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“Litigation funding attacks pose threat to qui tam cases”

Defense attorneys’ legal maneuvers to stop litigation funding are a cynical ploy to block whistleblower cases, say Phillips & Cohen associate Dave Jochnowitz and partner Steve Hasegawa. In an analysis for Law360, they make a strong case for continuing to allow qui tam whistleblowers the option of litigation funding.

Note: This is an edited version of the article that was published in Law360.

Litigation funding attacks pose threat to qui tam cases

By Dave Jochnowitz and Steve Hasegawa

Phillips & Cohen LLP

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 that bring qui tam cases.

The defense bar’s stated concerns about litigation funding, as reported in the recent Law360 article, “3rd-Party Funding Ruling Opens Door For FCA Case Flood,” include worries that introducing another party into qui tam 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 that litigation funding will lead to a glut of frivolous lawsuits and will corrupt the motives of whistleblowers.

The defense bar has spent decades trying to limit the scope of the False Claims Act, 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.

False Claims Act 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 False Claims Act 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 False Claims Act 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.

Qui tam 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 clients monthly, whistleblower firms working under a contingency fee are only paid if and when their clients receive an award.

Defense counsel are pressing their attack on litigation funding in a recent Eleventh Circuit appeal. In July, defendants in US ex rel. Ruckh v. CMC II, LLC, et al. requested an en banc rehearing, arguing that litigation funding in False Claims Act cases is an unconstitutional and illegal practice.

The Ruckh jury found that defendants unlawfully obtained $115 million from the government. Following the jury verdict, the whistleblower 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 False Claims Act.

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 Ruckh defendants are still trying to leverage the whistleblower’s funding agreement, 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 False Claims Act.

The history of the False Claims Act proves the appeals court’s point. For decades, courts and Congress have been aware that virtually all False Claims Act 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 stepping-stones 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.

Further, litigation funding does not disrupt the False Claims Act’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.

Nor is there a risk that litigation funding will lead to a flood of frivolous lawsuits. As Ruckh shows, litigation funders invest in strong cases, not frivolous ones. Funders have no interest in wasting money on cases that have little or no prospect of success.

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 False Claims Act 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 False Claims Act has been wildly successful, and the law’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 False Claims Act 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 False Claims Act is not going anywhere.

The published version of this article, “Litigation funding attacks pose threat to FCA,” can be found at Law360. (Subscription required.)

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