killingsworth unpersuasive. First, we are unimpressed
with the court’s contention that the legislative history of the
1986 False Claims Act amendments militates against giving the
government the power to veto a settlement. When President Lincoln
signed the original 1863 statute, it contained a version of what is
now the last sentence of § 3730(b)(1). The original statute,
however, contained no mechanism by which the government could take
over a qui tam action. In two sets of amendments, Congress has
both created and expanded the government’s power to assume control
of the litigation. See Pub. L. No. 78-213, ch. 377, 57 Stat. 608(1943) (currently codified at 31 U.S.C. § 3730(d)(2)(A)) (allowing
the government to take over the case within sixty days of
notification); Pub. L. No. 99-562, 100 Stat. 3154 (1986) (codified
at 31 U.S.C. §§ 3730(b)(3) & (c)(3)) (allowing the government both
to expand the sixty-day period and to intervene “at a later date”
on a showing of good cause).
13
After considering legislators’ remarks about the 1986
amendments, the Killingsworth court concluded that the current
version of the Act is designed to encourage private litigants to
take more responsibility for enforcement. 25 F.3d at 721.
“Congress’ intent to place full responsibility for False Claims Act
litigation on private parties, absent early intervention by the
government or later intervention for good cause, is fundamentally
inconsistent with the asserted ‘absolute’ right of the government
to block a settlement and force a private party to continue
litigation.” Id. at 722.
Even if we assume that Killingsworth gauged Congressional
intent accurately, intentions alone cannot work a repeal of the
last sentence of § 3730(b)(1). Before 1943, when the government
had no authority to control claims initiated by relators, that
sentence served as the government’s one opportunity to influence
the litigation in case a relator proposed a settlement that might
harm the United States. Although Congress has studied the Act and
seen fit to overhaul many of its provisions, it has not chosen to
eliminate the sentence we are asked to interpret. As far as we can
tell, Congress decided that it should combine its effort to
reinvigorate the qui tam provisions of the Act with a continuation
of its policy of encouraging the government to monitor relators’
actions and step in when a relator is not acting in the best
interest of the public. If Congress meant to repeal the
government’s power to consent to voluntary settlements, it needed
to say so explicitly. Otherwise, we must follow our usual
14
procedure of reading the statute and enforcing its dictates if its
language is clear.
The statutory language relied on by the government is as
unambiguous as one can expect: “The action may be dismissed only if
the court and the Attorney General give written consent to the
dismissal and their reasons for consenting.” Unlike the
Killingsworth court, we can find nothing in § 3730 to negate the
plain import of this language.
Section 3730(b)(4)(B) gives the relator “the right to conduct
the action” when the government declines to assume control. But it
does not follow that “[t]he right to conduct the action obviously
includes the right to negotiate a settlement in that action.” 25
F.3d at 722. A relator has “conducted” an action if he devises
strategy, executes discovery, and argues the case in court, even if
the government frustrates his settlement efforts. Apparently, a
relator “conducts” an action even though the government retains the
power to take the more radical step of unilaterally dismissing the
defendant. See 31 U.S.C. § 3730(c)(2)(A); Juliano v. Federal Asset
Disposition Ass’n, 736 F. Supp. 348, 351 (D.D.C. 1990) (“[T]he Act
[does not] state that the qui tam plaintiff remains free to
prosecute any person or entity he wishes, provided the government
declines to take over the action.”), aff’d, 959 F.2d 1101 (D.C.
Cir. 1992) (mem.). The power to veto voluntary settlements, then,
does not conflict with the relator’s statutory right to control the
litigation when the government chooses to remain passive. Section
3730(d)(2) states that “the person bringing the action or settling
15
the claim shall receive an amount which the court decides is
reasonable for collecting the civil penalty and damages.” But
again, the government’s power to block settlements does not mean
that the relator will never be the person settling the claim. This
provision does not purport to create an iron-clad “right to
settle.” See Killingsworth, 25 F.3d at 722-23.
The Killingsworth litigation demonstrates that relators can
manipulate settlements in ways that unfairly enrich them and reduce
benefits to the government. This case presents a relator who
allegedly wants to trade on the defendants’ desire to maximize
preclusive effects. Plaintiffs ordinarily prefer to keep their
options open; agreeing not to bring future suits can be costly. In
qui tam litigation, however, there is a danger that a relator can
boost the value of settlement by bargaining away claims on behalf
of the United States. According to the government, that’s what
Bortner is attempting: at little cost to himself, he is reaping the
benefit of promising that the United States will not make further
claims against Philips based on the transactions and occurrences at
issue in his suit. If the government decides the settlement isn’t
worth the cost, § 3730(b)(1) allows the government to resist these
tactics and protect its ability to prosecute matters in the future.
For more than 130 years, Congress has instructed courts to let
the government stand on the sidelines and veto a voluntary
settlement. It would take a serious conflict within the structure
of the False Claims Act or a profound gap in the reasonableness of
16
the provision for us to be able to justify ignoring this language.
We can find neither.
IV.
The district court’s settlement order and voluntary dismissal
are VACATED, and the case is REMANDED for further proceedings.
17