April 2007

The Supreme Court ruled that a qui tam informant cannot receive compensation if he lacked “direct and independent knowledge of the information upon which his allegations were based.” The Court’s ruling substantially increases the risk faced by a qui tam plaintiff, and therefore lessens the financial incentive for potential whistleblowers to come forward. Prior to the certain smaller recoveries that this case will cause, whistleblower suits annually returned about $3 billion to the government.

Even though it won, the defendant (Rockwell) must still pay the entire $4.2 million fine. The issue before the Court was only whether the whistleblower plaintiff (a former employee named James Stone) would collect a quarter of the fine under the False Claims Act.

In June 1987, more than a year after he left Rockwell’s employ, Stone approached government investigators with information about the defendant’s environmental violations. Stone provided the FBI with 2,300 pages of documents, including his 1982 engineering report predicting that Rockwell’s design would not work. In part based on Stone’s comments, the FBI and EPA raided Rockwell’s facility in June 1989 (two years later). News accounts about the raids followed shortly. Almost three years later, Rockwell pled guilty in March 1992 to ten environmental violations, and paid $18.5 million in fines.

Stone’s suit in July 1989 (a month after the government raid) sought monies above the fine that Rockwell eventually paid. Stone’s successful suit sought reimbursement for cleanup costs and repayment of performance bonuses that Rockwell received during a period when Rockwell falsely represented compliance with federal environmental regulations.

Stone predicted problems and alerted the government to something that deserved attention. However, the only false claims found by the jury involved failed processes discovered after Stone left his employment. Moreover, Stone’s prediction of failure turned out to be incorrect, in that Stone attributed the failure to something other than what actually ended up causing the problem.

With these facts, the lower court ruled in Stone’s favor. However, the Supreme Court saw things differently, describing the relevant facts as follows:

Respondents’ False Claims Act claims went to trial in 1999. None of the witnesses Stone had identified during discovery as having relevant knowledge testified at trial. And none of the documents Stone provided to the Government with his confidential disclosure statement was introduced in evidence at trial. Nor did respondents allege at trial that the defect in the piping system predicted by Stone caused

[the environmental problem].

The Court was troubled that the plaintiff changed its approach during the litigation, including dropping charges that were not as strong. Of course, every experienced litigator on both the plaintiff and defense side knows that this is common. Plaintiffs (as well as defendants) often do not have a complete picture of all key events until after obtaining additional information. If plaintiffs will not get any benefit for these efforts, many investigations will never occur in the first place. Nevertheless, the Court agreed with Rockwell that the qui tam law does not allow this adjustment to occur. For example:

Stone’s allegations changed during the course of the litigation, yet he asks that we look only to his original complaint. Rockwell argues that Stone must satisfy the original-source exception through all stages of the litigation.

Businesses may think this limitation is fine, calling many of these cases and related discovery costly and unnecessary “fishing expeditions.” Consequently, each person’s reaction to the Court’s new limitation will likely depend on whether you are on the plaintiff or defense side of the table.

However, everyone can agree on this. Whistleblowers now face greater risk when pursuing a claim. Fewer investigations and related cases will result. No plaintiff (and his contingent-fee lawyer) wants to accept the risk of successfully prosecuting a case for free. For this reason, the normally pro-business Bush administration sided with Stone. The government was the one who stood to gain if Stone lost his case, yet the administration wanted Stone to keep what it perceived as Stone’s fair share. The administration argued that the government benefits by encouraging whistleblowers since the government keeps most of the money ultimately collected.

The two justices that dissented (Stevens and Ginsburg) said that whistleblowers should only have to prove that their information led to the fraud, not that the claims ultimately accepted by the jury must have come from them.

The case is Rockwell International v. U.S., ex rel Stone, 05-1272.

Fulcrum Inquiry is a forensic accounting firm that performs fraud and accounting investigations. We use this experience in operating whistleblower collection mechanisms that improve governance processes for both businesses and nonprofit organizations.