Decided: December 12, 2013
The Fourth Circuit Court of Appeals vacated the district court’s dismissal of Plaintiffs’ action under the False Claims Act (the “FCA”) against Purdue Pharma L.P. and Purdue Pharma, Inc. (together “Purdue”). The Fourth Circuit held that the district court erred by giving preclusive effect to United States ex rel. Radcliffe v. Purdue Pharma L.P. and, therefore, for dismissing their action on res judicata grounds.
Prior to Plaintiffs’ claim, Mark Radcliffe, the husband of Plaintiff Angela Radcliffe, filed a FCA action against Purdue (“Qui Tam I”). Radcliffe was a district sales manager for Purdue, laid off as part of a reduction in force in June 2005. He subsequently executed a general release (“the Release”) of all claims against Purdue in order to receive an enhanced severance package. The Fourth Circuit affirmed the district court’s with-prejudice dismissal of Qui Tam I in Radcliffe, concluding that the Release barred Radcliffe’s FCA claims. After Radcliffe, Steven May and Angela Radcliffe (the “Relators”) commenced this FCA action against Purdue (“Qui Tam II”) setting forth allegations nearly identical to those advanced by Mark Radcliffe in Qui Tam I. On appeal, the Relators argued that the district court erred by giving preclusive effect to Radcliffe and dismissing their action on res judicata grounds.
According to the Fourth Circuit, whether res judicata precludes a subsequent action turns on the existence of three factors: (1) a final judgment on the merits in a prior suit; (2) an identity of the cause of action in both the earlier and the later suit; and (3) an identity of parties or their privies in the two suits. The Fourth Circuit concluded that Radcliffe was a “judgment on the merits,” and not merely a “jurisdictional dismissal,” as argued by the Relators. The Relators claimed that the dismissal in Radcliffe was premised on a determination that Mark Radcliffe lacked standing to pursue the FCA claims. However, the Fourth Circuit concluded that it had dismissed not because Radcliffe lacked standing, but because he had waived it through execution of the Release. The FCA statutorily vests private citizens with standing and, therefore, Radcliffe had the “right” to bring an FCA action before he signed the Release, wherein he waived, rather than lost, that right. However, even after finding Radcliffe was a “judgment on the merits,” the Fourth Circuit nonetheless agreed with the Relators that the district court improperly gave Radcliffe preclusive effect. In cases where the earlier action was dismissed in accordance with a release or other settlement, the traditional res judicata inquiry is modified– the principles of res judicata apply to the matters specified in the settlement agreement, rather than the original complaint. Settlement agreements operate on contract principles, and thus the preclusive effect of a settlement agreement should be measured by the intent of the parties. The Fourth Circuit explained that the Release executed by Mark Radcliffe in Qui Tam I was personal to him and addressed only his rights and the claims that he might assert against Purdue. Neither the Relators nor the government were parties to or intended beneficiaries of the Release. Therefore, the Release could not serve as a defense to any claims that the Relators might assert against Purdue and the judgment enforcing the Release cannot bar such claims.
Purdue and the government then argued that the district court’s dismissal could be affirmed because the action is prohibited by the FCA’s “public disclosure” bar. To address that argument, the Fourth Circuit first determined which version of the statute applied to this case. Here, the Plaintiffs’ complaint was filed after the 2010 amendments to the public-disclosure bar. However, it concerned conduct that occurred between 1996 and 2005, before the 2010 amendments. Ordinarily, courts will assess the legal effect of conduct under the law that existed when the conduct took place. Although there is a presumption against retroactive legislation, it is limited to statutes “that would have genuinely retroactive effect.” Therefore, the Fourth Circuit explained that changes in jurisdictional and procedural rules, which take away no substantive right, are often applied to pending cases. However, those new rules apply because they do not have an impermissible retroactive effect, not because the complaint was filed before the statute was amended. The Fourth Circuit ultimately determined that it does not matter that Plaintiffs’ complaint was filed after the FCA was amended, so long as the application of the 2010 amendments would have an impermissible retroactive effect. Here, the amendments create a jurisdictional change, but it is one that would have an impermissible retroactive effect. Therefore, the Fourth Circuit held that the amended version of the statute should not apply. Under the prior version of the statute, the public-disclosure bar operated to divest the district court of subject-matter jurisdiction. Under the amended version, which deleted the unambiguous jurisdiction-removing language, the public-disclosure bar is no longer a jurisdiction-removing provision. In addition, the 2010 amendments significantly narrowed the class of disclosures that can trigger the public-disclosure bar, while at the same time expanding the number of private plaintiffs entitled to bring qui tam actions. Finally, the 2010 amendments also changed the required connection between Plaintiff’s claims and the qualifying public disclosure. As amended, the public-disclosure bar no longer requires actual knowledge of the public disclosure, but instead applies “if substantially the same allegations or transactions were publicly disclosed.” Because the Relators allege that they did not derive their knowledge of Purdue’s fraud from any public disclosure, their claims are viable under the pre-amendment version of the FCA, but not under the amended version. Therefore, the 2010 amendments would significantly imperil the Relators’ right to assert their claims against Purdue, and would deprive Purdue of the previously available jurisdictional defense; the Fourth Circuit concluded they had retroactive effect. The Fourth Circuit concluded that 2010 version of the public-disclosure bar could not be applied in this case, notwithstanding the fact that the complaint was filed after the effective date of the amendments.
Having concluded that the pre-2010 version applies, the Fourth Circuit then addressed whether the public-disclosure bar required dismissal of the action. The pre-amendment version provides that “no court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions” in various hearings, reports, investigations, audits, and news media. The Fourth Circuit has interpreted the “based upon” language as barring only those actions where the relator’s knowledge of the fraud alleged was actually derived from the public disclosure itself. Whether a relator derived his knowledge of the fraud from a public disclosure is a jurisdictional fact to be resolved by the district court. Therefore, the Fourth Circuit remanded the case to the district court for discovery and other proceedings as necessary to resolve the issues related to the applicability of the public-disclosure bar.
Finally, the Fourth Circuit rejected two additional arguments made by Purdue for sustaining the district court’s dismissal of this action. The Fourth Circuit concluded that, because the Relators have not had the opportunity to amend their complaint, it would be improper to rely on any Rule 9 deficiencies to affirm the district court’s dismissal. The Fourth Circuit also concluded that the FCA’s “first to file” bar did not require dismissal. The first-to-file bar applies only if the first-filed action was still pending when the subsequent action as commenced. Here, Qui Tam I was no longer pending at the time this action was commenced, thus making the first-to-file-bar inapplicable.
– Sarah Bishop