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U.S. v. L M Construction Chemicals, Inc.

United States District Court, D. Nebraska
Oct 3, 2002
Case No. 8:98CV575 (D. Neb. Oct. 3, 2002)

Opinion

Case No. 8:98CV575

October 3, 2002


ORDER AND CONSENT TO DISMISSAL


This matter is before the Court on the Joint Motion for Approval of Settlement and Dismissal with Prejudice (Filing No. 52) filed by the Relator, Cenotech, Inc., and the Defendant, L M Construction Chemicals, Inc. ("LM"). The United States, as Plaintiff, opposes the Joint Motion and has offered the Declaration of Assistant United States Attorney Laurie Kelly in support of its position.

In December 1998, a qui tam Complaint was filed under seal against the Defendant alleging violations of federal law, specifically including violations of the False Claims Act, 31 U.S.C. § 3729 et. seq. After a lengthy investigation, in July 2000, the United States filed a Notice of Election to Decline Intervention (Filing No. 14.) By order of the Court, the pleadings were unsealed and served upon the Defendant. Thereafter, the Complaint was amended and Cenotech, Inc. was identified as the relator (Filing No. 17). The case has been prosecuted by Cenotech without the United States' involvement since that time.

In approximately June of this year, Cenotech and LM reached an agreement to settle the case. They contacted the assistant U.S. Attorney to obtain the government's agreement to dismiss the case with prejudice. The government refused to consent to the settlement unless LM's dismissal as to the United States' claims were without prejudice. The government's position is premised on the fact that the United States was not given any consideration for the fraud-based claims that were at issue in the case.

Cenotech and LM ask the Court to approve their settlement and consent to dismissal of the case with prejudice. In the Joint Motion, the parties explain:

Relator and Defendant have resolved all issues relative to the above-noted action with the agreement by Relator that Defendant pay to Relator recouping [sic] a portion of the attorney's fees and costs Relator has expended. Relator is not collecting a civil penalty or any damages from the Defendant as part of the settlement. In order to investigate and prosecute this action, Relator has incurred attorney fees and expenses totaling $48,582.10. Defendant has agreed to pay a portion of Relator's attorney's fees and expenses in the amount of $26,000 in consideration of a full release and dismissal of this litigation with prejudice.

(paragraphs omitted).

The problem with the settlement agreement is that Cenotech lacks the authority to release all claims against Defendant with prejudice under the False Claims Act. Pursuant to 31 U.S.C § 3730(b)(1), a qui tam action commenced by a private party "may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting." This requirement becomes a point of contention in situations, such as the one presented here, where the United States declines to intervene in the case and the relator and the defendant reach a settlement of the claims without the government's input. Under such circumstances, it is not surprising that the agreement of the relator and defendant will be scrutinized by the Attorney General, particularly if the settlement inflates the attorney's fee claims and minimizes the value of the FCA claims — as the relator is entitled to share in only a percentage of the damages on a FCA claim.

Of the Circuit Courts of Appeals that have addressed the issue, three have indicated a willingness to uphold the plain language of section 3730(b)(1). The Eighth Circuit Court of Appeals is among them. In United States ex rel. Shaver v. Lucas Western Corp., 237 F.3d 932, 934 (8th Cir. 2001), the Eighth Circuit Court, distinguishing an involuntary dismissal by the court from a voluntary dismissal, stated:

[W]e interpret this provision to mean the Attorney General's consent is required only where the relator seeks a voluntary dismissal, not where, as here, the district court grants a motion by the defendant to dismiss for failure to state a claim.

Id.

In support of this statement, the Eighth Circuit Court relied upon Searcy v. Phillips Electronics North America Corp., 117 F.3d 154 (5th Cir. 1997). In Searcy, the Fifth Circuit court recognized that section 3730(b)(1) gives "the government the power to veto a settlement," id. at 160, and the Fifth Circuit characterized the language of section 3730 "as unambiguous as one can expect." Id. at 159. See also, United States ex rel. Doyle v. Health Possibilities, P.S.C., 207 F.3d 335, 340 (6th Cir. 2000) (finding that the "the harms redressed by the FCA belong to the government" and "the power to veto a privately negotiated settlement of public claims is a critical aspect of the government's ability to protect the public interest in qui tam litigation.") Of the federal appellate courts that have addressed the issue, I have found that only the Ninth Circuit Court of Appeals has allowed a relator and defendant to dismiss a case with prejudice over the objections of the government. See United States ex rel. Killingsworth v. Northrop Corp., 25 F.3d 715, 722 (9th Cir. 1994). I am not persuaded by the reasoning of the Killingsworth court.

The issue is thoroughly researched and persuasively argued by Gregory G. Brooker, in The False Claims Act: Congress Giveth and the Courts Taketh Away, 25 Hamline L. Rev. 373 (2002).

In considering the statements made in the Joint Motion and in the Declaration offered by the government (Filing Nos. 52 and 53), the Court finds no clear evidence that the settlement that LM is offering to Cenotech represents an award of penalties or monetary damages for the public harms caused by violations of the FCA. Indeed, the parties have represented to this Court that the Relator has incurred expenses and attorneys fees in the amount of $48,582.10, and that the settlement amount constitutes only a partial reimbursement for the attorneys fees and expenses. Based on the Declaration filed by the government, the government does not dispute LM and Cenotech's characterization of the settlement. Moreover, if the Relator and the United States have been unable, since the investigation commenced in 1996, to discover facts upon which the claims in the Amended Complaint could be established, it is not simply speculation to assume that the claims against LM lack merit. Pursuant to the proposed settlement agreement, LM agrees to pay $26,000 to Cenotech in exchange for a full release of claims and dismissal of the action with prejudice.

Based on the parties' representations, the Court consents to the settlement agreement, and the Court stands ready to dismiss the case with prejudice if the Attorney General consents. The government is willing to consent to the settlement agreement and dismissal with one modification, that the government's claims against the Defendant be dismissed without prejudice. Because that option may not be satisfactory to the Defendant, the Court encourages the parties to attempt a complete resolution of this action. If the parties are unable to reach an agreement whereby all claims against LM can be dismissed with prejudice, then this Court has little choice except to dismiss the Relator's claims against the Defendant with prejudice and the government's claims against the Defendant without prejudice, or to progress the case for trial. Accordingly,

IT IS ORDERED:

1. Pursuant to 31 U.S.C § 3730(b)(1), the Court consents to the settlement agreement proposed by the Relator Cenotech and the Defendant LM, and the Court consents to their request to dismiss the case with prejudice for the reasons set forth in the memorandum;

2. The Court's consent does not constitute a dismissal of the action because the Attorney General has not consented to the settlement agreement and dismissal; and

3. The parties are ordered to meet and confer with the purpose of seeking an agreement whereby all claims against LM may be dismissed with prejudice, and after conferring, the parties are ordered to submit to the Court no later than October 14, 2002, either a Joint Status Report relative to the parties' discussions or a Joint Stipulation of Dismissal.


Summaries of

U.S. v. L M Construction Chemicals, Inc.

United States District Court, D. Nebraska
Oct 3, 2002
Case No. 8:98CV575 (D. Neb. Oct. 3, 2002)
Case details for

U.S. v. L M Construction Chemicals, Inc.

Case Details

Full title:UNITED STATES OF AMERICA, ex rel. CENOTECH, INC., a Utah Corporation…

Court:United States District Court, D. Nebraska

Date published: Oct 3, 2002

Citations

Case No. 8:98CV575 (D. Neb. Oct. 3, 2002)