Searcy v. Philips Electronics North America Corp.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 96-40515

JASON R. SEARCY, Trustee for the Bankruptcy
Estate of C&P Business World, Inc.; ET AL,
Plaintiff,

versus

PHILIPS ELECTRONICS NORTH AMERICA
CORPORATION; ET AL,
Defendant.
_______________________

LLOYD T. BORTNER, on behalf of the
United States of America,
Plaintiff-Appellee,

versus

PHILIPS ELECTRONICS NORTH AMERICA
CORPORATION; ET AL,
Defendants,

PHILIPS ELECTRONICS NORTH AMERICA
CORPORATION; PHILIPS ELECTRONICS NV,
Defendants-Appellees,

versus

UNITED STATES OF AMERICA,
Appellant.

Appeal from the United States District Court
For the Eastern District of Texas, Beaumont

June 30, 1997
( )

Before REYNALDO G. GARZA, HIGGINBOTHAM, and JONES, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:
 Today we must decide whether the False Claims Act gives the

government the power to veto a settlement after it has declined to

intervene in both the trial and appellate courts. We find the last

sentence of 31 U.S.C. § 3730(b)(1) unambiguous in its declaration

that courts may not grant a voluntary dismissal in a False Claims

Act suit unless the U.S. Attorney General consents to the

dismissal. Thus, we must vacate the settlement order and voluntary

dismissal and remand to the district court.

I.

According to the complaint, Philips Electronics North America

Corp. and Philips Electronics illegally concealed from the U.S.

government a 1985 executive decision to withdraw from the U.S.

market and to abandon their local U.S. dealers. The U.S.

government relied on Philips’s continuing presence in the U.S.

market when it bought and leased automation equipment worth

millions of dollars. Lloyd T. Bortner, Jr., learned of Philips’s

allegedly deceptive policy when he was serving as a manager for a

Philips division called Philips Information Systems Co. He brought

a suit on behalf of the government under the False Claims Act,

which prohibits “knowingly present[ing], or caus[ing] to be

presented, to an officer or employee of the United States

Government or a member of the Armed Forces of the United States a

false or fraudulent claim for payment or approval.” 31 U.S.C. §

3729(a)(1). The district court eventually consolidated Bortner’s

qui tam action with a private suit against Philips brought by five

former Philips dealers.

2
 As required by 31 U.S.C. § 3730(b)(2), Bortner served the

Attorney General with the complaint and evidence under seal so that

the government could decide whether to take over the action. In

keeping with § 3730(b)(3), after 60 days the government moved for

and received a 90-day extension of time in which to investigate

Bortner’s allegations. When it asked for a second 90-day

extension, however, the court denied its request. On January 26,

1995, the government decided not to exercise its right to

intervene. The court unsealed the documents so that Bortner could

prosecute the action. The government reminded Bortner’s counsel as

a matter of course that it was not a party and that discovery of

government documents would have to proceed by subpoena under Fed.

R. Civ. P. 45.

During nearly a year of discovery, Bortner forwarded court

documents to the government. Bortner and Philips made two

unsuccessful, court-ordered efforts at mediation. After three days

of trial, on February 1, 1996, they reached a settlement in which

the court would enter a judgment of $1 million dollars against

Philips. Pursuant to § 3730(d)(2), Bortner would get 30% of the

award, in addition to $300,000 in attorneys’ fees.

The government, however, objected to the settlement. Because

it had investigated only the claims that Bortner actually brought,

it protested a release from “all claims and counterclaims asserted

in any pleading or other filing in this action, or which could have

been asserted by the parties in this action, arising out of the

transactions and occurrences that are the subject matter of this

3
action.” The government was unsuccessful in its efforts to

convince Philips to accept a release only from claims actually

stated in the final complaint. In an objection filed with the

court and at a show-cause hearing, the government asserted that

§ 3730(b)(1) gives it the power to veto the settlement. It did

not, however, request to intervene for good cause under

§ 3730(c)(3). The district court overruled the objection and

approved the settlement. One week later, Philips paid the

government $700,000. The government filed a notice of appeal,

again without moving to intervene.

II.

Regardless of whether the government opts to control or

intervene in a case, the False Claims Act requires that actions “be

brought in the name of the Government.” 31 U.S.C. § 3730(b)(1).

Under the statutory structure, relators such as Bortner sue both

“for the person and for the United States Government.” Id. Thus,

as Bortner seems to concede, the United States is a real party in

interest even if it does not control the False Claims Act suit.

See United States ex rel. Milam v. University of Texas M.D.

Anderson Cancer Center, 961 F.2d 46, 48-49 (4th Cir. 1992).

The government draws the further conclusion that it is

automatically a party for purposes of appeal. At least one court

interpreting the Act as amended in 1986 has taken this position

where the question was whether the appellant should get the benefit

of Fed. R. App. P. 4(a)(1)’s special 60-day period for filing a

notice of appeal in a suit in which the United States is a party.

4
See United States ex rel. Haycock v. Hughes Aircraft Co., 98 F.3d

1100, 1102 (9th Cir. 1996) (“[T]he government’s nominal party

status combined with the majority financial interest in the outcome

suffices to make it a party for purposes of the sixty day notice of

appeal rule.”), cert. denied, ___ U.S. ___, 117 S. Ct. 1693 (1997).

According to the Ninth Circuit, litigants who are unsuccessful in

the district court should not be penalized for reading Rule 4(a)(1)

in light of the statute’s purpose of vindicating the interests of

the United States. Cf. United States ex rel. Petrofsky v. Van

Cott, Bagley, 588 F.2d 1327, 1329 (10th Cir. 1978) (holding that,

under the pre-1986 version of the Act, the government is not a

party for the purposes of Rule 4(a)(1) because its interest ends

once it decides not to prosecute the action itself), cert. denied,

444 U.S. 839 (1979).

But viewing the government as a party for the purposes of Rule

4(a)(1) does not compel us to treat it as a party for all appellate

purposes. The Act forces the government to decide at the outset

whether it wants to become an active litigant or to let the relator

represent its interests. 31 U.S.C. § 3730(b)(2). It further

allows the government to intervene at any time on a showing of good

cause. 31 U.S.C. § 3730(c)(3). In short, its structure

distinguishes between cases in which the United States is an active

participant and cases in which the United States is a passive

beneficiary of the relator’s efforts. When the government chooses

to remain passive, as it has here, we see no reason to treat it as

5
a party with standing to challenge the district court’s action as

of right.

Bortner argues that non-parties simply cannot appeal, and thus

that the government cannot prosecute an appeal without first

intervening. Read out of context, a few cases seem to announce

such a rule. See, e.g., Marino v. Ortiz, 108 S. Ct. 586, 587

(1988) (per curiam) (“[B]ecause petitioners were not parties to the

underlying lawsuit, and because they failed to intervene for

purposes of appeal, they may not appeal from the consent decree

approving that lawsuit’s settlement . . . .”); Edwards v. City of

Houston, 78 F.3d 983, 993 (5th Cir. 1996) (en banc) (“It is well-

settled that one who is not a party to a lawsuit, or has not

properly become a party, has no right to appeal a judgment entered

in that suit.” (citing Marino)).

We have enforced the rule with respect to nonnamed members of

class actions. See Flanagan v. Ahearn, 90 F.3d 963, 990 (5th Cir.

1996), petition for cert. filed, 65 U.S.L.W. 3611 (U.S. Feb. 27,

1997); Walker v. City of Mesquite, 858 F.2d 1071, 1074 (5th Cir.

1988) (“[T]he better practice . . . is for nonnamed class members

to file a motion to intervene and then, upon the denial of that

motion, appeal to this Court.” (citing Marino)). But the structure

of class actions differs from the structure of qui tam actions. As

the Walker court noted, allowing nonnamed class members to appeal

a final judgment could frustrate the Rule 23 mechanism by making

class actions unwieldy and less productive. 858 F.2d at 1074.

Class actions involve many unnamed class members, and giving each

6
a right to appeal could result in a confusing and unmanageable

appellate process. Furthermore, a nonnamed class member can

protect his interest by mounting a collateral attack. Litigation

conducted en masse presents different problems and calls for

different rules than litigation conducted on behalf of a single

entity such as the United States government.

Outside of the class-action context, the rule on non-party

appeals is not as rigid as Bortner and Philips contend. Although

we dismissed a would-be non-party appellant in EEOC v. Louisiana

Office of Community Services, 47 F.3d 1438, 1442-43 (5th Cir.

1995), we inquired whether “the non-parties actually participated

in the proceedings below, the equities weigh in favor of hearing

the appeal, and the non-parties have a personal stake in the

outcome.” See also United States v. Chagra, 701 F.2d 354, 358-60

(5th Cir. 1983) (allowing non-party reporters to appeal an order

closing a courtroom to the media in the wake of the assassination

of a federal judge). Professors Wright and Miller devote a long

section of their treatise to the topic and encapsulate the law by

stating that “[a]ppeal is likely to be available . . . if the

would-be appellant can show significant involvement with the

judgment, plausible reasons for not becoming involved earlier, a

risk that its interests will not be adequately protected by the

parties, and a lack of untoward interference in the affairs of the

parties.” 15A Federal Practice and Procedure 2d § 3902.1, at 102

(1992).

7
 We find that the Louisiana Office of Community Services test

provides the appropriate standard here. The government has

satisfied all three prongs of that test. First, it participated in

the district court proceedings by investigating and monitoring the

case and by arguing against the settlement at a hearing.

Second, the equities favor the government because it is

relying on a good-faith argument that Congress has instructed the

courts — including the courts of appeals — not to approve

settlements when the government doesn’t consent. Bortner condemns

the government for failing to take advantage of the Act’s provision

that “the court, without limiting the status and rights of the

person initiating the action, may nevertheless permit the

Government to intervene at a later date upon a showing of good

cause.” 31 U.S.C. § 3730(c)(3). Our question is not, however,

whether the government was prudent given the uncertainty about its

rights under the Act. Our question is whether Congress has given

to the government the right to block settlements even if it is not

a formal party to the district court or circuit court proceedings.

As we will explain, we agree with the government that the False

Claims Act grants it the power to withhold consent to voluntary

settlements. In light of this governmental right, it would be odd

to preclude appellate remedies based on the government’s failure to

intervene. If, as we conclude, the district court was mistaken in

determining that the government has no veto power, the government

should be able to correct that error by raising its veto power in

an appeal to this court, even if it chooses not to intervene.

8
 Bortner also argues that the government lacks standing and

thus fails the third prong, which requires a personal stake in the

outcome. We disagree. Although Bortner supposes that the

settlement binds only Bortner and Philips, the language in the

district court’s order approving the settlement may not be so

narrow. The settlement stretches to “all claims and counterclaims

asserted in any pleading or other filing in this action, or which

could have been asserted by the parties in this action, arising out

of the transactions and occurrences that are the subject matter of

this action.” By binding “the parties in this action,” the order

could be interpreted to include the government for claim-preclusion

purposes. See Valerie R. Park, Note, The False Claims Act, Qui Tam

Relators, and the Government: Which Is the Real Party to the

Action?, 43 STAN. L. REV. 1061, 1084-87 (1991) (arguing that because

the government has an opportunity to investigate and control False

Claims Act suits, it should be subject to claim preclusion when a

relator prosecutes a False Claims Act action on its behalf). Cf.

Westerchil Constr. Co. v. United States, 16 Cl. Ct. 727, 732 (1989)

(refusing to give a Miller Act suit preclusive effect against the

government because the Miller Act does not give the United States

any “participatory or supervisory authority”). We are unsure why

Philips would resist a settlement with more modest preclusive

language unless it hoped to buy peace from future suits by the

United States or relators based on the same transactions. Indeed,

Philips asserts in its brief that if this case had been decided by

the jury, future claims by the United States would be barred to the

9
same extent as claims by Bortner himself. We do not have occasion

to decide what sorts of claims the Bortner-Philips settlement might

preclude. It is enough to determine that the government has a

stake in the outcome because of a legitimate concern that giving

Philips the benefits of full claim preclusion could prevent

prosecutions not only under the False Claims Act, but also under

other statutes.

In sum, the unique structure of the False Claims Act gives the

government an adequate level of participation in the district court

proceedings, a good-faith reliance on a statutory right, and a

concrete stake in the outcome. Thus, the government’s appeal is

properly before us even though the government is not a party that

ordinarily could challenge as of right the district court’s final

order.

III.

The government asks us to sanction an absolute veto power over

voluntary settlements in qui tam False Claims Act suits. The

statutory language appears to grant just that: “The action may be

dismissed only if the court and the Attorney General give written

consent to the dismissal and their reasons for consenting.” 31

U.S.C. § 3730(b)(1).

Most cases have only flirted with the issue. In Minotti v.

Lensink, 895 F.2d 100, 104 (2d Cir. 1990), the court remarked that

“[o]nce the United States formally has declined to intervene in an

action . . . , little rationale remains for requiring consent of

the Attorney General before an action may be dismissed.” But that

10
case involved an involuntary dismissal for the relator’s failure to

comply with the defendants’ discovery requests. In spite of its

dicta, the Minotti court held that “the provision requiring consent

of the Attorney General prior to dismissal of a private action

. . . continues to apply only where the plaintiff seeks voluntary

dismissal of the action.” Id. at 103. Accord United States ex

rel. Fletcher v. Fahey, 121 F.2d 28, 29 (D.C. Cir.), cert. denied,

314 U.S. 624 (1941); United States ex rel. S. Prawer & Co. v. Fleet

Bank of Maine, 855 F. Supp. 419, 423 (D. Me. 1993). Before us, the

government forthrightly acknowledges that requiring the

government’s consent to an involuntary dismissal would raise

separation-of-powers concerns. A district court has made the

sweeping statement that “Congress did not intend to give the United

States a veto power over actions in which it has previously

declined to intervene.” United States ex rel. Pedicone v. Mazak

Corp., 807 F. Supp. 1350, 1352 (S.D. Ohio 1992). But its reasoning

turned on the fact that the government failed to comply with

§ 3730(b)(4)’s requirement that it either proceed with the action

or notify the court of its decision not to proceed. Id. These

cases did not confront the situation presented today and do not

bind us.

At the appellate level, only the Ninth Circuit has taken a

definitive position on whether the last sentence of § 3730(b)(1)

grants the government the power to veto voluntary settlements

11
without intervening.1 That court initially seemed prepared to give

teeth to § 3730(b)(1). In United States ex rel. McGough v.

Covington Technologies, 967 F.2d 1391, 1397 (9th Cir. 1992), it

determined that § 3730(b)(1) requires governmental consent to a

voluntary settlement where the relator has failed to notify the

government of the settlement terms. By failing to communicate his

settlement plans to the government, the relator denied the

government the opportunity to intervene and thus failed to

represent the government’s interests adequately.

But the court changed course in United States ex rel.

Killingsworth v. Northrop Corp., 25 F.3d 715 (9th Cir. 1994). In

Killingsworth, the government asked to intervene for purposes of

appeal after the district court refused to let it block a False

Claims Act settlement. According to the government, the relator

was short-changing the government by settling both a False Claims

Act suit and a private wrongful termination suit at the same time

and shifting most of the recovery into the wrongful termination

settlement in order to reduce the percentage of the overall amount

that would ordinarily go to the government. The court allowed the

intervention for purposes of appeal, but it held that “the

1
One district court anticipated the Ninth Circuit. The
Eastern District of Tennessee ruled in a brief opinion that
Ҥ 3730(b)(1) when read in the context of the statute as a whole,
is intended to ensure that legitimate claims brought by a qui tam
plaintiff are not dismissed before the United States has been
notified of the claims and has had an opportunity to decide whether
the United States should take over the conduct of the action.”
United States ex rel. Stenson, Lyons v. Provident Life & Accident
Ins. Co., 811 F. Supp. 346, 347 (E.D. Tenn. 1992). Consequently,
the court rejected the government’s effort to impose conditions on
a voluntary settlement.

12
government’s consent to dismissal is only required during the

initial sixty-day (or extended) period in which the government may

decide whether to [proceed with the action].” Id. at 723. It

distinguished McGough by explaining that the government knew about

the settlement and chose not to exercise its right to intervene for

good cause in the trial-court proceedings. The government in our

case concedes that the result in Killingsworth is directly contrary

to its position. It can do nothing but ask us to reject the Ninth

Circuit’s reasoning.

We find Killingsworth unpersuasive. First, we are unimpressed

with the court’s contention that the legislative history of the

1986 False Claims Act amendments militates against giving the

government the power to veto a settlement. When President Lincoln

signed the original 1863 statute, it contained a version of what is

now the last sentence of § 3730(b)(1). The original statute,

however, contained no mechanism by which the government could take

over a qui tam action. In two sets of amendments, Congress has

both created and expanded the government’s power to assume control

of the litigation. See Pub. L. No. 78-213, ch. 377, 57 Stat. 608

(1943) (currently codified at 31 U.S.C. § 3730(d)(2)(A)) (allowing

the government to take over the case within sixty days of

notification); Pub. L. No. 99-562, 100 Stat. 3154 (1986) (codified

at 31 U.S.C. §§ 3730(b)(3) & (c)(3)) (allowing the government both

to expand the sixty-day period and to intervene “at a later date”

on a showing of good cause).

13
 After considering legislators’ remarks about the 1986

amendments, the Killingsworth court concluded that the current

version of the Act is designed to encourage private litigants to

take more responsibility for enforcement. 25 F.3d at 721.

“Congress’ intent to place full responsibility for False Claims Act

litigation on private parties, absent early intervention by the

government or later intervention for good cause, is fundamentally

inconsistent with the asserted ‘absolute’ right of the government

to block a settlement and force a private party to continue

litigation.” Id. at 722.

Even if we assume that Killingsworth gauged Congressional

intent accurately, intentions alone cannot work a repeal of the

last sentence of § 3730(b)(1). Before 1943, when the government

had no authority to control claims initiated by relators, that

sentence served as the government’s one opportunity to influence

the litigation in case a relator proposed a settlement that might

harm the United States. Although Congress has studied the Act and

seen fit to overhaul many of its provisions, it has not chosen to

eliminate the sentence we are asked to interpret. As far as we can

tell, Congress decided that it should combine its effort to

reinvigorate the qui tam provisions of the Act with a continuation

of its policy of encouraging the government to monitor relators’

actions and step in when a relator is not acting in the best

interest of the public. If Congress meant to repeal the

government’s power to consent to voluntary settlements, it needed

to say so explicitly. Otherwise, we must follow our usual

14
procedure of reading the statute and enforcing its dictates if its

language is clear.

The statutory language relied on by the government is as

unambiguous as one can expect: “The action may be dismissed only if

the court and the Attorney General give written consent to the

dismissal and their reasons for consenting.” Unlike the

Killingsworth court, we can find nothing in § 3730 to negate the

plain import of this language.

Section 3730(b)(4)(B) gives the relator “the right to conduct

the action” when the government declines to assume control. But it

does not follow that “[t]he right to conduct the action obviously

includes the right to negotiate a settlement in that action.” 25

F.3d at 722. A relator has “conducted” an action if he devises

strategy, executes discovery, and argues the case in court, even if

the government frustrates his settlement efforts. Apparently, a

relator “conducts” an action even though the government retains the

power to take the more radical step of unilaterally dismissing the

defendant. See 31 U.S.C. § 3730(c)(2)(A); Juliano v. Federal Asset

Disposition Ass’n, 736 F. Supp. 348, 351 (D.D.C. 1990) (“[T]he Act

[does not] state that the qui tam plaintiff remains free to

prosecute any person or entity he wishes, provided the government

declines to take over the action.”), aff’d, 959 F.2d 1101 (D.C.

Cir. 1992) (mem.). The power to veto voluntary settlements, then,

does not conflict with the relator’s statutory right to control the

litigation when the government chooses to remain passive. Section

3730(d)(2) states that “the person bringing the action or settling

15
the claim shall receive an amount which the court decides is

reasonable for collecting the civil penalty and damages.” But

again, the government’s power to block settlements does not mean

that the relator will never be the person settling the claim. This

provision does not purport to create an iron-clad “right to

settle.” See Killingsworth, 25 F.3d at 722-23.

The Killingsworth litigation demonstrates that relators can

manipulate settlements in ways that unfairly enrich them and reduce

benefits to the government. This case presents a relator who

allegedly wants to trade on the defendants’ desire to maximize

preclusive effects. Plaintiffs ordinarily prefer to keep their

options open; agreeing not to bring future suits can be costly. In

qui tam litigation, however, there is a danger that a relator can

boost the value of settlement by bargaining away claims on behalf

of the United States. According to the government, that’s what

Bortner is attempting: at little cost to himself, he is reaping the

benefit of promising that the United States will not make further

claims against Philips based on the transactions and occurrences at

issue in his suit. If the government decides the settlement isn’t

worth the cost, § 3730(b)(1) allows the government to resist these

tactics and protect its ability to prosecute matters in the future.

For more than 130 years, Congress has instructed courts to let

the government stand on the sidelines and veto a voluntary

settlement. It would take a serious conflict within the structure

of the False Claims Act or a profound gap in the reasonableness of

16
the provision for us to be able to justify ignoring this language.

We can find neither.

IV.

The district court’s settlement order and voluntary dismissal

are VACATED, and the case is REMANDED for further proceedings.

17