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Should Third-Party Funders Be Able to Cash in on Whistleblower Cases?

Nov. 4, 2020, 9:01 AM

As third-party litigation funding proliferates in the U.S., so too does the debate. Concerns about such practices are particularly acute in False Claims Act cases, in which relator-plaintiffs are allowed to pursue big financial payouts on behalf of the federal government.

The Eleventh Circuit was among the first to wade into that specific controversy when it issued its decision this summer in Ruckh v. Salus Rehabilitation LLC, holding that relators do not lose standing by entering into litigation-funding agreements. While the Ruckh decision will likely provide a guidepost for other courts, its analysis leaves some questions unanswered and is unlikely to be the last word.

The Ruckh Decision

In Ruckh, a False Claims Act relator brought a False Claims Act qui tam action against nursing home facilities for the submission of fraudulent Medicare claims. At trial, a jury awarded over $340 million in damages. The nursing homes appealed the verdict, arguing, in part, that the relator lacked standing to pursue a qui tam action because she entered into a litigation-funding agreement through which she offered up to 4% of any recovery to an investor in exchange for immediate funding.

The nursing homes also argued that the False Claims Act does not permit assignment of interests through litigation-funding agreements and that the litigation funder was an improper relator.

The Eleventh Circuit rejected these arguments and held that the relator maintained standing because she gave “only a small interest” to the funder and, per the agreement, the funder had no authority to influence the litigation.

As to the language of the False Claims Act, the Eleventh Circuit turned the defendants’ argument around, holding that the lack of an express statutory prohibition against litigation-funding agreements means that they are permissible. In support of its ruling, the court noted several exclusions that do apply, such as when the relator is involved in the underlying fraud, and “decline[d] to interfere in Congress’s legislative prerogatives by engrafting any further limitations onto the statute.”

Finally, the court said that the litigation funder’s qualifications as a relator are irrelevant to the litigation because the relator herself is the one maintaining the qui tam action.

Questions After Ruckh

Given the importance of the issues presented, the Ruckh decision is unlikely to be the final word on such funding arrangements and future litigants will likely continue to press several arguments:

First, permitting litigation funding is contrary to the False Claims Act’s requirement that a relator possess non-public information. Litigation-funding companies, before deciding to make an investment in any particular case, will almost certainly want to know what information the relator has in assessing whether to provide funding.

When the relator discloses non-public information to the litigation funding company, it becomes “public.” Not only does publicizing the information potentially violate a statutory requirement, it subverts the policy goals underlying the False Claims Act’s public disclosure bar.

Second, as the defendants argued in Ruckh, litigation funding requires a partial re-assignment of rights to the funding company. A relator’s right to bring a qui tam action as an assignee of the U.S. is granted by statute. Nothing in the False Claims Act suggests that a relator has the right to re-assign his or her statutory rights to another party.

The Eleventh Circuit relied on this silence in ruling that re-assignment is permitted, but given how closely tied the standing of the relator is with the incentive structures established by the statute, allowing third-party funders to significantly influence those incentives raises serious questions about how such arrangements can be reconciled with the False Claims Act’s other provisions and underlying policy.

Third, the Ruckh decision feeds into a widening circuit split regarding the government’s discretion to dismiss False Claims Act cases. Although some courts have ruled that the government essentially has unfettered discretion to dismiss lawsuits relators have filed on its behalf, other courts have placed limits on the government’s unilateral ability to dismiss.

And if the government as the real party in interest is unable to dismiss the case, third-party funders could weaponize the False Claims Act to extract sizable settlements in which the government lacks an actual interest; thus, such a model risks turning the False Claims Act’s incentive structure on its head.

The government, litigants, and legal observers will closely monitor how other courts address these important arguments in future cases.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Eric Christofferson is an experienced litigation and compliance lawyer in DLA Piper’s Boston office and is a member of the firm’s white collar group. He represents corporations and individuals in government investigations, internal investigations, criminal and regulatory proceedings, and civil litigation.

Ilana H. Eisenstein is co-chair of DLA Piper’s appellate advocacy practice in the Philadelphia office. She has argued five cases in the U.S. Supreme Court, including cases involving novel questions of statutory interpretation and constitutional law and procedure. She is a former assistant to the solicitor general and a former federal prosecutor with experience at every stage of litigation—from investigation, through trials, appeals, and the U.S. Supreme Court.

Jamie Kurtz is a Boston-based associate with DLA Piper’s Litigation, Arbitration and Investigations practice.

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