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Monday, May 16, 2011

Supreme Court Undermines Whistleblowers’ Ability to Uncover Corporate Fraud

The Supreme Court held today in a 5-3 decision in Schindler Elevator v. United States ex rel. Kirk that a federal agency’s response to a Freedom of Information Act (FOIA) request is a “report” under the False Claims Act (FCA). Therefore, a private party that uncovers corporate fraud against the federal government as a result of a FOIA request may not obtain a court award for doing so.

Daniel Kirk, an employee of Schindler Elevator Corporation and a Vietnam veteran, suspected that his employer was violating a federal statute requiring companies with large federal contracts to establish affirmative action programs that benefit Vietnam-era veterans. Those suspicions were confirmed after he examined documents his wife received in response to a FOIA request.

Under the FCA, private individuals who uncover fraud against the federal government can sue on behalf of the United States and be awarded a portion of any recovery the government receives from the lawsuit. However, the statute prevents courts from hearing a case if the lawsuit is based upon one of several types of public disclosures, including information in a government “report.” The purpose of limiting recovery is to prevent “parasitic” lawsuits in which a party without personal knowledge of a company’s fraud sues and then profits by merely learning about the fraud from a public source. Kirk filed and initially prevailed in his lawsuit against Schindler Elevator, winning an award from the trial court that was affirmed by the Second Circuit.

The Supreme Court’s conservative majority overturned that award, holding that the “broad ordinary meaning of ‘report’” as the word is defined in dictionaries is consistent with the “generally broad scope” of public disclosure methods that prevent private parties from recovering an award. The Court described the information that must accompany a response to a FOIA request and stated that the information falls within those various dictionary definitions of “report” as “‘something that gives information,’ a ‘notification,’ and an ‘official or formal statement of facts.’”

Writing in dissent, Justice Ginsburg picked apart the majority’s arguments by quoting the Second Circuit’s opinion below. The dissent argued that the Court took “report” out of context by giving it a dictionary meaning when all of the other terms in the list of public sources describe “the synthesis of information in an investigatory context.” The Second Circuit stated that the other sources, such as “hearing” and “audit,” apply to information that the government intended to gather for some purpose, not the “mechanistic production of documents in response to a FOIA request made by a member of the public.” Until Mr. Kirk’s suspicions were confirmed by documents he obtained from the government, there was no government “report” or “investigation” that would have exposed Schindler Elevator’s fraud.

Ginsburg added that the Court’s ruling “weakens the force of the FCA as a weapon of fraud [against] Government contractors” who have cheated the government. She stated that it also “severely limits whistleblowers’ ability to substantiate their allegations” before suing and she suggested that Congress should remedy the majority’s holding.

The Supreme Court’s ruling undermines whistleblowers who play a critical role in uncovering fraudulent corporate activity against the government and taxpayers.

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