In an op-ed published by Law360, Phillips & Cohen attorneys Stephen Hasegawa and David Jochnowitz examine how recent attacks on litigation funding by False Claims Act defense firms undermine whistleblowers and the False Claims Act.
The False Claims Act defense bar’s latest effort to help companies accused of defrauding the government escape accountability comes in the form of a cynical attack on litigation funding that may be used by whistleblowers and law firms who bring FCA cases.
In an effort to respond to recent arguments calling into question the legitimacy of third-party litigation funding, including those reported in a recent Law360 article, this article will explain how the funding process actually works, why it is a good thing for relators and the government, and address concerns raised by several members of the defense bar in the Law360 piece.
Those concerns include worries introducing another party into FCA suits may be dangerous to the way the False Claims Act operates, hand-wringing over the motivations of whistleblowers who allege fraud against the government, and unfounded speculation about litigation funding’s impact on witnesses’ bias or credibility.
Defense lawyers also have argued, including in Law360, that litigation funding will lead to a glut of frivolous lawsuits and will corrupt the motives of whistleblowers.
The FCA defense bar has spent decades trying to limit the scope of the FCA, which allows whistleblowers to sue companies and individuals who defraud the government and to recover damages on the United States’ behalf. When qui tam cases are successful, whistleblowers can share in 15% to 30% of the recovery, depending on a number of factors, including whether the whistleblower pursued the case without government intervention.
FCA whistleblower cases have forced wrongdoers to return more than $45 billion to the US Treasury and pay billions more in related criminal fines. Not surprisingly, the FCA is the United States’ most important civil fraud enforcement law.
Recent attacks on litigation funding attempt to shut down whistleblower cases by starving them of funds and by increasing the financial hardship whistleblowers endure.
Litigation funding helps even the playing field in FCA litigation, where whistleblower counsel commonly face extremely well-funded defendants represented by multi-billion-dollar law firms and where whistleblowers are often unable to make ends meet because of employer retaliation.
cases can take years, sometimes a decade or more, to resolve. This is a very long time for a client to go with little or no income, or for a whistleblower law firm working under a contingency fee to go without payment. Unlike defense firms, which generally are paid by their client monthly, whistleblower firms working under a contingency fee are only paid if and when their clients receive an award.
FCA defense counsel are pressing their attack on litigation funding in a recent Eleventh Circuit appeal. In July, defendants in United States of America ex rel. Ruckh v. CMC II, LLC, et al. requested an en banc rehearing, arguing that litigation funding in FCA cases is an unconstitutional and illegal practice.
The jury found that defendants unlawfully obtained $115 millionfrom the government. Following the jury verdict, the whistleblower Angela Ruckh entered into a contract to provide a small portion of her potential award to a litigation funder in exchange for immediate funds, though she did not grant the funder any right to control or influence the litigation.
The trial court threw out the jury’s verdict, but an appellate court later reinstated more than $85 million in damages, plus the mandatory trebling and penalties required by the FCA.
In reinstating most of the verdict, a three-judge panel of the Eleventh Circuit rejected defendants’ argument that the relator’s agreement to give a portion of her award to a litigation funder was illegal and required dismissal. But the defendants are still trying to leverage the whistleblower’s funding agreement, which, as the Law360 article referenced above mentioned, is likely worth at most a few million dollars, to avoid hundreds of millions of dollars in liability for defrauding the federal government.
The defendants’ request for en banc review presses the argument that the whistleblower’s funding agreement was a clandestine, malicious, and corrupting arrangement that gives the funders governmental powers in violation of the law, the Constitution and public policy.
As the original Eleventh Circuit panel held, the Ruckh relator’s assignment of a portion of her relator’s share was neither unconstitutional nor a violation of the FCA.
The history of the FCA proves the appeals court’s point. For decades, courts and Congress have been aware that virtually all FCA whistleblower cases are pursued under contingency-fee arrangements that assign a portion of the whistleblower’s interest to attorneys. Courts have consistently enforced those arrangements, and Congress has never seen the need to prohibit them.
In fact, recent attacks on litigation funding may be ambitious and disguised steppingstones to eliminating contingency-fee arrangements, which would hobble, if not destroy, the ability of whistleblowers to bring qui tam cases –a result Congress clearly did not intend.
The consequences for the Government’s fraud enforcement efforts would also be dire. Whistleblower cases represent the vast majority of the Department of Justice’s civil fraud recoveries, and the Government greatly benefits from the ongoing assistance of whistleblower counsel during the prosecution of qui tam matters.
In the recent Law360 article referenced above, one defense counsel was quoted as stating that: To introduce another party into this equation that may be driven entirely by other motivations is, I think, dangerous to the way the False Claims Act operates and the structure of it
However, litigation funding does not disrupt the FCA’s statutory balance of power between the Government and the qui tam relator. Among other things, the Government maintains the right to control intervened litigation, to intervene in initially declined cases, to seek dismissal of cases it believes are meritless, and to settle cases over the whistleblower’s objections
The same attorney noted that, as former government counsel, he would have significant concerns if he learned that the relator was using a third-party funder because it would cause him to question the relator’s motivation.
The overwhelming majority of relators are motivated by a desire to see justice done, to prevent fraud and to recover taxpayer funds for the government. Relators are motivated to seek third-party funding because of a need to see their case through so that they can accomplish their goals in bringing the qui tam suit in the first place.
There is no risk that litigation funding will lead to a flood of frivolous lawsuits. As Ruckh’s case shows, litigation funders invest in strong cases, not frivolous ones. Funders have no interest in wasting money in cases that have little or no prospect of success.
The article also referenced a 2017 litigation finance survey which indicated there had been a 28% increase in the use of funding since 2016, and a 414% increase compared to 2013. Notwithstanding that the numbers are not specific to qui tam matters, the fact that more third-party funders are getting involved in such cases could be a very positive thing for both relators and the government.
Relators will be able to craft reasonable terms in their agreements with funders that protect the relator’s and the government’s interests, and offer the relator fair monetary terms so that they are more likely to pursue meritorious claims on the government’s behalf.
The real reason that the defense bar objects to litigation funding is that it equalizes some of the enormous advantages they enjoy in whistleblower litigation. It takes time and tremendous resources for both whistleblowers and defendants to litigate FCA cases. Nine years to litigate a qui tam matter, as is the case so far for Ruckh, is not uncommon.
Companies accused of defrauding the government benefit from this lengthy timeline. They generally have access to deep corporate pockets, capital markets, and highly paid lawyers and experts.
Indeed, according to The American Lawyer, two of the firms that represented some of the defendants in Ruckh, Akin Gump and Skadden, had 2019 revenues of $1.1 billion and $2.6 billion, respectively. Sidley Austin LLP, referenced in the Law360 article discussing Ruckh, had revenue of $2.3 billion in 2019.
By contrast, whistleblowers usually are represented by small law firms operating on contingency fee arrangements. Litigation funding can help close the resource gap between defendants and whistleblowers, which is exactly why the defense bar has it in its sights.
The FCA has been wildly successful, and the Act’s qui tam provisions that allow whistleblowers to bring suit especially so. The results—billions in recoveries, and a huge deterrent to future fraud—speak for themselves. Ruckh alone currently looks to return not just the $85 million reinstated on appeal, but triple damages and penalties as well.
This new effort to undermine the FCA by those who represent alleged fraudsters is yet more evidence that defendants know the most effective way to beat meritorious whistleblowers is to keep them out of court. Thankfully, the FCA is not going anywhere.
Read the op-ed, “Litigation Funding Attacks Pose Threat to FCA“, on Law360’s website