Member Article

Thirteen years after the filing of the initial complaint, the First Circuit recently revived a False Claims Act (FCA) suit, reversing the district court and holding a relator can be an “original source” without participating in or having contemporaneous knowledge about the alleged fraud. See United States ex rel. Banigan v. PharMerica, Inc., 950 F.3d 134 (1st Cir. 2020). The First Circuit’s reasoning conflicts with the approach taken by several other circuits, which require participation in or close observation of the alleged scheme in order to qualify as an “original source.”

Relevant Background

Through its qui tam provision, the FCA provides financial incentives to individuals to bring civil actions for fraud on the federal government in the capacity of relators (i.e., whistleblowers), by entitling them to a share in any eventual recoveries. See 31 U.S.C. § 3730(b) & (d). The statute attempts to strike a balance between incentivizing qui tam lawsuits and deterring parasitic lawsuits based on allegations already made by another relator or already in the public domain. One provision of the FCA, known as the “public disclosure bar,” prohibits relators from proceeding with a lawsuit based on information that has been publicly disclosed in specified ways, unless (1) the government objects, or (2) the relator is an “original source.” See 31 U.S.C. § 3730(e)(4). In relevant part, an “original source” is someone who has independent knowledge of the information on which the allegations are based.¹

In Banigan, the relator alleged that his employer, a drug manufacturer, offered kickbacks disguised as discounts, rebates, and other incentives to induce long-term care pharmacy companies to prescribe the manufacturer’s medications to nursing home residents. The relator did not participate directly in the alleged scheme and instead learned most of the facts alleged in the complaint from co-workers and documents after the scheme concluded.

The defendant moved to dismiss, arguing that the public disclosure bar applied because the relator’s complaint was substantially similar to the allegations in another case. The court agreed, and it also found that the relator was not an “original source” because, among other reasons, he learned of the fraud from others and only saw corroborating documents after the scheme had ended. United States ex rel. Banigan v. PharMerica, Inc., Civ. A. No. 07-12153-RWZ, 2018 U.S. Dist. LEXIS 72800, at *13 (D. Mass. Apr. 30, 2018).

First Circuit’s Opinion

On appeal, the First Circuit agreed that the public disclosure bar applied because the allegations were “substantially similar” to those in a prior lawsuit even though the relator provided “greater detail” about the fraud. Banigan, 950 F.3d at 142–44. However, it reversed on the issue of the original-source exception, finding that the relator qualified even without direct participation in the alleged fraud.

In its analysis of the original source exception, the court focused on the “direct . . . knowledge” requirement in the statutory text. The court used the same “absence of an intervening agency” definition of “direct” as had the district court, id. at *144–45, but it reached the opposite conclusion. The defendant argued that the relator lacked “direct” knowledge because (1) he learned of the scheme from those who designed it, (2) he neither designed, participated in, or observed the scheme, and (3) his investigation came only after the scheme had ended. Id. at *145. The court rejected this reasoning, finding that it would “require a relator to have either participated in the fraud or observed it in operation to qualify as an original source,” id. at *21, a requirement that would undermine the FCA’s “core purpose” of fostering disclosures of fraud, id. at 145–46. Despite conceding that the relator’s knowledge of the scheme came from others, the court held he was an original source because he had “obtained the remaining information underlying [his complaint] through his own investigation.” Id. at *145. The court therefore “readily conclude[d] that Banigan’s knowledge satisfie[d] [its] definition of ‘direct’ as ‘immediate,’” finding that Congress could not have “intended to reward as original sources only those who participated in the fraud.” Id. at *146.

While Banigan has been cheered by the FCA qui tam bar, placing the decision in its proper context will help defendants minimize its impact. The opinion acknowledged a potential circuit split on the interpretation of “direct . . . knowledge,” with at least three circuits reading the criterion as requiring a relator’s participation in, or contemporaneous witnessing of, a fraud.² It does not seem likely the Supreme Court will take up the question, however, as the issue of “direct . . . knowledge” is highly fact-specific, and Congress removed that language from the statute in 2010. Moreover, the 2010 amendments to the FCA also gave the Department of Justice the power to veto the application of the public disclosure bar simply by opposing the defendant’s motion. See 31 U.S.C. § 3930(e)(4)(A). That power further minimizes the impact of the public disclosure bar under the current version of the statute.

¹ The court applied the definition of “original source” that was in the FCA when the relator filed his complaint. See Banigan, 950 F.3d at 144; see also 31 U.S.C. § 3730(e)(4)(B) (2007) (requiring “direct and independent knowledge”). In 2010, Congress amended the FCA to remove the word “direct.” See 31 U.S.C. § 3730(e)(4)(B) (requiring “knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions”).

² The court cited, for that contrary reading of the statute, decisions of the Third, Eighth, and Eleventh Circuits: United States ex rel. Schumann v. AstraZeneca Pharms. L.P., 769 F.3d 837, 847 (3d Cir. 2014), United States ex rel. Newell v. City of St. Paul, Minn., 728 F.3d 791, 797 (8th Cir. 2013); United States ex rel. Saldivar v. Fresenius Med. Care Holdings, Inc., 841 F.3d 927, 935-36 (11th Cir. 2016). See Banigan, 950 F.3d at 145 & 145 n.15.