New York's Highest Court Addresses State False Claims Act For First Time; Holds That Federal Law Preempts Its Application To DHL Delivery Fees

On April 26, 2012, the New York State Court of Appeals issued its first decision addressing the five-year-old New York State False Claims Act, N.Y. State Fin. Law § 187 et seq. ("NYS FCA"). In State of New York ex rel. Grupp v. DHL Express (USA), Inc., No. 71, 2012 WL 1429252 (N.Y. April 26, 2012), the Court held that an NYS FCA qui tam case, which alleged that DHL falsely charged the State for air shipments when it was actually transporting the packages by ground, was preempted by federal air and carrier laws.1 In reaching this conclusion, the Court acknowledged the punitive nature of the NYS FCA, a finding that may be useful to defendants seeking to challenge retroactive application of the statute.

Background

The NYS FCA was enacted in 2007, based on the federal False Claims Act as it then stood. Both FCAs allow private whistleblowers, as well as the government itself, to file suit to redress fraud against the government (with the NYS FCA covering both fraud against the State and fraud against local governments within the State); both provide for treble damages plus per-claim penalties; and both award whistleblowers a share of any money recovered as a result of their action. However, the NYS FCA is in some respects broader and in some respects narrower than its current federal counterpart.2 Grupp arose out of a contract under which DHL agreed to provide New York State with courier services using air and ground transportation. The relators own a trucking company that served DHL as an independent contractor, providing it with ground shipping services. In their complaint, the relators claimed that DHL submitted false claims by (1) asserting that packages were delivered by air and imposing a jet-fuel surcharge when the packages were actually delivered by truck, and (2) imposing a diesel-fuel surcharge even when independent contractors (including relators' company) incurred the fuel costs. After the New York State Attorney General declined to intervene, DHL moved to dismiss the complaint, arguing it was preempted by the Airline Deregulation Act of 1978 ("ADA"), 49 U.S.C. § 41713(b)(1), and the Federal Aviation Administration Authorization Act ("FAAAA"), 49 U.S.C. § 14501(c)(1). The trial court denied the motion, concluding that the market-participant exception to federal preemption applied.3 907 N.Y.S.2d 772 (Sup. Ct., Erie County 2010). The Appellate Division reversed and dismissed the complaint, rejecting applicability of the...