Kang Haggerty News
As an initial matter, the government’s refusal to intervene in an FCA action does not strip a relator of his Article III standing in bringing an FCA action when the relator does not suffer an injury in fact. Qui tam actions present a “well-established exception” to the traditional Article III analysis.
In the August 30, 2024 Edition of The Legal Intelligencer, Edward Kang writes, “Going It Alone: Can Whistleblowers Seek Corporate Veil-Piercing in Declined Cases?“
Recently, I received an email from a national public interest organization dedicated to whistleblower advocacy. The message asked whether a relator (i.e., a whistleblower), while not a victim of fraud, has standing to seek corporate veil-piercing in a False Claims Act case where the government declined to intervene. It is an interesting question, and no one seems to know the answer. Having litigated complex veil-piercing cases and complex declined whistleblower cases, I wanted to dig a little deeper.
That answer requires some background. The False Claims Act (FCA), originally enacted in 1863, allows either the Attorney General or a private party to bring a civil lawsuit against anyone who knowingly submits a false claim to the government for payment. See 31 U.S.C. Section 3730(a), (b). In 2023, the government and whistleblowers initiated more than 1,200 new FCA cases, a record-high number, and the DOJ recovered approximately $2.7 billion through settlements and judgments. When an individual files a lawsuit on behalf of the government, it’s known as a qui tam action, and the private plaintiff is referred to as the relator.
When the relator files an FCA case, the suit is filed under seal for at least sixty days to allow the government to review the complaint and decide whether it will intervene. See Section 3730(b)(2), (4). If the government does choose to intervene, it takes the lead in prosecuting the case and is not bound by the relator’s actions. See Section 3730(c)(1). Even if the government does not intervene in the case, it still maintains a role and holds specific legal rights in the case, such as the right to intervene later for good cause (Section 3730(c)(3)) and to block a relator’s attempt to voluntarily dismiss the case (Section 3730(b)(1)).
The “corporate veil” refers to the legal separation between a corporation and its shareholders, which generally protects shareholders from liability for corporate debts. When the corporate entity is used as a sham to advance illegitimate purposes, however, courts may disregard the general rule and “pierce the corporate veil” to make the shareholders and their personal assets liable for corporate debts. Piercing the corporate veil is an equitable remedy and a theory of liability, and the standard of veil-piercing differs from jurisdiction to jurisdiction.
Now, back to the question of whether a relator has the standing to seek corporate veil piercing in False Claims Act cases where the government has declined to intervene. As an initial matter, the government’s refusal to intervene in an FCA action does not strip a relator of his Article III standing in bringing an FCA action when the relator does not suffer an injury in fact. Qui tam actions present a “well-established exception” to the traditional Article III analysis. See Spokeo v. Robins, 578 U.S. 330, 346 n.* (Thomas, J., concurring). In an FCA action, standing for an uninjured relator flows from an assignment theory. A qui tam relator is suing “as a partial assignee of the United States.” See Vermont Agency of Natural Resources v. Stevens, 529 U.S. 765, 774 fn. 4 (2000). The qui tam action is for a redress of the government’s injury, and “it is the government’s injury that confers standing upon the private person.” See Stalley v. Methodist Healthcare, 517 F.3d 911, 917 (6th Cir. 2008). Thus, an uninjured relator has standing when “the FCA can reasonably be regarded as effecting a partial assignment of the government’s damages claim.”
The standard for piercing the corporate veil as a theory of FCA liability is governed by the federal common law. See Dekort v. Integrated Coast Guard Systems, 705 F. Supp. 2d 519 (N.D. Tex. 2010) (“Federal common law (rather than the law of the state where a corporation is incorporated), governs the veil-piercing question in a FCA case.”); see also United States v. Pisani, 646 F.2d 83 (3d Cir.1981) (“Federal law governs questions involving the rights of the United States arising under nationwide federal programs.”) (quoting United States v. Kimbell Foods. 440 U.S. 715 (1979)). The federal common law standard is generally articulated in broad terms and requires a fact-specific analysis of the circumstances in each given case to determine the propriety of veil-piercing. See Exter Shipping v. Kilakos, 310 F. Supp. 2d 1301 (N.D. Ga. 2004) (“Under federal common law, no uniform standard exists for determining when a corporation is the alter ego of its owners; each case must be decided based upon the totality of the circumstances.”) The essential legal test for veil-piercing in all jurisdictions is whether it would be “equitable to look behind the corporate form” under the circumstances presented. See United States v. Emor, 850 F. Supp. 2d 176 (D.D.C. 2012). In FCA cases, courts have held that courts can “pierce the corporate veil to prevent circumvention of a statute or avoidance of a clear legislative purpose.”
Courts have analyzed piercing the corporate veil as a theory of FCA liability in cases where the government declined to intervene. For example, in United States ex rel. Jenkins v. Sanford Capital, 2020 WL 5440551 (D.D.C. Sept. 10, 2020), the plaintiff tenant advanced an alter ego theory to hold the sole principal of the corporate landlord liable for FCA violations when the company deceptively took only superficial steps to remedy regulatory violations in the apartment building while continuing to take Section 8 voucher funds that depended on the building’s compliance with those regulations. The court analyzed and dismissed the veil-piercing liability theory, reasoning that the plaintiff’s allegations regarding the relationship between the principal and company were threadbare and conclusory. In another declined case, Scollick v. Narula, 215 F. Supp. 3d 26 (D.D.C. 2016), the court found that the relator failed to allege that defendant companies’ shareholders were individually liable under the FCA in connection with a purported fraudulent scheme to obtain set-aside government contracts, reasoning that the relator did not allege any fact showing that an inequitable result would follow if the corporate veil remained unpierced. Specifically, the court found that the relator failed to allege that corporations were undercapitalized or that he would be unable to recover damages from them if he succeeded in the action.
Some courts have found that relators sufficiently alleged FCA liability under a veil-piercing theory in declined cases. In Scharber v. Golden Gate National Senior Care, 35 F. Supp. 3d 944 (D. Minn. 2015), former nursing home employees brought a claim against the nursing home’s parent company under the veil-piercing theory for FCA violations arising out of the nursing home’s submission of fraudulent claims for Medicare and Medicaid reimbursement. Denying the defendant’s motion to dismiss the veil-piercing theory of liability, the court found that the relators made sufficient allegations against the parent company. Specifically, the court found that the relators had alleged a level of control by the parent company over the culture, policies, and decision-making at the nursing home sufficient for the parent company to be held liable under a veil-piercing theory. Similarly, in United States v. Kindred Healthcare, 469 F. Supp. 3d 431 (E.D. Pa. 2020), the court found the relator’s allegations of undercapitalization and siphoning of funds were sufficient to allege FCA violations under the alter ego theory between nursing home operators and their nursing facilities. Specifically, the court noted that failing to hold nursing home operators liable for facility conduct “would circumvent the statute by preventing full recovery” because the facilities were grossly undercapitalized and entirely dependent on the operators.
When the government declines to intervene in a relator’s case, it doesn’t necessarily mean that the case is weak or unwinnable. The whistleblower can still pursue the case independently. The decision not to intervene may simply reflect the government’s priorities or limited resources, rather than a judgment on the case’s merits. Whistleblowers and their attorneys can still proceed with the case, bring wrongdoing to light, and recover damages. Piercing the corporate veil provides yet another powerful tool for whistleblowers and their attorneys to fight fraud under the False Claims Act.
Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.
Reprinted with permission from the August 30, 2024 edition of “The Legal Intelligencer” © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.