The <i>Chandler</i> Decision: What It Means

In a dramatic departure from the majority view that also resolved the circuit court split, a unanimous Court held in Chandler that municipal and county governments are “persons” subject to liability under treble damages and penalty provisions that have, the Court acknowledged, “punitive objectives.” Chandler, 123 S. Ct. at 1246.

Historical Perspectives on Municipalities as 'Persons'

Cook County argued that Congress never intended to subject municipalities to FCA liability when the FCA was enacted in 1863, because the word “person” was not presumed to include corporations at that time. Alternatively, Cook County argued that Congress effectively immunized municipal corporations from all FCA liability when it increased damages from a remedial to a punitive level in 1986. In Chandler, a unanimous Supreme Court relied on a variety of historical sources to conclude that, since at least 1787, municipal corporations were considered to be “persons” that may sue and be sued. Id. Once the Court made this determination, the County arguments against imposing FCA liability on municipalities were, in many ways, doomed.

Municipalities As 'Persons' Subject to Punitive Liability

The Supreme Court conceded that there are strong presumptions against imposing punitive liability on governmental entities in the absence of express Congressional intent. Id. The Court also continued to characterize the FCA's treble damages provision as a punitive one, and it did not retreat from its holding to this effect in Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 784 (2000).

Although there is no express authority in the FCA for imposing punitive liability on municipalities, the Court, starting from the premise that municipalities were “persons” subject to suit under the Act in 1863, simply refused to hold that Congress impliedly repealed the FCA as to municipalities when it increased damages to a punitive level in 1986. Doing so would require the Court “to infer a remarkable consequence unstated in the 1986 Amendments to the FCA.” Chandler, 123 S. Ct. at 1246.

The simple reality is that Congress did not make its intentions clear on this point. Congress did not engage in debate over the propriety of allowing qui tam relators or the Department of Justice to sue local governments under the civil False Claims Act. It is not at all clear that Congress even seriously considered this issue. If it had done so, the strong policy arguments against such suits, which have been previously enumerated by the majority of courts that dismissed qui tam actions against municipalities before Chandler, would have almost certainly been raised and carefully examined. Whether Congress will use the Chandler decision as an opportunity to engage in this analysis for the first time remains to be seen.

In any event, it is important to consider the broader implications of the Chandler decision, because the Court made a number of significant statements with implications for all healthcare defendants subject to suit under the FCA.

Clarifying the Boundaries for Applying the FCA

The Supreme Court's acknowledgement 3 years ago in the Stevens decision that treble FCA damages are “essentially punitive in nature” was the first time in the 14 years following the enactment of the 1986 Amendments that a court explicitly recognized that the new treble damages regime crossed over into punitive territory. In Chandler, the Court again acknowledged the “punitive feature[s]” of the treble damages provision. Id. Those punitive features remain as firmly entrenched in FCA jurisprudence as they were before the Chandler decision was issued.

The characterization of FCA's damages as punitive has implications in several aspects of FCA litigation. It affects the potential application of constitutional protections against excessive fines and penalties. It may also affect whether an FCA action survives the death of a relator or defendant, and whether principals may be held vicariously liable for the unauthorized acts of their agents. See Boese, Civil False Claims and Qui Tam Actions ' 3.02. Until Chandler was decided, many courts also concluded that it immunized certain local governmental entities from punitive liability.

The Supreme Court was willing to subordinate the presumption against imposing punitive liability on municipalities to another presumption – one against implied repeals of statutes. The Act's “punitive features” do not, the Court held, have “the force to show congressional intent to repeal implicitly the existing definition of ['person'], which included municipalities.” Chandler, 123 S. Ct. at 1246.

Several aspects of the Court's discussion of the FCA's treble damages provision merit closer attention. Perhaps most fundamentally, the Court's discussion makes clear what kinds of injuries give rise to FCA damages, and they are those that “impose on the federal fisc and exploit the federal spending power.” Id.

• The Court treats as self-evident the fact that the FCA comes into play only when there is a direct effect on the Federal Treasury.
• The Court resolves any question that may have remained as to whether consequential damages are recoverable under the False Claims Act, noting that treble damages were “adopted by Congress as a substitute for consequential damages.” Id. at 1247. Chandler also notes that the FCA does not contain a separate provision for prejudgment interest or “other consequential damages” (ie, investigative costs) “that typically come with recovery for fraud.” Id.
• The Court referred to the trebling provision as a damages “ceiling,” in support of its assertion that the FCA has remedial as well as punitive features. Id.

Power of Dismissal

One enticing aspect of the Court's decision is the rationale used for rejecting the argument that an opportunistic qui tam relator could do serious economic harm to municipal taxpayers. The Court stated that such concerns should be resolved “by a combination of the judge's discretion and the Government's power to intervene and dismiss or settle an action.” Id. See 31 U.S.C. ' 3730(c)(2). The power of the Department of Justice to dismiss a qui tam case has been the subject of significant debate in the courts. Compare United States ex rel. Sequoia Orange Co. v. Baird – Neece Packing Corporation, 151 F.3d 1139 (9th Cir. 1998) with Swift v. United States, 318 F.3d 250 (D.C. Cir. 2003). The Supreme Court seems to be sending a clear signal that it considers DOJ to have broad dismissal and settlement powers under the FCA.

Providing the Government with 'Rough Remedial Justice'

It is the Court's repeated references to FCA damages in isolation of the FCA penalty provisions that reveal the limitations of the Chandler decision. When one looks beyond those limits, it is clear that the fundamentally punitive nature of the FCA remains intact under Chandler.

The Court reiterated its longstanding assertion that the government is permitted to receive a “make-whole” recovery under the False Claims Act. Chandler, 123 S. Ct. at 1247. Treble FCA damages serve some remedial purposes, the Court held, because they serve to fully compensate the government for ancillary costs that are not separately recoverable under the FCA, including:

• costs of detection and investigation;
• in qui tam cases, the cost of a relator's share comprising up to nearly one-third of the recovery;
• pre-judgment interest, which is not otherwise provided for under the FCA; and
• consequential damages. Id.

Additionally, the Court noted that FCA treble damages differ some from “classic punitive damages” because the multiplier is fixed by the trial court and is limited to either double (in only limited circumstances) or treble damages. FCA penalties are also set by the court, avoiding potentially extreme awards from “unduly generous juries.” Id. The Court relied on the treble damages “ceiling” to conclude that the FCA is, in essence, “remedial enough” to overcome the presumption against imposing punitive damages on municipalities, though “the FCA's treble damages remedy is still 'punitive' in that the recovery will exceed full compensation in a good many cases.” Id.

When Rough Justice Becomes Clear Injustice

The Supreme Court recognized in Chandler that “the tipping point between pay-back and punishment defies general formulation,” and is “dependent on the workings of a particular statute and the course of particular litigation.” That the tipping point does in fact point quite firmly to the punishment category becomes clear when one takes into consideration two additional factors: 1) the relative size of single damages, and 2) the number of penalties that may be imposed. A panel of the Ninth Circuit recognized this when it held, in the context of deciding Eighth Amendment excessive fines issues in an FCA case, that FCA damages and penalties cannot be considered in isolation, as if the other did not exist. See United States v. Mackby, 261 F.3d 821, 831 (9th Cir. 2001). See also Hays v. Hoffman, Nos. 01-3888, 01-3891, 2003 WL 1825040, at *7 (8th Cir. Apr. 9, 2003) (vacating most of a lower court judgment and rejecting the approach to counting penalties advocated by the relator, which would have resulted in a $1 million penalty for hundreds of claims in the absence of any injury to the government, because it was “laced with Excessive Fines implications.”).

In Chandler, the Court did not discuss the fact that where large single damages are involved, the treble damages multiplier may provide for a recovery that is “exponentially greater” than the amount of the Government's total loss. As the Supreme Court noted in a 1989 False Claims Act decision, while the government is entitled to rough remedial justice, “rough justice becomes clear injustice” when “a supposedly remedial sanction does not remotely approximate the Government's damages and actual costs.” See United States v. Halper, 490 U.S. 435, 446 (1989).

Indeed, the Supreme Court recently overturned a $145 million punitive damages award imposed in a case in which the jury assessed $1 million in compensatory damages, in State Farm Mutual Automobile Insurance Co. v. Campbell, No. 01-1289, slip op. (U.S. Apr. 7, 2003). The Court held in State Farm that the punitive damages award, with its 145:1 ratio of punitive to compensatory damages, violated the Due Process Clause of the Fourteenth Amendment because it was “neither reasonable nor proportionate to the wrong committed,” and was an “irrational and arbitrary deprivation” of the defendant's property. Id., slip op. at 19. In State Farm, the Court held that few awards that exceed compensatory damages by a ratio of more than 4:1 would pass constitutional muster. Moreover, “when compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.” Id. at 15.

Conclusion

Thus, although the Chandler decision holds that municipalities may be subject to qui tam liability under the FCA, it strongly suggests that both courts and the Justice Department should exercise discretion to dismiss those cases that are contrary to sound policy. Moreover, when taken together with other federal and Supreme Court precedent, Chandler preserves the significant constitutional limitations on punitive FCA liability for both public and private entities alike.

John T. Boese is co-chair of the litigation department in the Washington, DC, office of Fried Frank Harris Shriver & Jacobson, and a nationally recognized expert on the civil False Claims Act and qui tam actions. He is the author of the book entitled Civil False Claims and Qui Tam Actions (Aspen Law & Business, 2d ed.). Beth C. McClain is a staff attorney with the firm who also specializes in False Claims Act matters.

In March, the United States Supreme Court issued a decision in a False Claims Act case that has been closely watched by public and private entities alike. See Cook County v. United States ex rel. Chandler, 123 S. Ct. 1239 (2003). This article is intended to put that decision in perspective, to help readers understand what Chandler actually holds, and to reflect upon the future of False Claims Act litigation in the wake of Chandler and other recent Supreme Court decisions on punitive damages.

Are Municipalities Subject to 'Punitive' FCA Liability?

The Supreme Court was confronted with two fundamental questions in the Chandler case: 1) whether Congress intended the FCA to apply municipalities when the law was originally enacted in 1863, and 2) whether Congress intended the Act to apply to municipalities when it increased FCA damages and penalties in 1986. Although courts were split on the issue, a majority had held that local governments are not subject to qui tam liability under the “essentially punitive” provisions of the civil False Claims Act. Other courts held that even when local governments were sued under the FCA by the Justice Department, the punitive nature of FCA damages precluded municipal liability. See John T. Boese, Civil False Claims and Qui Tam Actions, ' 2.07[D] (Aspen Pub. 2d ed. Supp. 2003-1).

In a dramatic departure from the majority view that also resolved the circuit court split, a unanimous Court held in Chandler that municipal and county governments are “persons” subject to liability under treble damages and penalty provisions that have, the Court acknowledged, “punitive objectives.” Chandler, 123 S. Ct. at 1246.

Historical Perspectives on Municipalities as 'Persons'

Cook County argued that Congress never intended to subject municipalities to FCA liability when the FCA was enacted in 1863, because the word “person” was not presumed to include corporations at that time. Alternatively, Cook County argued that Congress effectively immunized municipal corporations from all FCA liability when it increased damages from a remedial to a punitive level in 1986. In Chandler, a unanimous Supreme Court relied on a variety of historical sources to conclude that, since at least 1787, municipal corporations were considered to be “persons” that may sue and be sued. Id. Once the Court made this determination, the County arguments against imposing FCA liability on municipalities were, in many ways, doomed.

Municipalities As 'Persons' Subject to Punitive Liability

The Supreme Court conceded that there are strong presumptions against imposing punitive liability on governmental entities in the absence of express Congressional intent. Id. The Court also continued to characterize the FCA's treble damages provision as a punitive one, and it did not retreat from its holding to this effect in Vermont Agency of Natural Resources v. United States ex rel. Stevens , 529 U.S. 765, 784 (2000).

Although there is no express authority in the FCA for imposing punitive liability on municipalities, the Court, starting from the premise that municipalities were “persons” subject to suit under the Act in 1863, simply refused to hold that Congress impliedly repealed the FCA as to municipalities when it increased damages to a punitive level in 1986. Doing so would require the Court “to infer a remarkable consequence unstated in the 1986 Amendments to the FCA.” Chandler, 123 S. Ct. at 1246.

The simple reality is that Congress did not make its intentions clear on this point. Congress did not engage in debate over the propriety of allowing qui tam relators or the Department of Justice to sue local governments under the civil False Claims Act. It is not at all clear that Congress even seriously considered this issue. If it had done so, the strong policy arguments against such suits, which have been previously enumerated by the majority of courts that dismissed qui tam actions against municipalities before Chandler, would have almost certainly been raised and carefully examined. Whether Congress will use the Chandler decision as an opportunity to engage in this analysis for the first time remains to be seen.

In any event, it is important to consider the broader implications of the Chandler decision, because the Court made a number of significant statements with implications for all healthcare defendants subject to suit under the FCA.

Clarifying the Boundaries for Applying the FCA

The Supreme Court's acknowledgement 3 years ago in the Stevens decision that treble FCA damages are “essentially punitive in nature” was the first time in the 14 years following the enactment of the 1986 Amendments that a court explicitly recognized that the new treble damages regime crossed over into punitive territory. In Chandler, the Court again acknowledged the “punitive feature[s]” of the treble damages provision. Id. Those punitive features remain as firmly entrenched in FCA jurisprudence as they were before the Chandler decision was issued.

The characterization of FCA's damages as punitive has implications in several aspects of FCA litigation. It affects the potential application of constitutional protections against excessive fines and penalties. It may also affect whether an FCA action survives the death of a relator or defendant, and whether principals may be held vicariously liable for the unauthorized acts of their agents. See Boese, Civil False Claims and Qui Tam Actions ' 3.02. Until Chandler was decided, many courts also concluded that it immunized certain local governmental entities from punitive liability.

The Supreme Court was willing to subordinate the presumption against imposing punitive liability on municipalities to another presumption – one against implied repeals of statutes. The Act's “punitive features” do not, the Court held, have “the force to show congressional intent to repeal implicitly the existing definition of ['person'], which included municipalities.” Chandler, 123 S. Ct. at 1246.

Several aspects of the Court's discussion of the FCA's treble damages provision merit closer attention. Perhaps most fundamentally, the Court's discussion makes clear what kinds of injuries give rise to FCA damages, and they are those that “impose on the federal fisc and exploit the federal spending power.” Id.

• The Court treats as self-evident the fact that the FCA comes into play only when there is a direct effect on the Federal Treasury.
• The Court resolves any question that may have remained as to whether consequential damages are recoverable under the False Claims Act, noting that treble damages were “adopted by Congress as a substitute for consequential damages.” Id. at 1247. Chandler also notes that the FCA does not contain a separate provision for prejudgment interest or “other consequential damages” (ie, investigative costs) “that typically come with recovery for fraud.” Id.
• The Court referred to the trebling provision as a damages “ceiling,” in support of its assertion that the FCA has remedial as well as punitive features. Id.

Power of Dismissal

One enticing aspect of the Court's decision is the rationale used for rejecting the argument that an opportunistic qui tam relator could do serious economic harm to municipal taxpayers. The Court stated that such concerns should be resolved “by a combination of the judge's discretion and the Government's power to intervene and dismiss or settle an action.” Id. See 31 U.S.C. ' 3730(c)(2). The power of the Department of Justice to dismiss a qui tam case has been the subject of significant debate in the courts. Compare United States ex rel. Sequoia Orange Co. v. Baird – Neece Packing Corporation , 151 F.3d 1139 (9th Cir. 1998) with Swift v. United States , 318 F.3d 250 (D.C. Cir. 2003). The Supreme Court seems to be sending a clear signal that it considers DOJ to have broad dismissal and settlement powers under the FCA.

Providing the Government with 'Rough Remedial Justice'

It is the Court's repeated references to FCA damages in isolation of the FCA penalty provisions that reveal the limitations of the Chandler decision. When one looks beyond those limits, it is clear that the fundamentally punitive nature of the FCA remains intact under Chandler.

The Court reiterated its longstanding assertion that the government is permitted to receive a “make-whole” recovery under the False Claims Act. Chandler, 123 S. Ct. at 1247. Treble FCA damages serve some remedial purposes, the Court held, because they serve to fully compensate the government for ancillary costs that are not separately recoverable under the FCA, including:

• costs of detection and investigation;
• in qui tam cases, the cost of a relator's share comprising up to nearly one-third of the recovery;
• pre-judgment interest, which is not otherwise provided for under the FCA; and
• consequential damages. Id.

Additionally, the Court noted that FCA treble damages differ some from “classic punitive damages” because the multiplier is fixed by the trial court and is limited to either double (in only limited circumstances) or treble damages. FCA penalties are also set by the court, avoiding potentially extreme awards from “unduly generous juries.” Id. The Court relied on the treble damages “ceiling” to conclude that the FCA is, in essence, “remedial enough” to overcome the presumption against imposing punitive damages on municipalities, though “the FCA's treble damages remedy is still 'punitive' in that the recovery will exceed full compensation in a good many cases.” Id.

When Rough Justice Becomes Clear Injustice

The Supreme Court recognized in Chandler that “the tipping point between pay-back and punishment defies general formulation,” and is “dependent on the workings of a particular statute and the course of particular litigation.” That the tipping point does in fact point quite firmly to the punishment category becomes clear when one takes into consideration two additional factors: 1) the relative size of single damages, and 2) the number of penalties that may be imposed. A panel of the Ninth Circuit recognized this when it held, in the context of deciding Eighth Amendment excessive fines issues in an FCA case, that FCA damages and penalties cannot be considered in isolation, as if the other did not exist. See United States v. Mackby , 261 F.3d 821, 831 (9th Cir. 2001). See also Hays v. Hoffman, Nos. 01-3888, 01-3891, 2003 WL 1825040, at *7 (8th Cir. Apr. 9, 2003) (vacating most of a lower court judgment and rejecting the approach to counting penalties advocated by the relator, which would have resulted in a $1 million penalty for hundreds of claims in the absence of any injury to the government, because it was “laced with Excessive Fines implications.”).

In Chandler, the Court did not discuss the fact that where large single damages are involved, the treble damages multiplier may provide for a recovery that is “exponentially greater” than the amount of the Government's total loss. As the Supreme Court noted in a 1989 False Claims Act decision, while the government is entitled to rough remedial justice, “rough justice becomes clear injustice” when “a supposedly remedial sanction does not remotely approximate the Government's damages and actual costs.” See United States v. Halper , 490 U.S. 435, 446 (1989).

Indeed, the Supreme Court recently overturned a $145 million punitive damages award imposed in a case in which the jury assessed $1 million in compensatory damages, in State Farm Mutual Automobile Insurance Co. v. Campbell, No. 01-1289, slip op. (U.S. Apr. 7, 2003). The Court held in State Farm that the punitive damages award, with its 145:1 ratio of punitive to compensatory damages, violated the Due Process Clause of the Fourteenth Amendment because it was “neither reasonable nor proportionate to the wrong committed,” and was an “irrational and arbitrary deprivation” of the defendant's property. Id., slip op. at 19. In State Farm, the Court held that few awards that exceed compensatory damages by a ratio of more than 4:1 would pass constitutional muster. Moreover, “when compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.” Id. at 15.

Conclusion

Thus, although the Chandler decision holds that municipalities may be subject to qui tam liability under the FCA, it strongly suggests that both courts and the Justice Department should exercise discretion to dismiss those cases that are contrary to sound policy. Moreover, when taken together with other federal and Supreme Court precedent, Chandler preserves the significant constitutional limitations on punitive FCA liability for both public and private entities alike.

John T. Boese is co-chair of the litigation department in the Washington, DC, office of Fried Frank Harris Shriver & Jacobson, and a nationally recognized expert on the civil False Claims Act and qui tam actions. He is the author of the book entitled Civil False Claims and Qui Tam Actions (Aspen Law & Business, 2d ed.). Beth C. McClain is a staff attorney with the firm who also specializes in False Claims Act matters.