Who Gets a Cut? District Court Awards Relators a Share Of Settlements Paid by Non-Parties

Consider the following scenario: Relators brought suit against a defendant company alleging that it paid kickbacks to certain identified surgeons to use its product. But the relators did not name those surgeons as defendants in their complaints. As the government investigated the allegations, it extracted a $3.3 million settlement from the non-party surgeons who admitted to participating in the alleged kickback scheme at issue in the relators’ lawsuit. Are relators entitled to a share of the recovery?

Finding this to be an issue “of first impression,” a Massachusetts district court ruled that relators do indeed get a share of the surgeons’ settlements in U.S. ex rel. Birchall v. Spinefrontier, Inc., 2024 WL 4686985 (D. Mass. Nov. 4, 2024). The government argued that the relators were not entitled to a share because they did not name the surgeons as defendants. The court, however, noted the absence of “binding caselaw directly responsive to the question of whether, to constitute the same claim of which relators are entitled a share, the relators must name the same defendants.”

Section 3730(d) of the False Claims Act (FCA) allows a relator’s share of the “proceeds of the action or settlement of the claim,” but does not expressly state if the proceeds must emanate from a suit naming the settling party. In the absence of any precedent, the court examined different approaches to “claim comparisons” in other parts of § 3730. First, the court considered the first-to-file bar of § 3730(b)(5), observing that courts compare the “substance” of complaints in determining whether to bar a later-filed action alleging a similar fraud. Second, the court determined that application of the alternative remedies provision of § 3730(c)(5) similarly required courts to look to the “substance of the complaints.”

The court thus concluded that the relators were not required to name each settling party as a defendant. Instead, to get a share, relators “must specifically, and with particularity, allege the fraud, the mechanism, the essential facts, and the conduct giving rise to the claim settled by the government,” which the court found the relators to have done in their complaints. The court also found that the FCA’s “structure and purpose” supported a broad reading of the term “claim” in determining if relators were entitled to a share.

While defendants in FCA actions may not be overly concerned with relators’ shares, this case should be kept in mind by those negotiating with the government to resolve FCA liability of non-parties who may nevertheless be very involved in the conduct described in a qui tam complaint. If, as in Birchall, the “essential facts” underlying the settlement “mirrored the allegations in the relators’ initial complaints,” the government is likely to seek a recovery to make it whole after paying relators’ share. And defendants will also have to be on the lookout for a potential attorneys fees demand from relators directly against them.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.