In a strongly-worded opinion filed (unpublished) last week on February 23, the U.S. Court of Appeals for the Fifth Circuit held that a private suit brought under the False Claims Act (“FCA”) against a federal contractor by two federal auditors was not prevented by the “public disclosure bar.”  Generally, federal law allows a private person to bring a civil action against an entity for violation of the FCA (referred to as a qui tam suit) unless the “allegations or transactions as alleged in the . . . claim were publicly disclosed.” Furthermore, federal courts lack jurisdiction over any FCA action brought by a private person “based upon the public disclosure of allegations . . . in a criminal, civil, or administrative hearing,” or in an “administrative . . . report, audit, . . . or investigation” unless that person is “an original source of the information.”  The Fifth Circuit held that— despite the auditors’ status as employees of the agency, and the district court’s finding that the allegations were based upon information disclosed by way of public debate, administrative disclosure, judicial disclosure, and government investigation — the auditors’ suit was not barred.

This opinion was the result of a second appeal of a case that began in 2006, when two auditors for the Minerals Management Service (“MMS”), a Department of the Interior agency, brought a qui tam suit against an oil company who had obtained leases from MMS to extract oil in various locations and deliver that oil to the government.  The oil company was “generally responsible for all cost of moving the oil to the custody transfer point at no cost to the government, i.e., without deducting the gathering costs.”  However, if the oil had to be transported from its extraction point to market, the company was permitted to “deduct the costs associated with that additional movement, called ‘transportation cost,’” from the royalties it owed to the government.  The auditors’ suit alleged that the oil company “deprived the United States of royalties by taking unauthorized deductions for expenses to gather and store oil on twelve of its offshore drilling platforms.”  The district court granted the company’s motion for summary judgment on the dual grounds that (1) the suit was not brought by a private person under 31 U.S. Code § 3730(b)(1), and (2) the allegations in the auditors’ claim had been publicly disclosed by the government under 31 U.S. 3730(e)(4)(A), (B).  In 2012, the Fifth Circuit reversed the district court’s decision on both grounds, holding: (1)  “[a] person can have two legal identities, one official and one individual” therefore the auditors (or “even a district attorney”) could bring a qui tam suit, and (2) the district court “applied an overly broad definition” of public disclosure.  Specifically, the Fifth Circuit directed the district court to “determine whether the public disclosures identified in the motion for summary judgment reveal either (i) that [the oil company] was deducting gathering expenses prohibited by program regulations, or (ii) that this type of fraud was so pervasive in the industry that the company’s scheme, as alleged, would have been easily identified.”  On remand, the oil company filed a “re-urged” summary judgment motion which the district court granted nearly a year later, and which the auditors appealed.

In the instant case, the Fifth Circuit asserted that the district court disregarded its mandate with regard to the public disclosure analysis, and further held that there was not “a single public disclosure of the fraudulent scheme alleged in this case, and . . . therefore [there was] no basis for applying the public disclosure bar.”  Notably, the following instances were not considered “public disclosures” sufficient to bar the auditors’ suit: (1) the oil company’s participation in MMS’ rulemaking process where it argued that MMS should change its rules for classification of gathering costs versus transportation costs; (2) administrative decisions and related administrative disclosures by the oil company concerning the company’s practice of deducting transportation allowances for certain “capital costs”; (3) a series of previous lawsuits, two of which involved the company being accused of deducting more money than it should in transportation costs; and (4) an audit of the oil company conducted in 2002-2003 that was not publicly disseminated.

The narrow construction of the public disclosure bar applied in this case is a strong indication that individuals — even federal employees tasked with auditing government contractors — have a significant amount of room to bring qui tam suits against contractors without fear of being barred by the public disclosure rule.  Under this standard, such individuals can look to publicly available information such as contractors’ activity during rulemaking processes, their disclosures to the government, and both administrative and judicial litigation to deduce possible allegations for a suit, and the public disclosure rule will not prevent the suit as long as their claims allege a much more specific and narrowly construed scheme than that which is available publicly.  This outcome also signals increased potential for liability for contractors — as qui tam suits can subject contractors to liability even in cases where the government has chosen to conserve its resources and declined to prosecute a claim.