Last month, the Sixth Circuit affirmed sanctions imposed by a district court against a relator and his counsel for bringing a frivolous False Claims Act ("FCA") action. The ruling in United States ex rel. Jacobs v. Lambda Research, Inc., N 4-3705, 2015 WL 1948247 (6th Cir. May 1, 2015) is a positive development for companies that have faced an increase in FCA actions in recent years. It also illustrates the use of a sanctions provision that is specific to FCA claims.
Lambda Research is a small business that contracts with the United States Navy to strengthen the metal components of warplanes. Terry Jacobs, the individual who brought the FCA case, worked for Lambda for two years before he left the company to become vice president of a competitor business, Ecoroll Corporation.
Lambda thereafter sued Jacobs in state court, alleging that Jacobs stole Lambda's trade secrets and gave them to Ecoroll. A jury found Jacobs liable and awarded Lambda $8 million in damages. Additionally, the state court found that Jacobs misappropriated trade secrets willfully, and ordered him to pay Lambda $1.4 million in attorney's fees.
Two months later, Jacobs filed an FCA action in the U.S. District Court for the Southern District of Ohio, alleging that Lambda had defrauded the Navy. The district court warned Jacobs and his attorney three times that they would be subject to sanctions if they had filed the suit in retaliation for Lambda's suit and proceeded to the end of discovery without evidence. Nevertheless, during discovery Jacobs failed to depose any Navy employees, and his counsel filed a motion asking the court to allow Jacobs to inspect Lambda's equipment and processes. The court denied Jacobs' motion over concern that Jacobs may steal more trade secrets.
Lambda moved for summary judgment and sanctions against Jacobs and his attorney. After holding that Jacobs' FCA claim was meritless, the district court imposed sanctions under three provisions: (i) 31 U.S.C. § 3730(d)(4), which is a provision of the FCA; (ii) 28 U.S.C. § 1927, which provides sanctions against an attorney for the excessive costs of a vexatious lawsuit; and (iii) Rule 11 of the Federal Rules of Civil Procedure. Under the FCA sanctions provision, where the government does not intervene in an FCA action, "the court may award to the defendant its reasonable attorneys' fees and expenses if the defendant prevails in the action and the court finds that the claim of the person bringing the action was clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment." 31 U.S.C. § 3730(d)(4).
Accordingly, the district court ordered Jacobs to pay Lambda $511,633.58 in attorney's fees, and ordered Jacobs' attorney to pay $194,522.89 in attorney's fees. On appeal, the Sixth Circuit affirmed the district court's sanctions order and further ordered Jacobs' attorney on appeal to show cause why he should not be sanctioned for filing a frivolous appeal.
The facts of this case were particularly egregious, and such sanctions rulings under the FCA's sanctions provision are rare. In the past year, only one other federal court has imposed sanctions under the FCA provision. In United States ex rel. Fox Rx, Inc. v. Omnicare, Inc., No. 12cv275 (DLC), 2015 WL 1726474, at *1 (S.D.N.Y. Apr. 15, 2015), the court awarded the defendant $168,967.61 in attorney's fees. The court held that the relator's claims against the long-term care pharmacy network were "clearly frivolous" because the relator knew that the pharmacy network had nothing to do with the fraudulent schemes alleged and had no financial incentive to engage in these schemes. See United States ex rel. Fox Rx, Inc. v. Omnicare, Inc., No. 12cv275 (DLC), 2014 WL 6750277, at *4–5 (S.D.N.Y. Dec. 1, 2014).
Such holdings, though rare, are an encouraging development for entities facing an ever-intensifying battleground of FCA enforcement. In fiscal year 2014 alone, the Department of Justice recovered $5.7 billion in FCA suits, with approximately $300 million flowing from procurement and grant cases. Many relators proceed with their FCA suit even where the government does not intervene, which was the case in Lambda Research and Omnicare, where the courts imposed sanctions for frivolous and vexatious litigation. These holdings will hopefully deter relators and their counsel from bringing frivolous FCA actions that waste court resources and impose a substantial burden on companies.
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