In Morehouse, Eleventh Circuit Underscores Threshold Test for FCA Retaliation Claims

November 3, 2020Analysis
Dinsmore on FCA

  Man blowing a red whistle

In Brown v. Morehouse College, a False Claims Act (FCA) retaliation action, the U.S. Court of Appeals for the Eleventh Circuit affirmed the case’s dismissal, agreeing with the district court that while the plaintiff’s ethics complaints may have led to retaliation against him by the College, the complaints did not allege FCA fraud and therefore were not protected by the statute. No. 19-13773, 2020 U.S. App. LEXIS 33444 (11th Cir. Oct. 23, 2020).

Employee’s Ethics Complaint

The plaintiff was employed by the defendant (“College”) as director of its office of research, and as principal investigator for a National Science Foundation (NSF) program responsible for ensuring the College’s compliance with NSF grant reporting obligations. Around 2010, the plaintiff submitted an internal ethics complaint regarding the College’s subcontract with another institution under an NSF grant. The complaint alleged the College was noncompliant with its cost-sharing obligations, and was over-expensing employee salaries to the grant. In its formal response to the complaint, the College declined to remove a contested employee from the grant and deemed the matter closed. Id. at *1–3.

Two years later, the plaintiff sent a memorandum to the provost raising three concerns: (1) on the grant his ethics complaint had concerned, the College was not recovering sufficient funds from its subcontract; (2) on another grant, the College had over-charged fringe benefits; and (3) when the College’s budget analysts rejected spending requests, they refused to give reasons for those adverse decisions. Id. at *3.

Around the time of the memorandum, the plaintiff’s salary payments ceased for approximately half a year, then resumed. The following year, in June 2015, he received notice of non-renewal of his contract, ending his employment with the College. Id. The plaintiff retained counsel and sent a letter to a member of the College’s board of trustees, alluding to “the whistleblower statutes with regard to [NSF] grant funding.” Id.

FCA Retaliation Action and District Court’s Dismissal

Subsequently, the plaintiff filed an FCA retaliation action, alleging the College “intentionally discriminate[d] and punish[ed] [him] for reporting . . . misuse of Federal funds spending.” Id. at *3–4. Following a round of discovery, the College moved for summary judgment. In its brief, the College asserted non-retaliatory reasons for the plaintiff’s termination, including failure to follow NSF scholarship selection regulations and the expiration of grant funding for his position. Id. at *4.

The district court granted summary judgment for the College, finding the plaintiff had failed to meet the threshold test of demonstrating he had engaged in protected conduct. To invoke recovery under the FCA’s anti-retaliation provision, 31 U.S.C. § 3730(h), an employee’s discharge, demotion, harassment, or other form of employment discrimination must have occurred “because of lawful acts done by the employee [] in furtherance of an action under this section or other efforts to stop [one] or more violations of this subchapter.” § 3730(h)(1) (alterations added). Those “lawful acts . . . or other efforts” constitute “protected activity” under the statute. See Morehouse Coll., 2020 U.S. App. LEXIS 33444, at *5 (omission added).

The district court found the plaintiff’s accusations of “misus[e]” or “abus[e]” of federal money failed to suggest fraud against the United States, concluding “the evidence in the record does not show that Brown’s [ethics] complaint or letter to [the trustee] made [the College] aware of the possibility of an FCA action.” Id. at *4–5 (internal quotation omitted). Therefore, the court found that the plaintiff had not engaged in protected activity. Id. at *4.

The plaintiff appealed to the Eleventh Circuit. The college then moved for sanctions under Federal Rule of Appellate Procedure 38, seeking damages for a frivolous appeal. See Fed. R. App. P. 38 (permitting appellate court, upon “determin[ing] that an appeal is frivolous,” to award the appellee “just damages and single or double costs”)

The Eleventh Circuit’s Decision

The Eleventh Circuit panel resolved the appeal without oral argument, beginning its analysis with the concept of “protected activity” and noting the parties both recognized protected activity could include “employee actions by which FCA litigation was ‘a distinct possibility.’” Id. at *5 (quoting Childree v. UAP/GA AG Chem., Inc., 92 F.3d 1140, 1146 (11th Cir. 1996)).1 The court found the retaliation claim failed for two reasons. First, the plaintiff characterized the reported conduct as “mismanagement of funds,” “financial irregularities,” and like terms. However, “mere misuse or bad practice is not enough to ground an FCA claim.” Id. at *6. Rather, “submission of a fraudulent claim to the government” is required. Id. (quoting Urquilla-Diaz v. Kaplan Univ., 780 F.3d 1039, 1045 (11th Cir. 2015)) (emphasis added).

The panel also stressed a second, even more basic reason why the plaintiff failed to show protected activity: the absence of even a suggestion “that the College [] submitt[ed] anything to the government.” The lack of any submission of a fraudulent claim cut any possibility of an FCA violation off at the knees. Id. at 6–7.2 And with it collapsed any basis for a § 3730(h) retaliation claim. Id. at *7.

Though its summary judgment victory held up on appeal, the College failed to win sanctions. Noting “a losing appeal is not synonymous with a frivolous one,” id. at *8, the panel found the plaintiff’s appeal not so “utterly devoid of merit” as to warrant sanctions, id. (quoting Bonfiglio v. Nugent, 986 F.2d 1391, 1393 (11th Cir. 1993)).3

Morehouse usefully delineates the threshold test a plaintiff must meet to show entitlement to relief under § 3730(h). The plaintiff’s activity must have pointed to fraud against the government, not merely to generalized maladministration of funds. It also could be useful in supporting a motion to dismiss a substantive FCA claim for lack of scienter, as the court’s reasoning suggests that internal allegations of financial mismanagement are not enough to give rise to a plausible allegation of scienter.

[1] The panel noted that the “distinct possibility” test for whether an employee’s activity is protected under the FCA arguably no longer applied after the 2009 and 2010 amendments, and cited a Fourth Circuit opinion on point. See Morehouse Coll., 2020 U.S. App. LEXIS 33444, at *5 n.1 (citing United States ex rel. Grant v. United Airlines Inc., 912 F.3d 190, 201 (4th Cir. 2018) (holding the test no longer applied due to the amended statute’s enlargement of protected activity to include “other efforts to stop [one] or more violations of this subchapter”)). Although the Eleventh Circuit has not yet taken up the issue, the panel assumed the test applied because both parties accepted its application. See id.

[2] The panel observed the case might have fared differently had the plaintiff argued the College received “wrongful[] reimburse[ment], and that such reimbursement was fraud upon the government.” See id. at *7 n.2. Because plaintiff “d[id] not mention this aspect with any specificity,” however, the panel declined to consider it.

[3] The stringency of the Circuit’s test for Rule 38 motions is suggested by the fact that the Rule refers to an appellate court’s “determin[ation] that an appeal is frivolous,” Fed. R. App. P. 38—while the Eleventh Circuit has stated that “Rule 38 sanctions are appropriately imposed against appellants who raise ‘clearly frivolous claims in the face of established law and clear facts,’” Morehouse Coll., 2020 U.S. App. LEXIS 33444, at *8 (quoting Parker v. Am. Traffic Sols., Inc., 835 F.3d 1363, 1371 (11th Cir. 2016)) (emphasis added). While courts in other circuits sometimes point out that a particular appeal is “clearly frivolous,” the Eleventh appears to be the only circuit that uses that phrasing in applying the Rule 38 standard itself. See Parker, 835 F.3d at 1371; Farese v. Scherer, 342 F.3d 1223, 1232 (11th Cir. 2003).