The growth of litigation finance in DOJ whistleblower suits: implications and recommendations.

Author:Andrews, Mathew
Position:Dept. of Justice - IV. Solutions to the Privilege Dilemma through Conclusion, with footnotes, p. 2450-2476

    As this Note argues, the answer to the common interest dilemma may lie in how ALF entities obtain a legal interest in a qui tarn claim. Although contested by one financier, (105) commentators generally agree that ALF entities purchase an interest in a claim through partial assignment. (166) Unlike a contract, which creates a legal right, an assignment is an agreement to transfer a right. (167) Accordingly, a partial assignment is a partial transfer of a right. (168) In the context of litigation finance, if a relator seeks funding, it would transfer a portion of its damages claim to an ALF entity. Likewise, if relator's counsel seeks funding, it would transfer a portion of its contingency fee to the ALF entity. (169) As a result of the partial assignment, the ALF entity and the relator each become "real parties in interest" (170) and both have a cause of action under the Federal Rules of Civil Procedure. (171) In practice, the ALF entity will not sue and only the plaintiff will bring the action as a party. (172)

    Significantly, qui tarn relators obtain an interest in the government's fraud claim using the same legal instrument as ALF entities: partial assignment. As the Supreme Court has held, "[t]he FCA can reasonably be regarded as effecting a partial assignment of the Government's damages claim" to the relator. (173) Additionally, much like an ALF entity, the government remains a "real party in interest" even if it is not a party to the suit. (174)

    As this Part argues, the similar means through which an ALF entity and a qui tarn relator obtain standing have three important consequences. First, ALF entities can use case law protecting exchanges between relators and the DOJ to justify protections for relators and financiers. Second, through a quirk of qui tarn law, relators can turn ALF entities into fellow whistleblowers by transferring privileged and non-privileged information to them. As co-relators, co-parties in interest, and potential co-plaintiffs in the qui tarn suit, the relator and ALF entity would likely share a common interest. Third, relators can make revocable, gratuitous partial assignments to ALF entities during the due diligence phase in order to align the entities' interests, thereby preventing waiver.

    1. ALF Entities and Relators Can Appeal to Case Law Protecting Communications Between the DOJ and Relators

      Although ALF entities might ordinarily lack a common interest with recipients, it appears that the interests of ALF entities and qui tarn relators are uniquely aligned. This is demonstrated by comparing the relationship between ALF entities and relators to that of the DOJ and relators. Given that the courts have almost universally protected exchanges with the DOJ, (175) ALF entities could justify protection by analogizing their relationship to that of the government.

      As demonstrated in Leader Technologies, ALF entities face a challenge because courts conflate funders' due diligence phase with arm's-length negotiation. In practice, however, it is possible to distinguish these two periods. The DOJ's prosecution of qui tarn claims illustrates as much.

      The courts have acknowledged that the DOJ and the relator go through two phases. The first is the due diligence phase during investigation and litigation of the qui tam claim. (176) The second phase follows settlement or judgment, and entails an arm's-length negotiation between the relator and the DOJ over the size of the relator's share. (177) As previously noted, the courts have universally recognized that the DOJ and relator share a common interest during the due diligence phase. The parties are united in a common effort to investigate and prosecute the defendants. (178) Meanwhile, the courts have also recognized that the DOJ and relator lack a common interest during negotiations over the relator's share. (179) At this point, each party is bargaining over a pot that is zero-sum.

      ALF entities can appeal to the same analytical distinction. The due diligence phase of an ALF entity and the DOJ is largely similar. Both entities are vetting the suit to determine whether they will pursue the claim. Both entities are requesting privileged information to conduct their investigations. And both entities stand to profit tremendously from the successful prosecution of the defendant.

      Once an ALF entity completes its due diligence, the arm's-length negotiation phase begins. At this time, the ALF entity and the relator bargain over contract terms and how the parties will share any proceeds from the suit. Since ALF entities go through similar due diligence/arm's length negotiation phases as the DOJ, ALF entities may be able to persuade the courts to find common interest using the same analytical distinction.

      Additionally, ALF entities can appeal to the same statutory and policy rationale as the DOJ for finding common interest. The courts recognize two reasons for protecting communications between the relator and government. First, as a statutory basis, the False Claims Act provides that the relator shall bring the action in the name of the Government" and allows the relator to receive a percentage of the proceeds. (180) Thus, "the legislature left no doubt that the relator is acting on behalf of the government." (181) Second, as a matter of policy, protecting communications "advances the congressional desire that the relator apprise the government of all he or she knows as a condition of bringing a qui tarn action." (182) Thus, finding waiver would "discourage[] the sort of comprehensive disclosure most likely to facilitate the government's evaluation of the merits and its choice about whether to intervene." (183)

      These two rationales also apply to an ALF entity and a relator. First, a relator acts on the ALF entity's behalf. As a partial assignee, the ALF entity is the real party in interest" to the suit, and can only vindicate its rights through successful litigation by the whistleblower. Second, ALF would further comprehensive disclosure between relators and the government. (184) Given the DOJ's practice of outsourcing pre-intervention investigations to qui tarn firms, third-party financing would promote firms' investigations. These investigations, in turn, apprise the government of all the information related to the claim.

      In fact, the legal interests of ALF entities and relators may be even more closely aligned than those of the relator and the government. In a qui tarn claim, a relator retains several interests that are adverse to those of the government. For example, the relator has the right to a hearing before the Government dismisses the suit and the right to a judicial determination of fairness, adequacy, and reasonableness before the government settles the suit. (185) Since ALF contracts generally do not contain similar provisions, ALF entities and relators lack such adverse interests. (186)

    2. Using Partial Assignment to Align the Interests of Relators and ALF Entities Prior to Filing Complaints

      Despite the similar rationale for protecting communications between ALF entities and relators, financiers face an additional hurdle: the parties must share a common interest at the time that the privileged materials are exchanged. For the federal government this task is easy: it is the party that suffered the injury and therefore shares a common interest with the relator early on. ALF entities face a more difficult task. As noted previously, while courts are generally willing to recognize that a financier shares a common interest after signing a funding agreement, the parties lack a common interest beforehand. Some ALF's have successfully contracted out of this dilemma by using common interest and confidentiality agreements. (187) Given the uncertainty still surrounding waiver of privilege, there remains a need for additional legal mechanisms to ensure common interest.

      A quirk of qui tarn law, largely ignored in the secondary literature, (188) may provide a unique solution to relators and counsel seeking funding prior to filing a complaint with the DOJ. While the Supreme Court has held that relators have standing through the doctrine of partial assignment, it did not state when that assignment actually occurs. One view suggests that the partial assignment occurs when the relator files his or her complaint with the government. (189) Another suggests that the partial assignment occurs whenever a person learns of fraud. (190)

      The former interpretation provides relators little aid. But under the latter view, the relator's disclosure of basic, non-privileged information about the alleged fraud to the ALF entity might simultaneously turn the financier into a partial assignee under the FCA. In other words, the financier would become another whistleblower. As co-relators, the parties--under certain circumstances-would share a common interest prior to exchanging any privileged information. In fact, if the ALF entity becomes a co-relator simultaneously with receiving information about the alleged fraud, then the two-step exchange of factual-then-privileged information might be unnecessary. The exchange of privileged information would simultaneously transform the ALF into a co-relator, and the parties would share a common interest at the time of the transmission.

      1. Based on the Case Law of Several Circuits, It Appears that Persons Become Partial Assignees Whenever They Learn of Fraud

        The strategy of turning ALF entities into co-relators is supported by lower court jurisprudence. At least two circuits have concluded that partial assignment occurs upon learning of fraud. (191) These decisions arose from disputes over pre-filing releases." In essence, such releases are an agreement by the relator to sell its claim to another entity'. (192) These sales are also rarely to disinterested parties. Ordinarily, a relator releases the action to the alleged defendant. (193) Since the defendant does not bring suit against...

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