U.S. Supreme Court Unanimously Holds Municipalities Liable Under False Claims Act

By Christopher A. Myers and Jennifer Short

On March 10, 2003, the United States Supreme Court held that local governments are "persons" within the meaning of the False Claims Act and can be held liable for violations of the Act. The Court's decision in Cook County, Illinois v. United States ex rel. Chandler, No. 01-1572 (March 10, 2003), resolved a split that had developed between the Seventh Circuit's approach - the view that the Court upheld - and that of the Third and Fifth Circuits, which had determined that localities were immune from liability under the Act. See United States ex rel. Chandler v. Cook County, 277 F.3d 969 (7th Cir. 2002); cf. United States ex rel. Dunleavy v. County of Delaware, 279 F.3d 219 (3rd Cir. 2002); United States ex rel. Garibaldi v. Orleans Parish School Board, 244 F.3d 486 (5th Cir. 2001).

The federal False Claims Act, 31 U.S.C. 3729 et seq., is commonly referred to as the whistleblower statute because it allows private citizens to file a civil lawsuit in the name of the United States when they believe that an entity has submitted false claims for payment from the federal government. The federal government then investigates the claims and can intervene, or take over the lawsuit. If the government chooses not to intervene, the whistleblower (frequently a former employee or other insider of the target) can pursue the action alone. If fraud is found and a recovery made, the whistleblower receives a substantial portion of the proceeds. Under the current version of the Act, violators can be liable for up to $10,000 per false claim submitted, plus three times the amount of damages that the government has sustained, plus attorneys' fees.

In recent years, the federal government has been able to recover more than $3.5 billion through False Claims Act litigation initiated by whistleblowers. Whistleblowers have received hundreds of millions of dollars. Not surprisingly, attorneys who represent whistleblowers in these actions have made substantial efforts to find situations where the False Claims Act may apply.

The Chandler case involved a municipally owned hospital and an affiliated nonprofit research institute that had received a federal grant for a study related to the treatment of drug-addicted pregnant women. The former director of the study filed a False Claims Act lawsuit pursuant to the whistleblower provisions. She alleged that the hospital had submitted false claims to the government including, for...