In State of California v. Hamby, (— Cal.Rptr.3d —, 2008 WL 1838079, Cal.App. 4 Dist., April 25, 2008), a California Court of Appeal considered whether employees of a public agency are proper defendants under the California False Claims Act (“CFCA”). The Court of Appeal held “employees of a public agency, acting in the course and scope of their employment, and solely on the agency’s behalf, are not proper defendants under the CFCA.”
Dennis Dockstader and Christopher Dockstader (collectively, the “Dockstaders”) as qui tam plaintiffs on behalf of the State of California brought a lawsuit against the Los Angeles Unified School District (“District”) to recover approximately $100 million that the Dockstaders claim the District wrongfully obtained from the state for new school construction. The Dockstaders claim that the District submitted funding requests to the state that understated the number of classrooms the District had for student use and overstated the number of students who were anticipated to attend certain schools. The Dockstaders sent their complaint to the California Attorney General’s office, but the Attorney General declined to intervene.
After the Dockstaders filed their suit against the District, the California Supreme Court issued a ruling in Wells v. One2One Learning Foundation (2006) 39 Cal.4th 1164, in which it held that a school district is not a person under the CFCA and cannot be sued under the CFCA. After the Wells decision was handed down, the Dockstaders filed an amended complaint which deleted the District as a defendant and added as defendants Beth Hamby, Lynn M. Roberts, and Julie Crum, who are employees of the District. The Dockstaders alleged that Hamby, Roberts, and Crum “knowingly signed fraudulent funding applications in the course and scope of their employment as [District] officials.” The trial court granted judgment in favor of Hamby, Roberts, and Crum (collectively, “Employees”) finding that the CFCA did not authorize a lawsuit against Employees “for acts taken in their official capacities.”
The Court of Appeal affirmed the decision of the trial court. A lawsuit against Employees is tantamount to a lawsuit against the District itself. The court concluded that “the Legislature did not intend to allow a plaintiff to circumvent its intent to exempt public entities from CFCA liability simply through a pleading device.”
The CFCA provides, among other things, that any person who knowingly presents, or causes to be presented, a false claim for payment for approval to any political subdivision shall be liable to the state or political subdivision for three times the amount of damages sustained. If state funds are involved, a State Attorney General may sue to recover under the CFCA. A CFCA action to recover state funds may also be initiated on behalf of the state by a qui tam plaintiff. If the Attorney General declines to pursue an action after being notified by a qui tam plaintiff, the qui tam plaintiff may conduct the action and collect a portion of the proceeds from the lawsuit or settlement. “Person” is defined under the CFCA as including “any natural person, corporation, firm, association, organization, partnership, limited liability company, business, or trust.”
However, as set out in the Wells case, the term person does not include public entities such as public school districts. The Wells Court concluded “that holding school districts liable under CFCA ‘would interfere with the state’s plenary power and duty, exercised at the local level by the individual districts, to provide the free public education mandated by the Constitution.’” If a school district is subject to the CFCA, it could face two or three times the damages cause by a false submission, plus civil penalties. “Such exposure, disproportionate to the harm caused to the treasury, could jeopardize a district financially for years to come.”
A lawsuit against an employee of a public agency could have the same financial result. Government Code section 825 provides that, if an employee of a public entity requests that the public entity defend him or her against a claim brought against the employee for an action or omission, which occurred while the employee was acting within the scope of his or her employment, the public entity must pay any judgment or approved settlement arising from the claim. In some cases, the public entity may also be required to pay punitive damages. The court found, “interpreting ‘persons’ to allow suit against the specific individuals who signed or submitted funding requests on behalf of a public school district would allow plaintiffs in every instance to simply plead around the Legislature’s ban” of CFCA suits against public school districts. Also, a qui tam plaintiff is entitled to a percentage of the money recovered in a CFCA lawsuit. The court stated, “Allowing private individuals to siphon off substantial funds from the limited school funding in the State would undermine the Legislature’s intent to shield public entities from CFCA damage awards.”
In Harris v. PricewaterhouseCoopers, LLP (2006) 39 Cal.4 th 1220, the Supreme Court held “that a city was not a proper plaintiff in a CFCA action that did not involve the city’s funds.” If funds of the state alone, or funds of a political subdivision and the funds of the state are involved, the Attorney General may pursue recovery. The Attorney General, acting in his or her official capacity, “is not authorized to sue to recover exclusively political subdivision funds.” The prosecuting authority for a local agency is authorized to pursue recovery where its own political subdivision funds, or both the state’s and its own funds, are at issue. The Harris court “held (1) CFCA’s definition of ‘person’ delineates who qualifies as a plaintiff or defendant under the CFCA, and (2) a public official acting in his or her official capacity is not a ‘person’ for purposes of prosecuting under CFCA.” The Court of Appeal concluded that “[g]iven these rulings, it follows that the Supreme Court would also hold that a public official may not be a proper defendant under CFCA for acts taken in his of her official capacity.”