Proceed With Caution: Bringing Qui Tam Actions Pursuant to California’s False Claims Act May Be Jurisdictionally Barred

Whistle-blower statutes are designed to protect individuals who report illegal or wrongful activities to the government or a law enforcement agency.  (See e.g., Labor Code § 1102.5 [prevents retaliation of employers against employees who report employer misconduct].)  Under California’s False Claims Act (“CFCA”), individuals can bring qui tam actions, or lawsuits on behalf of the State or Counties, to protect public finances. (Gov. Code § 12650 et seq.)   However, even if you have the best intention to raise awareness about public wrongdoing, plaintiffs must ensure that they plead properly requisite jurisdictional facts in order to prevent their lawsuit from being dismissed and thrown out of court.

A dismissal is precisely what happened in Bates v. Mortgage Elec. Registration Sys., Inc. (9th Cir. 2012) 694 F.3d 1076.  Realtor Barrett Bates filed a qui tam action under the CFCA in July 2009 alleging that Defendants Mortgage Electronic Registration System, Inc. (“MERS”), Bank of America, N.A., Countrywide Home Loans, Inc., Citimortgage, Inc., GMAC Mortgage LLC, J.P. Morgan Chase Bank, and Wells Fargo, N.A. were making false representations to various counties in California in an attempt to avoid paying recording fees.  (Id. at 1078-79.)  As part of his state court qui tam action, Bates claimed that “he discovered that Defendants were making false statements in order to avoid or decrease recording fees. . . [by] falsely nam[ing] MERS as a beneficiary in recorded mortgage documents.”  (Id. at 1079.)  Thus, California counties were being deprived of their recording-fee revenues.

When Defendant MERS removed the action to federal court under a claim of diversity jurisdiction, Bates filed a motion to remand to state court and claimed that diversity was destroyed because the State of California was listed as a real party in interest.  (Id. at 1079).  The Court denied Bates’ motion because Bates’ complaint sought to recover recording fees which, when due, would be payable to the counties which were identified in his complaint.  Because Bates failed to plead how he was suing on behalf of California, the motion to remand was denied. When the district court subsequently granted Defendants’ motion to dismiss on the grounds that Bates’ claims were jurisdictionally barred under an exception to the CFCA, Bates immediately appealed.  (Id. at 1080.)

The Ninth Circuit evaluated the granted motion to dismiss and agreed with the district court that “Bates ‘failed to point to any allegation in his complaint showing that he is also suing on behalf of the State.’ ” (Id. [internal citations omitted].)  Further, “[i]f Bates were successful in his suit, the State would not realize any benefit as a result.”  (Id.)  Thus, the district court properly denied the motion to remand.

The Ninth Circuit also determined that Bates’ qui tam action was jurisdictionally barred by the CFCA.  As a whistle-blower statute, the CFCA is “designed to protect public finances by allowing individuals to file suit under seal on behalf of the State or Counties.”  (Id.)  However, jurisdiction can not be based upon the public disclosure of transactions.  (Id. at 1081.)

“This public disclosure provision ‘erects a jurisdictional bar to qui tam actions that do not assist the government in ferreting out fraud because the fraudulent allegations or transactions are already in the public domain.’ “  (Id. at 1081 [quoting State ex rel. Grayson v. Pac. Bell Tel. Co. (2006) 142 Cal.App.4th 741, 748).  "An action is barred under the public disclosure provision when the prior public disclosures are ‘sufficient to place the government on notice of the alleged fraud’ or ‘practice prior to filing the qui tam action.’ " (Id. [internal quotation omitted].)

Despite Bates’ claims of being the “original source” of the allegations in his complaint, the Court determined that “equivalent information [was] already available to the public through other cases and published articles.”  Thus, “substantially similar information to Bates’ allegations already existed in the public domain at the time he filed suit.”  (Id.)

The lesson here is that if you intend on filing a qui tam action under the CFCA and want to ensure your lawsuit does not get dismissed on a technicality, besides knowing who the parties are in order to file in the proper court, it is important to ensure you are not “substantially repeating” facts that are already known to the general public.  Otherwise, your lawsuit may be found to be under an exception to the CFCA, prohibiting your lawsuit from proceeding.

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