When Evaluating a Release of FCA Claims, Sequence Can Make All the Difference

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Meet Peter Fabien.  Until recently, Peter worked as an engineer at a company that makes tank parts for the United States military.  Last June, he discovered that his employer was knowingly delivering substandard parts and hiding the defects using falsified test results.  Peter alerted upper management, and was fired for his trouble.  Incensed, he hired an employment lawyer to protest his termination.  The employment lawyer negotiated a lump sum payment from the company, but in exchange the company insisted that Peter sign a release promising not to file any lawsuits alleging violations of the False Claims Act (FCA).  Is the release enforceable?  Federal courts increasingly hold that, in many cases, the answer is no.

To start, it is useful to distinguish between post-filing releases and pre-filing releases.  Post-filing releases are releases an employee signs after filing suit under the FCA.  Courts generally invalidate post-filing releases on the ground that an FCA action “may be dismissed only if the court and the Attorney General give written consent to the dismissal.”  31 U.S.C. § 3730(b)(1).  In other words, once an FCA action is filed, the citizen-plaintiff (relator) and defendant cannot unilaterally end it by private agreement.

Pre-filing releases are releases an employee signs before filing suit under the FCA.  The validity of these releases generally turns on an application of the government-knowledge rule. 

The government-knowledge rule states that if the government did not know about a given fraud when the employee signed the release, the release cannot foreclose a later FCA suit bringing that fraud to light.  The rationale for this rule is public policy.  Although the law typically enforces freely made contracts, the public has an overriding interest in exposing fraud on the government.  So when a release destroys the incentive to report a fraud about which the government is unaware, it must yield to the public interest.  If the government already knows about the fraud, however, encouraging disclosure serves no public interest and the sanctity of contract prevails.[1]

To illustrate, let’s return to our hypothetical engineer.  Suppose that Peter Fabien’s complaint to upper management prompted the company to disclose its misconduct to the Department of Defense, which then conducted a comprehensive investigation with Peter’s assistance.  In that instance, the government-knowledge rule would probably point toward enforcing the release, because, by the time Peter signed the release, the government had complete knowledge of the alleged misconduct.   

Now suppose that the company’s self-disclosure was partial and misleading, and that Peter was shut out of the agency’s investigation.  In that case, the government-knowledge rule would probably point toward invalidating the release.  The government was not fully informed of the alleged misconduct when Peter signed the release, so public policy demands that he have every incentive to reveal what he knows.

These sequencing rules are easy to get wrong.  To ensure that their rights are fully protected, potential relators should remember the following sequencing rule above all others: consult with experienced FCA counsel before signing any release.

 

[1]              For cases discussing and applying the government-knowledge rule, see United States ex rel. Green v. Northrop Corp., 59 F.3d 953 (9th Cir. 1995); United States ex rel. Hall v. Teledyne Wah Chang Albany, 104 F.3d 230 (9th Cir. 1997); United States ex rel. Ritchie v. Lockheed Martin Corp., 558 F.3d 1161 (10th Cir. 2009); United States ex rel. Longhi v. United States, 575 F.3d 458 (5th Cir. 2009); United States v. Purdue Pharma L.P., 600 F.3d 319 (4th Cir. 2010); United States ex rel. Ladas v. Exelis, Inc., 824 F.3d 16 (2d Cir. 2016); United States ex rel. Class v. Bayada Home Health Care, Inc., No. 16-cv-680, 2018 WL 4566157 (E.D. Pa. Sept. 24, 2018).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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