Central District of California Opinion Confirms that Information Gained through Employment is Not Necessarily “Direct” Knowledge under the Public Disclosure Bar

By on September 4, 2015

Last week, a court dismissed a relator’s claim for a share of the government’s $322 million settlement in United States v. Scan Health Plan, 2:09-cv-05013-JFW (C.D. Cal. Aug. 28, 2015), ruling that the relator did not qualify as an original source under the False Claims Act’s (FCA) public disclosure bar. The ruling followed the Court’s earlier decision in June that the relator’s claim was “based upon” a publicly disclosed audit report by the State of California Controller’s Office (SCO), which found that the defendant, Scan Health Plan, was receiving “duplicative of overlapping payments” from Medicare and Medi-Cal. The court’s June ruling left open, however, whether the relator could nonetheless avoid application of the public disclosure bar by showing that he was an original source. Last week’s decision concluded that he could not:  despite the relator’s previous employment with the defendant and his role in initiating the SCO’s audit, he did not have the kind of “direct and independent” knowledge of the alleged fraud necessary to qualify as an original source.

The court’s opinion focused on the FCA’s requirement that only “direct” knowledge can qualify a relator as an original source. Citing Ninth Circuit precedent, the court rejected the relator’s argument that anything learned during his employment with the defendant qualified as direct knowledge. Rather, the court stated that direct knowledge comes from “actually view[ing] the source documents or view[ing] firsthand the fraudulent activity that is the basis of [the] qui tam action.” Knowledge that the relator learns from others in the company is “secondhand” and not “direct.”

The court also based its conclusion on the relator’s failure to provide any detailed support for his allegations in his complaint that did not otherwise arise from the publicly disclosed SCO audit report. The court noted that the relator’s factual allegations underlying the claim of fraud were either pled on information and belief or were drawn from the SCO audit. The relator did not plead that he had direct and independent knowledge of the fraud.  Indeed, the relator’s position with the company did not give him access to the financial data needed to detect the alleged fraud. Rather, all the relator had was “speculation and conjecture.” That the speculation arose from information that the relator gained as an employee of the defendant did not matter. The relator still lacked “direct” knowledge of the information underlying the alleged fraud.

The court’s decision confirms that a relator must have direct knowledge or involvement in the underlying conduct for the relator to qualify as an original source under the public disclosure bar.  Mere speculation and conjecture of fraudulent activity, even if based on information learned through employment with the defendant, is not sufficient to support making a fraud allegation under the FCA.  Even though the relator had played a role in initiating the government audit that ultimately resulted in the FCA settlement, this was not enough. The FCA has, and should have, strict requirements for individuals to qualify as relators in order to avoid turning qui tam complaints into fishing expeditions for information to support someone’s speculation and conjecture.