Parsing the Second Circuit’s Decision in U.S. ex rel. Hanks v. Florida Cancer Specialists: the Court Analyzes the “Original Source” Exception under the False Claims Act (FCA)

June 8, 2020 - Kenneth M. Abell / Raquel Frier

It seems self-evident that a whistleblower, known as a “relator” in False Claims Act (“FCA”) parlance, should not be able to derive a financial benefit by bringing to the government information of which the government is already aware or which already exists in the public domain.  That principle is enshrined in the so-called “public disclosure bar” of the FCA, which was most recently amended in 2010 by the Patient Protection and Affordable Care Act (“ACA”). In sum and substance, the public disclosure bar states that a relator’s qui tam action under the FCA is not viable if the essence of the allegations or transactions at issue have been publicly disclosed in court actions, government reports or news media.

There is, however, a critical and oft-utilized exception to this rule: notwithstanding the fact that the information at issue is in the public domain, a relator can assert a viable qui tam action if he is the “original source” of that information. It is this exception that recently caused the Second Circuit in United States ex rel. Hanks v. Florida Cancer Specialists et al. to vacate and remand a long-running FCA action for further and more specific consideration by the district court for the Eastern District of New York.

A Brief Historical Look at the Public Disclosure Bar and First-to-File Rule

Since its passage in 1863, the FCA has been amended several times.  Prior to 2010, and the passage of the ACA, it is important to note that the public disclosure bar within the FCA was jurisdictional.  Accordingly, a district court did not have jurisdiction over qui tam actions “based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media.”

As mentioned, there existed (and still exists) an exception to this bar for relators who are the “original source” of the information upon which the qui tam action was based. Prior to the ACA, “original source” was defined as “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.”

Under the ACA, the public disclosure bar was amended in a few significant ways.  First, the public disclosure bar is no longer jurisdictional, although if established, it provides a valid and explicit ground for dismissal.  In addition, the ACA broadened the definition of “original source,” which is codified in 31 USCS § 3730(e)(4)(B). Now, in order qualify as an original source, the relator need not have “direct and independent knowledge” of the information, and the relator is not required to provide the information on which the action is based.  Instead, in order to qualify as an original source under the new definition, the relator must simply “materially add” to the publicly disclosed transactions on which the claims are based.

An important corollary to the public disclosure bar is the FCA’s “first-to-file rule,” which essentially states that no person other than the government can bring a subsequent qui tam action based on facts alleged in a previously-filed action. Unlike the public-disclosure bar, however, the first-to-file rule has never been expressly jurisdictional (circuits have been split on that question) and applies even if the relator in the subsequent action would otherwise qualify as an “original source.”  The logic behind the rule is that once a qui tam suit has been filed, the government has the knowledge it needs to seek appropriate recourse.

The Second Circuit’s Focus on the Original Source Exception in Hanks

The Second Circuit’s recent decision in Hanks highlights the ongoing relevance of the original source analysis.  This appeal, in a more-than-decade old qui tam action by a former sales representative for Amgen, Inc., took issue with the district court’s dismissal of relator’s fifth amended complaint against a certain subset of remaining defendants.  The dismissal was based on, among other things, the first-to-file rule on the ground that the central allegations had, in the court’s view, been alleged in previous lawsuits by other plaintiffs.

The ultimate problem with the decision, from the Second Circuit’s perspective, is that it “elided” the core question of whether the public disclosure bar applied in the first instance, which, because the case was filed pre-ACA, would have expressly deprived the district court of jurisdiction. If the bar applied, of course, the district court would have had no basis to reach the first-to-file rule or other arguments pertaining to Fed. R. Civ. P. 9(b).  Although the Circuit stated that “it is hard to fault the district court’s critique of the pleading,” it gently chastised the district court for not squarely addressing the jurisdictional question upfront and head-on.

Thus, without taking a position on the ultimate merits of the appeal, the Second Circuit sent the case back to the district court to specifically analyze whether it had jurisdiction in light of the public disclosure bar.

How Hanks May Impact Future Qui Tam Actions

Astute observers might minimize the relevance of the Hanks decision given that the public disclosure bar is no longer jurisdictional post-ACA.  They could feasibly argue that the decision would have come out differently but for the fact that the underlying case in Hanks was filed way back in 2008, and the Circuit was forced to focus on a jurisdictional issue that no longer exists.  That argument should not, however, be read too broadly.

Hanks serves as an important reminder – for relators’ counsel and defense counsel alike – that the question of whether a relator is an original source is a threshold question on which the courts will continue to focus in determining the viability of qui tam actions.  Indeed, since the public disclosure bar still provides an express ground for dismissal, it remains critical for FCA practitioners to pay specific attention to precisely how relators came across the information on which their claims are based.  Without doubt, it is a question better addressed at the outset of a case than after years, or even decades, of hard-fought litigation.