SEPTEMBER 26, 2006
 

Today the Supreme Court granted certiorari in four cases of interest to the business community, two of which it consolidated.

1.  Dormant Commerce Clause—Flow Control of Solid Waste—Publicly Owned Facilities. 

This case concerns the constitutionality of “flow control” measures—laws requiring delivery of all waste within a particular jurisdiction to a facility designed by the local government. In C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383 (1994), the Supreme Court held that a local ordinance that required all municipal solid waste within the town to be delivered to a privately owned facility impermissibly discriminated against interstate commerce and was invalid under the dormant Commerce Clause. The Court granted certiorari in United Haulers Ass’n, Inc. v. Oneida-Herkimer Solid Waste Mgmt. Ass’n, No. 05-1345, to assess the constitutionality of an ordinance requiring local waste to be delivered to a publicly owned waste management facility.

In United Haulers, the Second Circuit held that there can be no discrimination against interstate commerce when a flow-control ordinance benefits a publicly owned facility. 261 F.3d 245 (2001). Accordingly, it ruled that flow-control laws benefiting facilities owned by the Oneida-Herkimer Solid Waste Management Authority were not subject to the “virtually per se rule of invalidity” applicable to discriminatory regulations (City of Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978)), but instead should be evaluated under the balancing test outlined in Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970). Under Pike, an evenhanded regulation “will be upheld unless the burden imposed on [interstate] commerce is clearly excessive in relation to the putative local benefits.” Id. Adopting a very narrow understanding of the Pike test, the court of appeals upheld the ordinance. 438 F.3d 150 (2006).

The public-private distinction adopted by the Second Circuit has been rejected by the Sixth Circuit. In National Solid Waste Management Ass’n v. Daviess County, 434 F.3d 898 (6th Cir. 2006), the court found there to be “little doubt” that a flow-control provision requiring all waste generated within Daviess County, Kentucky, to be deposited at facilities owned by the County “discriminates against interstate commerce.” Id. at 905. “By forcing [plaintiffs] to use Defendant’s disposal and transfer facilities,” the court held, “the Ordinance would prohibit these members from using other in-state and out-of-state facilities” and hence was “facially discriminatory against out-of-state interests.” Ibid.

This case is significant to all companies that are involved in the interstate transportation of waste or that rely upon the interstate market in waste processing and disposal to handle their own waste. If the Second Circuit’s reasoning is upheld, it threatens to render Carbone a dead letter because it is a simple matter for municipalities to structure (or restructure) transactions so that they have record title to the preferred facilities. Pervasive flow control undoubtedly would damage the interstate waste market, forcing companies to rely upon local facilities for the disposal of their waste.

Mayer Brown Rowe & Maw LLP is counsel of record for the petitioners in this case. Amicus briefs in support of the petitioners will be due on November 10, 2006, and amicus briefs in support of the respondent will be due 35 days from the date petitioners file their opening brief. Any questions about this case should be directed to Evan Tager (202-263-3240) in our Washington, D.C. office.
 

2.  False Claims Act—Whistleblower/Qui Tam Provision—Original Source Rule.

A private person (a “relator”) bringing a lawsuit under the False Claims Act in the name of the United States (a “qui tam” suit) based on publicly disclosed information must be an “original source” with “direct and independent knowledge of the information” on which the allegation of a fraud against the United States is based. 31 U.S.C. § 3730(e)(4)(A) & (B). The Supreme Court granted certiorari in Rockwell International Corp. v. United States, No. 05-1272, to decide whether a relator must have knowledge of the false statements made to the government, or whether knowledge underlying or supporting the fraud allegations is sufficient.

After his termination as an engineer in Rocky Flats, a nuclear-weapons facility operated by Rockwell for the Department of Energy (“DOE”), James Stone filed a qui tam action alleging that Rockwell violated numerous state and federal environmental regulations while processing waste at the Rocky Flats facility, and that Rockwell falsely represented to the DOE that it complied with these regulations when submitting reimbursements under its contract. At the time Stone filed his complaint, newspapers had already published detailed reports concerning environmental-compliance problems at Rocky Flats. In response to Rockwell’s motion to dismiss based on these “public disclosures” of the allegations, Stone argued that despite the news coverage, he was an “original source” with “direct and independent” knowledge who could maintain the suit under Section 3730(e)(4)(A) & (B). 

The United States District Court for the District of Colorado denied Rockwell’s motion to dismiss, finding that Stone qualified as an original source because he had direct and independent knowledge of Rockwell’s environmental violations and knew that Rockwell’s governmental compensation was linked to its compliance with environmental regulations. The district court rejected Rockwell’s argument that Stone was not an “original source” because he could identify neither the specific individuals who made misrepresentations to the government nor the specific documents in which those misrepresentations were made. The United States intervened in Stone’s suit, and a jury ultimately returned a verdict in favor of the United States and Stone for over $4 million.

The Tenth Circuit affirmed in relevant part, holding that to satisfy the False Claim Act’s “direct and independent knowledge” requirement, a relator need only have direct and independent knowledge of information “underlying or supporting” the fraud allegation. 282 F.3d 787, 802-803 (2004). The court rejected Rockwell’s contention that an “original source” must have “direct and independent knowledge of the actual fraudulent submission to the government.” Id. at 802. The court also rejected Rockwell’s argument that Stone could not be an “original source” because he no longer worked at Rocky Flats when the environmental problems arose. Id. at 802-803. After a remand for further factual development, the court held that Stone qualified as an original source. 92 Fed. Appx. 708 (2004). Judge Briscoe dissented and would have held that Stone failed to qualify as an “original source” because he did not independently know about the actual environmental problems that arose at Rocky Flats. 282 F.3d at 815-817; 92 Fed. Appx. at 710-711.

The federal courts of appeals have taken widely varying approaches to the original source rule. Two circuits require relators to have direct knowledge of an actual false statement to the government. United States ex rel. Mistick PBT v. Housing Authority of the City of Pittsburgh, 186 F.3d 376, 389 (3d Cir. 1999) (Alito, J.); Cooper v. Blue Cross & Blue Shield of Florida, Inc., 19 F.3d 562, 564-565 (11th Cir. 1994). One does not permit relators to qualify based on “speculation or conjecture” unless the relator “triggers” a government investigation that uncovers the fraud. United States ex rel. Aflatooni v. Kitsap Physicians Servs., 163 F.3d 516, 525 (9th Cir. 1998); Seal 1 v. Seal A, 255 F.3d 1154, 1162 (9th Cir. 2001). Two require knowledge of the essential elements of the underlying fraud. United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 647 (D.C. Cir. 1994); Minnesota Ass’n of Nurse Anesthetists v. Allina Health System Corp., 276 F.3d 1032 (8th Cir. 2002). And the Tenth Circuit now only requires knowledge “underlying or supporting” the fraud allegations. 282 F.3d at 802-803. The Court will presumably clarify which of these rules is mandated by the statute.

This case is important to any business that participates in government programs or has government contracts. Because the “original source” rule is jurisdictional, how the Supreme Court decides what information the relator must have direct and independent knowledge of—either the false statements or merely the underlying fraud—will affect whether many potential relators can bring qui tam suits at all. If the Supreme Court decides that a relator can be an “original source” merely by having direct knowledge of an underlying fraud, it would be far easier for individuals to bring whistleblower suits on the basis of publicly disclosed or broad and unspecific information.

Amicus briefs in support of the petitioners in this case will be due on October 26, 2006, and amicus briefs in support of the respondents will be due on November 20, 2006. Any questions about this case should be directed to David Gossett (202-263-3384) in our Washington, D.C. office.
 

3. Consumer Credit—Fair Credit Reporting Act (FCRA)—Definitions of “Willful  Noncompliance” and “Adverse Action.”  

FCRA, the Fair Credit Reporting Act, regulates the accuracy and use of consumer credit information by consumer reporting agencies, generators of consumer credit information, and users of consumer reports such as lenders and insurers. 15 U.S.C. § 1681 et seq. FCRA requires that a user of consumer credit information provide a notice of “adverse action” to a consumer if the user denies credit, insurance, or employment on the basis of the information in the consumer report. 15 U.S.C. § 1681m(a). For insurance, adverse action is defined as “a denial or cancellation of, an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of, any insurance, existing or applied for, in connection with the underwriting of insurance.” 15 U.S.C. § 1681a(k)(1)(B)(i). FCRA contains two civil liability provisions; plaintiffs may seek relief for “negligent noncompliance” (15 U.S.C. § 1681o) and recover actual damages sustained, or seek relief for “willful noncompliance” (15 U.S.C. § 1681n) and recover, in lieu of “actual damages sustained,” statutory “damages of not less than $100 and not more than $1,000.” Id. § 1681n(a)(1). Additionally, punitive damages are available under Section 1681n. FCRA does not define “willful.” The Supreme Court granted certiorari and consolidated the cases of Safeco Ins. Co. v. Burr, No. 06-84 and GEICO Gen. Ins. Co. v. Edo, No. 06-100, to resolve the meaning of the terms “adverse action” and “willful” as used in FCRA.
 

Petitioners are two insurance companies that were defendants in class action suits in which the plaintiffs alleged “adverse action” violations. The plaintiffs claimed that the insurers failed to send adverse action notices after using consumer credit report information to offer insurance at a less favorable rate. Plaintiffs alleged a willful violation of FCRA and sought recovery of statutory damages of $100 to $1,000 per class member. The district courts in both cases granted the defendants’ motions for summary judgment, ruling that the plaintiffs had not in fact suffered any adverse action that triggered the insurers’ obligations to send out notice. Neither district court reached the issue of willfulness.

The Ninth Circuit reversed and remanded. See 435 F.3d 1081 (2006). The court first addressed whether, in the insurance context, FCRA’s adverse action notice requirement applies to rates charged in an initial policy of insurance, or if that requirement is instead triggered only by an increase in a rate that the consumer has previously been charged. Rejecting the argument that a rate “increase” under the terms of § 1681a can occur only if a previous policy at a lower rate existed, the Ninth Circuit held that the district courts erred in granting summary judgment for the insurers because the “adverse action” notice requirement can been triggered by the offer of insurance at a higher rate than the consumer would have received had the insurer not used consumer credit report information. Id. at 1090-1092.

The court then turned its attention to the definition of willfulness. The court ruled that, if a company violates FCRA, “either knowing that the action violates the rights of consumers or in reckless disregard of those rights, the company will be liable under 15 U.S.C. § 1681n.” Id. at 1099 (emphasis added). In adopting a “reckless disregard” standard, the court created a split with at least five other circuit courts that define “willful” in terms of a “knowing and intentional” FCRA violation. See, e.g., Ruffin-Thompkins v. Experian Info. Solutions, Inc., 422 F.3d 603 (7th Cir. 2005); Phillips v. Grendahl, 312 F.3d 357, 370 (8th Cir. 2002); Dalton v. Capital Associated Indus., Inc., 257 F.3d 409, 418 (4th Cir. 2001); Cousin v. Trans Union Corp., 246 F.3d 359, 372 (5th Cir. 2001); Duncan v. Handmaker, 149 F.3d 424, 429 (6th Cir. 1998).

The resolution of this case is of vital interest to all members of the business community that create, collect, or use consumer credit report information. While the Ninth Circuit’s “adverse action” ruling is far-reaching in its own right—it affects insurers as they attempt to establish premiums—the Ninth Circuit’s adoption of a “reckless disregard” standard extends far beyond the context of “adverse actions” because Section 1681n applies to all FCRA violations for which there is a private right of action. As opposed to a “knowing and intentional” threshold, a “reckless disregard” standard may broaden exposure to statutory damages, particularly given that FCRA, unlike other consumer credit statutes (such as the Truth In Lending Act or the Equal Credit Opportunity Act) has no damages cap for class actions. With damages of $100 to $1000 per class member for willful violations of FCRA, even a medium-sized class action suit can lead to a tremendous amount of liability.

Amicus briefs in support of the petitioners in this case will be due on November 10, 2006, and amicus briefs in support of the respondents will be due 35 days from the date petitioners file their opening briefs. Any questions about these cases should be directed to David Gossett (202-263-3384) in our Washington, D.C. office.

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The general editor of the Docket Report is David Gossett in our Washington, DC office, who can be reached at dgossett@mayerbrown.com or 202-263-3384.