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Whistleblower Suit Revived by Third Circuit Despite Settlement in Related State Court Action

Posted  August 13, 2019

In United States ex rel. Jean Charte v. American Tutor, Inc., the Court of Appeals for the Third Circuit reversed dismissal of a whistleblower’s qui tam action under the False Claims Act, giving the whistleblower the right to pursue her claims. The district court had dismissed the action under state law res judicata principals, because the relator had settled a defamation action brought in state court against her by the defendants.

The Third Circuit opinion correctly recognizes that the state court settlement did not bar the False Claims Act action.

  • First, FCA claims belong to the government, not the relator.
  • Second, the whistleblower was barred from disclosing the FCA action while it was under seal. While the law favors the resolution of related legal controversies in one action, the practicalities of the seal can make that effectively impossible, and application of res judicata inequitable.
  • Finally, while the defendant accused the relator of improperly hiding the FCA action – the sealed FCA action – the district court’s holding would in fact encourage gamesmanship by potential FCA defendants, who, as the Third Circuit wrote, might seek to “’smoke out’ qui tam actions by suing potential relators and then quickly settling those private claims with the sole purpose of subsequently relying on that settlement to bar a qui tam.”

The Whistleblower Claims of Education Fraud and the Defamation Action

The whistleblower, Jean Charte, worked for American Tutor from 2005 to 2007. The company provided tutoring services to New Jersey public school students under arrangements with local school districts which received federal Title I funding to provide supplemental educational services such as tutoring. Charte’s FCA action alleges that the defendants submitted false claims to school districts, billing for students who did not attend tutoring, either because they were absent or because they were never enrolled.

Where a contractor submits fraudulent invoices for education services, the contractor faces liability under the False Claims Act.  Here, Charte pleaded claims under both the federal False Claims Act – because federal Title I funding was involved – and the New Jersey state False Claims Act.

While employed at American Tutor, Charte raised her concerns about the company’s questionable billing and recruiting policies with the company’s principals. After doing so, she was terminated in 2007.  She reported her concerns to the both the federal and New Jersey Departments of Education. In 2008, American Tutor and its principals sued Charte in New Jersey state court for defamation and related claims; Charte answered and counterclaimed for defamation. In 2012, the defamation action was settled and dismissed without prejudice.

Meanwhile, in 2010, Charte had filed her qui tam action, under seal, in federal district court. The case remained under seal for seven years, with the government repeatedly requesting extensions of the seal. The Third Circuit noted that “the Government, not Charte, is largely responsible for the length of this case. Notwithstanding Charte’s consent to some extensions, most of the seven-year period is directly attributable to the Government.” In October 2017, the government notified the court that it would not intervene, the case was unsealed, and Charte served the complaint on defendants.

Defendants then moved for summary judgment on the grounds that the FCA action was barred by New Jersey’s “entire controversy doctrine” and should therefore have been consolidated or resolved along with the state court defamation action.  The district court granted defendants’ motion.

Between a Rock and a Hard Place: Navigating Multiple Actions as a Whistleblower

As noted above, the Third Circuit reversed the district court’ dismissal. While the appellate court agreed that the state court tort action and the federal FCA action both related to the same core set of facts – namely, defendant’s alleged false billings – it held that the entire controversy doctrine did not bar the claims.

There are two interesting things to note about the framing of the issue. First, while relator seems to have conceded that the two actions were related, in fact, the underlying operative facts are quite different: the defamation action involves events after relator’s termination, and does not require any inquiry into whether false claims were submitted to the government. Second, it does not appear that there was any allegation that Charte released the FCA claims through a settlement agreement in the state court action; instead, the Court focused only on the entire controversy doctrine. The law on the invalidity of whistleblower releases would only have strengthened plaintiff’s argument.

As the Third Circuit began, “qui tam actions belong to the Government, not relators.”  Charte, therefore, was in no position to have put the qui tam claims on the table in settling the defamation action. Any settlement of a qui tam action requires the consent of the Attorney general and approval by the federal court.

Moreover, with the case under seal, Charte was barred from raising the fact of the qui tam claims in the defamation action. In fact, she tried to, filing a motion with the district court to lift the seal; that motion was denied. A dissenting opinion suggests that Charte had more options, and could perhaps have alerted the state court ex parte, and that the state court “might have required the Government to make its intervention decision sooner.”

These suggestions in the dissenting opinion are, frankly, both impossible and impracticable. Without a seal lift from the federal court, alerting the state court to the FCA action, even ex parte, would risk the FCA action. Furthermore, there is no reason to believe that an order from a state court judge would compel DOJ to make an intervention decision. The federal court in the FCA action granted the government’s requests for seal extensions throughout the relevant period. For a state court to interject with an order purporting to shorten a seal imposed by a federal judge would raise serious jurisdictional issues.

It is also notable that Charte faced one other related action during this period: the principal of American Tutor, Jim Wegeler, was charged and pleaded guilty to federal tax evasion, paying a $2 million penalty. Charte moved to intervene in that action for the limited purpose of claiming a share of that recovery as an alternate remedy. Her motion was denied, and she has appealed.

Although she was fired almost 12 years ago, Charte’s FCA claims can only now begin active litigation. This long road, with many twists and turns, is all too common for whistleblowers. Her case illustrates the many pitfalls that may be faced by whistleblowers, including where related actions are involved. The Third Circuit was right to recognize her right to continue with the FCA action. FCA claims belong to and are controlled by the government, and during the seal period in particular, that control imposes strict limits on a relator’s ability to act. When the government declines, however, the case is unsealed and relator can proceed.

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Tagged in: Confidentiality and The Seal, Court Decision, Education Fraud, FCA Federal, FCA State, Government Decision, Whistleblower Case,