Environmental Qui Tam Actions: Ongoing Litigation and Recent Settlements Show Potential Risks

When a company is alleged to have committed such violations as falsifying a barge’s oil record book or acting fraudulently under hazardous waste regulations, a federal or state environmental enforcement action is expected. But can that conduct also subject the company to False Claims Act (FCA) liability? The answer can be yes. Long-running litigation and recent settlements illustrate how the FCA and its state analogues can be brought to bear on environmental issues.

FCA Fundamentals

The FCA is the main statute used by the Department of Justice and whistleblowers to recover damages for false or fraudulent claims submitted to the government. ¹31 U.S.C. §3729 et seq. This Civil War-era law deputizes private-citizen whistleblowers, called relators, to bring actions against entities that defraud the government. It also provides for those citizens to recover a portion of the money obtained fraudulently. ²The False Claims Act, 31 U.S.C. §3729 et seq., includes a qui tam provision (from a Latin phrase meaning “he who brings a case on behalf of our lord the King, as well as for himself”), which permits a private person—known as a whistleblower or a relator—to file a lawsuit under seal on behalf of the United States where the defendant is believed to have knowingly submitted or caused the submission of false or fraudulent claims to the United States. The complaint and all other filings in the case remain under seal for a period of at least 60 days. For an overview of litigation under the False Claims Act, see http://www.justice.gov/usao/pae/Civil_Division/InternetWhistleblower%20update.pdf. This can mean big money. A whistleblower can take home up to 30 percent of total damages. And total damages can be high because the FCA authorizes treble damages in addition to a mandatory penalty of $5,500-$11,000 for every false claim submitted.

Given the potential for large payouts, perhaps it is not surprising that most FCA cases are initiated by whistleblowers. The government, however, can also independently initiate cases. According to Department of Justice statistics, ³Fraud Statistics-Overview (Dep’t of Justice, Dec. 23, 2013), available at http://www.justice.gov/civil/docs_forms/C-FRAUDS_FCA_Statistics.pdf. in 2003 there were 334 new FCA whistleblower cases filed, but only 92 FCA non-whistleblower cases. Ten years later, in 2013, the non-whistleblower new matters remained almost constant at 93 but the number of whistleblower cases more than doubled to 753, making up fully 89 percent of all new civil fraud cases opened by the Justice Department.

In a whistleblower case, the FCA requires a whistleblower to file a complaint under seal and provide a copy to the local U.S. attorney’s office and the U.S. attorney general. The statute allows for the complaint to remain under seal for 60 days while the United States investigates and decides whether to intervene in the case, thereby taking it over. According to Stuart Delery, then-assistant attorney general for the Civil Division, DOJ declines 80 percent of whistleblower cases. ⁴“For every ten cases filed by relators, the government ultimately intervenes in only two.” Justice News: Acting Assistant Attorney General Stuart F. Delery Speaks at the American Bar Association’s Ninth National Institute on the Civil False Claims Act and Qui Tam Enforcement, Washington, D.C., Dep’t of Justice, http://www.justice.gov/iso/opa/civil/speeches/2012/civ-speech-1206071.html, (June 7, 2012). The whistleblower can go forward with the litigation even if the United States declines to intervene. Although DOJ does not release information about the number of cases in which whistleblowers decide to proceed after the government has declined to intervene, there is no doubt that number is increasing.

Despite the FCA’s provision of a 60-day seal and decision period for the government to review and evaluate a case, the government rarely observes this time limit. The United States usually requests and receives at least one extension of time. As a result, an FCA complaint is usually under seal for an extended period, often years. While the complaint is under seal, and usually before the defendant knows it is a defendant in a filed lawsuit, the government is required to investigate the complaint’s allegations. It often does so by requesting documents from the defendants and others and interviewing witnesses either informally or through a more formal deposition-like process.

And who are the whistleblowers? Pretty much everyone and anyone can be one. The whistleblower community includes former or current employees and industry competitors. Much to DOJ’s chagrin, even federal employees are included in the group of potential whistleblowers. ⁵According to a recent Fifth Circuit decision, the question—“Is a federal employee, even one whose job it is to investigate fraud, a ‘person’ under the False Claims Act such that he may maintain a qui tam action?”—should be answered in the affirmative. Little v. Shell Exploration Co., 690 F.3d 282, 2012 BL 191940 (5th Cir. 2012). In that case, the whistleblowers, auditors whose job duties included uncovering theft or fraud, discovered the facts underlying their suit as part of their official duties. Despite the amicus brief filed by the United States urging the court to bar whistleblower suits by “government employees who discover wrongdoing in the scope of their official duties,” the Court concluded there was no basis to exclude federal employees. And a whistleblower can even be someone who participated in the fraud, as long as that person was not convicted of a crime based on his or her actions. The FCA also includes a provision protecting whistleblowers from retaliation.

While many FCA cases originate with whistleblowers who are employees working for government contractors, other types of FCA cases are possible. The government can initiate an FCA action based on evidence of fraud or a false claim, whether or not the evidence of fraud or falsity comes from a whistleblower. And an FCA action can also target an entity receiving federal money in a variety of ways—for example as grants—not just prime or sub-prime government contractors. A privatized utility receiving federal funds, for example, could be subject to an FCA action if environmental compliance was a condition of the utility’s federal funding and if the government found evidence that the company had falsely certified environmental compliance. In such a situation, an FCA action could proceed in parallel with a federal criminal prosecution. In fact, the Department of Justice officially encourages such parallel proceedings. ⁶U.S. Attorney’s Manual, Coordination of Parallel Criminal, Civil, Regulatory, and Administrative Proceedings, available at http://www.justice.gov/usao/eousa/foia_reading_room/usam/title1/12mdoj.htm.

FCA liability does not require proof of intentional fraud. Liability can be based on a simpler showing of knowing submission of a false claim. Knowing, in this sense, means that a person:

• (1) has actual knowledge of the fraud or falsity of submitted information,
• (2) acts in deliberate ignorance of the truth or falsity of submitted information or
• (3) acts in reckless disregard of the truth or falsity of submitted information.

Reckless disregard, in turn, has been compared to gross negligence. Liability does not require specific intent to defraud. Claims can be considered false or fraudulent because they are factually false (e.g., you billed for services you did not perform, or you certified that you would meet a certain level of performance but in fact performed at a different level) or legally false (e.g., you violated the Anti-Kickback Act and therefore the FCA).

In addition to FCA claims, a company in these circumstances could also be subject to debarment from federal contracts and to state actions under either the state version of the FCA or consumer protection laws. There are now 28 states, as well as some cities and counties, that have enacted some type of false claims act. Some states aggressively use their versions of the FCA to enforce environmental obligations.

Overview of Environmental FCA Litigation

Environmental FCA litigation began in earnest with the decision by the U.S. District Court for the Western District of Wisconsin in United States ex rel. Fallon v. Accudyne Corp., 880 F. Supp 636, 41 ERC 1317 (W.D. Wis. 1995). In Fallon, the Atlantic States Legal Foundation and several individuals alleged that a contractor had made false claims for contract payments. The relators alleged that Accudyne had represented that its bid price included costs of environmental compliance, but that the company had failed to comply with applicable environmental statutes. The relators thus alleged that defendant Accudyne’s payment requests were fraudulent and that it had falsely certified compliance with environmental requirements to induce payment. The court rejected Accudyne’s arguments that relators had failed to state an FCA claim and that environmental law precluded an FCA claim. Id. at 640. The case ultimately settled for $12 million, 22 percent of which went to the relators.

In the years since Fallon, a small but steady stream of decisions has reaffirmed the viability of environmental qui tam actions. Ongoing FCA litigation involving Lockheed Martin demonstrates both the potential length of FCA litigation and how FCA claims can be combined with other environmental claims. The Lockheed Martin case ⁷United States ex rel. Natural Res. Defense Council, v. Lockheed Martin Corp., No. 5:99 CV00170-M (W.D. Ky.)., which relates to alleged conduct going back more than 20 years, was commenced in 1999, when the Natural Resources Defense Council, its director, a plant manager and two former employees brought a qui tam lawsuit under the FCA, raising allegations that Lockheed Martin had improperly stored hazardous waste and shipped hazardous waste off-site without proper permits—and had made false statements relevant to these actions in violation of the FCA. The allegations related, in part, to a government-owned plant operated by Lockheed Martin that enriched uranium for use in the nuclear industry. In 2003, following a grand jury investigation, the United States intervened in the FCA suit and filed a multi-count complaint combining numerous alleged RCRA violations (for which it sought statutory penalties) with a count alleging violation of the FCA for statements and conduct during the period 1993-1999 (for which it sought treble damages and per-claim penalties). In essence, the government based the FCA section of its complaint on allegations that Lockheed failed to report RCRA violations truthfully, concealed information about the nature, degree and circumstances of RCRA noncompliance and provided the false impression that it was effectively implementing RCRA requirements. Although the discovery phase of this 1999 case began 10 years ago (in 2005), the litigation continues.

In recent months, the litigation has centered around allegations relating to a pipe and pump structure alleged to have diverted uranium-contaminated waste from a holding pond and to have contaminated a drainage ditch. The complaint alleges that in 1995, after employees raised concerns about this diversion of wastes, Lockheed Martin told the Department of Energy site manager that concerns over the ditch were “questionable” and that “[a]n in-depth site characterization of the area failed to reveal any contamination.” According to Lockheed Martin’s recent motion to preclude introduction of evidence, the United States identified this statement as an alleged false statement for the first time in June 2014. Lockheed Martin argued that this “eleventh hour” disclosure was not timely and asked the court to preclude any evidence relating to this issue. This past November, however, Magistrate Judge Lanny King of the U.S. District Court for the Western District of Kentucky—while agreeing with Lockheed Martin that the United States had violated the timely disclosure requirements of Rule 26(e) of the Federal Rules of Civil Procedure—recommended that the appropriate sanction would be an extension of time for discovery rather than the exclusion of evidence. On Dec. 8, 2014, the court adopted Magistrate Judge King’s recommendations, extending discovery but imposing no other sanction on the government.

In addition to Lockheed, another significant FCA decision involved radioactive material. In United States ex rel. Stone v. Rockwell Int’l Corp., a jury awarded $4.2 million in a qui tam action against Rockwell International, based on allegations that the company concealed environmental and other problems from the Department of Energy at Rocky Flats—the former nuclear weapons-manufacturing site—“throughout the 1980s,” and presented fraudulent claims for payment, including applications for bonuses. ⁸United States ex rel. Stone v. Rockwell Int’l Corp. 282 F.3d 787, 793-94, 53 ERC 1230 (10th Cir. 2002).

More recently, the U.S. Court of Appeals for the Tenth Circuit reinstated an FCA action in which relators alleged that the defendant contractor violated a variety of state and federal environmental regulations by mismanaging hazardous waste, and in so doing violated its contractual obligations to the government. ⁹See United States ex rel. Lemmon v. Envirocare of Utah Inc., 614 F.3d 1163 (10th Cir. 2010).

Additionally, multiple federal contractors have settled FCA claims based on allegations that they violated the Clean Water Act by dumping oily bilge and other material and failing to maintain oil record books accurately. ¹⁰See United States ex rel. Marcy v. Rowan Companies, Inc., 2010 BL 179381 (E.D. La. 2006); Pickens v. Kanawha River Towing, 916 F. Supp. 702, 705 (S.D. Ohio 1996).

A number of FCA cases, both federal and state, were resolved in the past year. In a case involving the FCA retaliation provisions, in November 2014, the Sixth Circuit rejected a landfill manager’s claim that EnergySolutions Inc. violated the FCA in failing to hire him based on his prior whistleblowing activity. At a previous job, the landfill manager had reported environmental violations—activity which all parties to the subsequent litigation agreed had been protected. The Sixth Circuit rejected the plaintiff’s claims that the FCA also protected him as a job applicant, holding that the FCA’s protections extended only to employees—which, as a job applicant, he was not. ¹¹See United States ex rel. Marcy v. Rowan Cos., 772 F.3d 1056, 1062, 2014 BL 323854 (6th Cir., Nov. 18, 2014).

Companies that contract or subcontract with the government to perform environmental services can also be subject to the same types of FCA allegations as any other government contractor. In a case with both criminal and civil aspects, in November 2014, a Superfund contractor, Sevenson Environmental Services Inc., agreed to pay more than $2.7 million to resolve an FCA case in which relators alleged that the company had solicited and accepted kickbacks from six companies in exchange for the award of subcontracts for work at a Superfund site. ¹²Press Release, Dep’t of Justice, Sevenson Environmental Services Inc. Agrees to Pay $2.72 Million to Settle Claims of Alleged Bid-Rigging and Kickbacks, available at http://www.justice.gov/opa/pr/sevenson-environmental-services-inc-agrees-pay-272-million-settle-claims-alleged-bid-rigging (Nov. 17, 2014). Relators also alleged that Sevenson had conspired to pass on the kickback costs to EPA and had conspired with one subcontractor to pass on to EPA inflated charges for soil disposal. In a separate criminal case, two site managers, as well as a number of subcontractors and several of their executives, were convicted and sentenced to varying prison terms as a result of the scheme.

In an example of state FCA environmental enforcement, Massachusetts in 2014 used its version of the FCA to settle allegations of environmental violations against two companies. In December, an environmental services company agreed to settle allegations that it falsified tests for the inspection and repair of sewers and drain pipes, improperly billed for removal of sewage water and dumped sewage sludge and wastewater improperly. ¹³See Environmental Services Company to Pay Over $650,000 to Settle Alleged Violations Under False Claims and Clean Water Acts, available at http://www.mass.gov/ago/news-and-updates/press-releases/2014/2014-12-23-nwmc-false-claims-judgment.html. Earlier in 2014, Shell Oil agreed to settle allegations under the Massachusetts FCA that it received reimbursement payments from a state fund for environmental cleanup projects even though the company sought and received payments from its insurers for the same gas station sites. ¹⁴See Kira Lerner, Shell to Pay $4M in FCA Suite over Cleanup Double-Dipping, Law360, Feb. 27, 2014.

Massachusetts had previously resolved similar FCA claims against a number of other companies for similar conduct.

Outlook for Environmental FCA Cases

Given the success of past whistleblower FCA cases and the increasing interest in such cases as potential revenue generators, relators (and their lawyers) may turn their focus to areas, such as environmental cases, that have not yet received much attention. Publicity about large awards to whistleblowers is bound to inspire both current and former employees of government-funded companies engaged in environmental work to file whistleblower complaints. ¹⁵Press Release, Dept. of Justice, : Justice Department Recovers Nearly $6 Billion from False Claims Act Cases in Fiscal Year 2014, available at
http://www.justice.gov/opa/pr/justice-department-recovers-nearly-6-billion-false-claims-act-cases-fiscal-year-2014 (Nov. 20, 2014)

Of course, the FCA does not suit everyone’s purpose. Environmental groups may be unlikely to use the FCA as a litigation tool because the ultimate relief in a qui tam action consists of payment to the government and the whistleblower rather than injunctive relief that could guarantee correction of the original problem. Additionally, the government’s right to intervene and supplant original relators may dissuade environmental advocacy groups from using the FCA. Nonetheless, the FCA probably will still be utilized in environmental contexts, in large part because the incentives for whistleblowers are exceedingly strong.

In addition to whistleblower-initiated cases, the Justice Department may pursue FCA environmental cases on its own. The current administration has placed emphasis on recovering large settlements and judgments under the FCA; last fall, DOJ issued a statement touting its record recovery of almost $6 billion from FCA cases. ¹⁶Id. With this focus on FCA recoveries, it would not surprise us to see DOJ utilize the FCA for more environmental cases, perhaps, for example, in the context of federally funded, highly regulated private utilities. ¹⁷In non-environmental contexts, utilities have been targeted in FCA actions. See Ellis Smith, EPB faces second whistleblower lawsuit as Red Bank, East Ridge join in, Chattanooga Times, 2014 WLNR 26679552.

Given the potential FCA risk, companies with potential environmental exposure should consider the FCA implications of suspected environmental violations, as well as the potential environmental penalties. Several options are available to companies interested in reducing the risk of environmental FCA liability. A compliance audit may be an appropriate first step. Such an audit may result in recommendations for improvements to environmental compliance programs, which can help prevent any actions that could provide the basis for FCA claims. In situations where potential issues have already arisen, companies may consider voluntary disclosure to the government. Although such a disclosure has many implications and must be considered carefully, it can significantly reduce the likelihood that a successful qui tam action could be brought and can significantly reduce the potential penalties and multiplier for damages, as well as frame the discussion for calculation of actual damages.