Court to decide FCA liability for local governments

The Supreme Court may rein in the government’s application of the False Claims Act (FCA) when it hears Cook County, Illinois v. United States ex rel. Chandler in its next session. The question before the court is whether local governmental entities, which traditionally are considered to be immune from punitive liability, are subject to liability under the civil FCA, says John Boese of Fried Frank in Washington, DC.

Boese says private entities will be watching to determine if the court will expand on, or back away from, its watershed holding in Vermont Agency of Natural Resources v. United States ex rel. Stevens that the current version of the FCA imposes damages that are "essentially punitive in nature." In that case, the Supreme Court held that State entities are not "persons" subject to qui tam liability under the FCA.

While the court’s decision will directly affect local government and quasi-government entities, Boese says it also will be closely watched by private entities subject to FCA enforcement, including health care providers.

Because significant amounts of money filter from the federal government through local governments, municipal and other local governmental entities have been the targets of an increasing number of qui tam FCA suits," says Boese.

Robert Homchick of Davis Wright Tremaine in Seattle says, "There is a lot of activity going on out there trying to extend Stevens in a variety of different ways. There are many issues about when is the state the state," he explains. "To the extent that the Supreme Court draws the distinction between state and other municipal entities, that will provide some guidance on just how broad the Stevens exception is going to be drawn."

Many states have public hospital districts or the functional equivalent, where counties can own and run hospitals, notes Homchick. "For example, in Washington state, you form a municipal corporation and public hospital districts have taxing authority and their commissioners are elected," he says. "That sort of governmental entity would not be in the scope of the False Claims Act statute."

The court declined to review a case presenting the same issues earlier this year dealing with local governments. But a growing split among the circuits has developed, demonstrating a more urgent need for Supreme Court review, says Boese.

In Chandler, the panel acknowledged that FCA damages now are considered to be punitive, and that municipalities are generally presumed to be immune from punitive damages, Boese says. "Nevertheless, the court concluded that there is no indication that Congress intended to exempt municipalities from liability under the FCA."

"District courts are similarly split on the issue, but a majority of courts have held that local governmental entities are not subject to liability under the False Claims Act, because the act imposes punitive damages," adds Boese. "With much at stake, both economically and politically, the Chandler case will be one of the more closely watched cases before the Supreme Court during the next term."