Revised May 23, 2000
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 98-11483
UNITED STATES OF AMERICA,
Plaintiff-Appellant,
versus
UNITED STATES OF AMERICA,
ex relatione, PETER JENSEN THORNTON,
Relator-Appellee,
versus
SCIENCE APPLICATIONS INTERNATIONAL
CORPORATION; BENDIX FIELD
ENGINEERING CORPORATION,
A Division of Allied Signal
Aerospace Company; LLOYD ELECTRIC
COMPANY, INC.,
Defendants.
Appeal from the United States District Court
for the Northern District of Texas
March 28, 2000
Before POLITZ, JOHN R. GIBSON,* and HIGGINBOTHAM, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
This appeal presents the issue of how to value a False Claims
Act settlement when the settlement includes both cash and released
claims against the government. The government appeals the district
court’s determination that the award of the qui tam relator, Peter
*
Circuit Judge of the Eighth Circuit, sitting by designation.
Thornton, should be calculated using both the cash value of the
settlement and the court’s estimate of the value of the defendants’
released contractual claims against the government. We conclude
that ordinarily the value of such released claims shall be added to
any cash paid to the government in settlement for purposes of
calculating the sum due the informant under the statute. The
amount of such released claims shall be included when the released
claims are part of the bargain of the settlement and are not so
intertwined with the subject of the False Claims Act cause of
action so as to present the equivalent of a compulsory
counterclaim. We VACATE the award and REMAND, however, so that the
district court may develop a record of how it determined that
value.
I
Peter Thornton filed a False Claims Act (“FCA”) suit against
several defendants relating to the installation of a government
security system. The government opted to participate in the suit
and settled with each of the defendants. The settlement included
$230,000 in cash from the three defendants combined, the release of
contractual claims the defendants had against the government, which
they claimed had a value of $1.6 million, and the transfer of the
system’s software code to the government.
Thornton challenged the adequacy of the settlement, triggering
the FCA’s statutory fairness hearing. At that hearing, Thornton
argued that the settlement did not take into account several
2
additional incidents of fraud. The district court, which at that
time had not seen the settlement agreement, conditionally approved
the settlement and rejected Thornton’s objections. The court noted
in passing that the parties had settled the defendants’ claims as
part of the settlement, but apparently this aspect was not a focus
of the hearing. The court set a second hearing to determine
Thornton’s share.
In his briefing for the second hearing, Thornton argued that
the total value of the settlement should take into account the
defendants’ administrative claims released by the government. He
argued that the face value of the released claims should be added
to the cash value of the settlement for a total of $1.83 million.
He also argued that the software code had value to the settlement.
The government contended that neither the released claims nor the
software code should be considered part of the value.
The district court held that the released claims should be
included but held that the software code was collateral to the
settlement: its transfer had been provided for in the original
contract, and its mention in the settlement agreement was simply
for the parties’ convenience. The parties dispute the procedure by
which the district court arrived at its valuation of the released
claims. Thornton reports that the district court examined
documents withheld by the government as privileged in camera,
including the contract documents, change orders, claims of the
defendants, and the government’s investigative report. The
3
government contends that the court simply split the face value of
the claims in half. The record before us sheds no light on what
procedure was used. The district court held that even if the value
of the defendants’ claims was half their face value, or $800,000,
Thornton was entitled to all of the cash proceeds of the settlement
if his share was 22.33 percent.
The court entered final judgment, at which point the
settlements were accepted. The government appealed, claiming that
the value of the released claims should not have been included,
that the district court and Thornton were bound by their positions
at the first hearing, and that the valuation of the released claims
was clearly erroneous.
II
The qui tam provisions of the False Claims Act create
incentives for potential whistle blowers to assist the government
to discover fraud against the taxpayers.1 The FCA allows a private
citizen with special knowledge of fraud against the government to
commence suit in the name of the government.2 The government may
intervene in the action or allow the qui tam relator to proceed
with the suit alone.3 If the government intervenes, it may settle
the case over the relator’s objections as long as the settlement is
1
See United States ex rel. Hall v. Teledyne Wah Chang Albany,
104 F.3d 230, 233 (9th Cir. 1997).
2
See 31 U.S.C.§ 3730(b)(1) (1999).
3
See § 3730(b)(2).
4
fair, adequate and reasonable.4 The relator may request a hearing
to review the fairness of the settlement.5
Upon settlement, the relator receives between 15 and 25
percent “of the proceeds of the action or settlement of the claim,”
depending on the value of his contribution to the recovery.6 We
first address whether the value of the defendants’ released claims
against the government should be included in the settlement for
purposes of calculating Thornton’s share. The parties agree that
the “proceeds” of an FCA settlement may include non-cash value,
such as the value of certain released claims. Certain principles,
however, confine when other settlements are relevant to the value
of the FCA settlement for purposes of determining the relator’s
share.
First, for the value of the released claims to be included,
there must be an indication that they were released in return for
the government’s release of the FCA claims. For example, in United
States ex rel. Burr v. Blue Cross & Blue Shield of Florida, Inc.,
the court stated that it would not consider the “sums received” by
the defendant in its settlement with the government and a third
party. Because the two settlements were paid separately, the
4
See § 3730(c)(2)(B).
5
See id.
6
See § 3730(d)(1).
5
settlement of the defendants’ claims was not set off against the
value of the FCA settlement.7
Even if the different settlements are memorialized in a single
agreement, there may have been no exchange of releases. In
Thornton’s case, the district court found that the transfer of the
software code was not in return for the settlement of the FCA case
because the government’s contractual right to the code had not been
in dispute. The defendants’ claims against the government, in
contrast, were part of the bargain of the settlement. It is clear
from the settlement agreement and from the defendants’ statements
at the fairness hearing that the defendants’ claims were released
in exchange for the settlement of the FCA suit.
Second, latent claims against the government may be so
intertwined with the government’s FCA claim that the FCA suit
triggers them as counterclaims.8 In such instances, the government
might well not have been exposed to liability had the FCA suit not
been brought. The resulting settlement in such cases represents
not so much a trading of valued claims but rather the sum total of
the value of the litigation to the government. To base the share
on the amount of released claims in this circumstance would leave
7
882 F. Supp. 166, 169 (M.D. Fla. 1995).
8
Such closely related claims correspond roughly to compulsory
counterclaims under the Federal Rules of Civil Procedure. See
FED.R.CIV.P. 13(a) (1999).
6
the relator in a better position than the government, the entity on
whose behalf the suit was brought.
In Thornton’s case, the released claims of the defendants do
not meet these circumstances. The defendants had already filed
their administrative claims by the time Thornton brought the FCA
suit. Thus, the value of the claims, stated by defendants as
having been part of the bargain of the settlement, is part of the
value of the settlement in determining Thornton’s share of the
total proceeds.
III
We turn to the procedural questions of how the valuation
should occur for purposes of determining the relator’s share. The
government contends that the valuation of the settlement must be
made at the fairness hearing before the settlement is finalized.9
Here, Thornton first raised the issue of the released claims when
the district court determined the relator’s share.
9
We are not persuaded by the government’s argument that the
district court was barred from considering the issue at the
relator’s share hearing under the law of the case. The law of the
case speaks to reconsidering issues previously decided by the
court. Free v. Abbott Lab., Inc., 164 F.3d 270, 272 (5th Cir.
1999). It is not apparent that the district court decided the same
issue differently at the two hearings: at the first hearing, he
determined what amount was adequate to settle given the claims; at
the second hearing, he determined the value of the settlement for
purposes of calculating Thornton’s share. We are especially not
eager to preclude the second ruling when the government had not
provided the court with copies of the settlement agreement at the
first hearing.
7
Under normal circumstances, the value of non-cash proceeds
should be determined before the district court approves the FCA
settlement. This sequence allows the government to withdraw from
a global settlement whose net cash value, after subtracting the
relator’s share, the government deems too minimal. To achieve this
end, a district court is free to advise the relator that the total
value of the settlement will be determined when the court
ascertains the fairness of the settlement, and that the relator
must raise any objections at the fairness hearing. Such an
approach also allows the court to evaluate the total value relative
to the strength of the FCA claims, rather than in a vacuum, and
allows the possibility of a single proceeding.
This approach does not prejudice the relator as long as he and
the court are on notice of the components of the settlement and the
government’s estimate of any non-cash proceeds. The government has
a duty to advise the relator of the value of the settlement at the
time it notifies him that it intends to settle the case, and this
representation should include the government’s estimate of the
value of non-cash proceeds. Especially in cases such as this one,
in which the face value of the defendants’ claims is significant,
the government will have a rough idea of the claims’ value.10
10
The value of some non-cash proceeds, such as the government’s
release of potential criminal liability or the defendant’s
agreement to provide additional services in the future, may not be
ascertainable. Where no reasonable valuation is possible, it
cannot be taken into account in calculating the relator’s share.
8
Here, the relator received no estimate of the government’s
valuation of the released claims and was not advised that he must
object to that value at the fairness hearing. Thornton was thus
free to contest the value assigned by the government in his request
for a share of the proceeds. It is unclear from the record,
however, how the district court undertook to value the released
claims: the opinion gives no explanation as to how the amount was
reached, and the documents on which Thornton claims the court
relied are not before us. We thus must remand for fuller
development of the record.
On remand, the government should provide the district court
with an estimate of the released claims and documentation
supporting that estimate. As the relator is unlikely to have much,
if any, information as to the value of such claims, he should be
allowed access to as much as possible of the documentation.
Ultimately, he bears the burden of disproving the government’s
estimate of value.
We note that this inquiry should not balloon into extensive
collateral litigation. It comes as no surprise that while the
government and relator have litigated on the same side, their
interests diverge when it comes time to pay the relator’s share.
The government has not always been magnanimous to its relators at
the end of the day.11 They cannot easily part ways at this stage,
11
See United States v. General Elec., 808 F. Supp. 580, 583-
84 (S.D. Ohio 1992); Marc S. Raspanti & David M. Laigaie, Current
9
however: the relator must rely to some extent on the government to
report in good faith the fruits of their joint efforts.
VACATED AND REMANDED.
Practice & Procedure Under the Whistleblower Provisions of the
Federal False Claims Act, 71 TEMP. L. REV. 23, 47-53 (1998).
10