Click Fraud Protection In State False Claim Act Case Involved A Country Club’s Failure To Escheat Unclaimed Deposits, California Court Rules That Defendant’s SEC Filings Are Not “Public Disclosures” - TZ Legal - Fraud Fighters
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HomeThought LeadershipIn State False Claim Act Case Involved A Country Club’s Failure To Escheat Unclaimed Deposits, California Court Rules That Defendant’s SEC Filings Are Not “Public Disclosures”

In State False Claim Act Case Involved A Country Club’s Failure To Escheat Unclaimed Deposits, California Court Rules That Defendant’s SEC Filings Are Not “Public Disclosures”

The California Court of Appeal, Second Appellate Division (an intermediate appellate court in California’s state court system) recently ruled, in an interesting qui tam case brought under the California False Claims Act (“CFCA”), that a defendant’s filings with the United States Securities and Exchange Commission (“SEC”) are not “public disclosures” within the meaning of the CFCA’s so-called “public disclosure bar.” In so doing, the Court of Appeal correctly rejected arguments by the California Attorney General and the defendant that, if accepted, would have greatly expanded the reach of the public disclosure bar, and thus frequently barred otherwise valuable qui tam lawsuits.

The case is State of California ex rel. Bartlett v. Miller, Case No. B259472.  Bartlett originally brought a lawsuit against a company called ClubCorp, which operates country clubs, claiming that ClubCorp had refused to refund his $7,500 initiation deposit.  Bartlett then subsequently filed an amended complaint, adding a claim under the CFCA.  His CFCA claim was based upon an allegation that ClubCorp had a practice of both failing to refund such deposits unless requested to do so by the club member, while also failing to escheat the unclaimed deposits to the state.  California, like most states, has an escheat law, which requires a company to turn over to the state monies held by the company that belong to someone else but that are “unclaimed.”  Thus, Bartlett’s CFCA claim was based upon what is known as the “reverse false claim” provision of the CFCA, which, in essence, makes it unlawful for a company to fail to pay money to the state that the company knows is owed.  (The federal False Claims Act, like most state false claims acts, has a similar “reverse false claims” provision.)

Bartlett admitted that the primary basis for his CFCA claim was information he obtained by reading certain of ClubCorp’s SEC filings. In those filings, ClubCorp stated that it had a large amount of unclaimed deposits, that those deposits might be subject to escheat, and that it was currently involved in an audit by 20 different states (not including California) in which that issue was being investigated.  Those SEC filings were publicly available through an online database maintained by the SEC, known as EDGAR.  In other words, Bartlett’s qui tam claim was not based on his own “insider” information, but rather was based upon information that any member of the public could have obtained if they knew where to look.

The California Attorney General moved to dismiss the qui tam claim under the CFCA’s public disclosure bar. That provision provides for dismissal of a qui tam claim that is “based upon the public disclosure of allegations or transactions . . . in an investigation, report, hearing or audit conducted by or at the request of the Senate, Assembly, auditor, or governing body of a political subdivision, or by the news media . . .”  The trial court granted the motion to dismiss, and Bartlett appealed.

The Court of Appeal, in reversing, rejected two arguments made by the Attorney General and ClubCorp. First, the Court rejected the argument that the SEC filings were a “report” within the meaning of the CFCA public disclosure bar.  The Court correctly read the CFCA public disclosure bar to apply only where the “report” at issue was to or by the California state government, and not to or by a federal agency.  As the Court explained, “state officials may be unaware of information disclosed solely to or by the federal government; and a relator with information about a state or local fraud, even if that misconduct has been publicly disclosed in a federal forum, may still be making a valuable contribution to state or local authorities that is properly rewarded under CFCA.”

Second, the Court rejected the argument that the SEC’s online database, EDGAR, was “news media.” The question of what materials available on the internet qualify as “news media” has been an issue that courts have struggled with in recent years.  (The same term—“new media”—appears in the public disclosure provision of the federal False Claims Act.)  In concluding that EDGAR was not “news media,” and in rejecting contrary conclusions of certain other courts, the Court reasoned that “wherever that fuzzy line now is between news media and some other form of publicly accessible information, we have little difficulty concluding that disclosures in forms available only on the SEC’s online public database are not disclosures by the news media no matter how broadly that term is interpreted.”

As it turns out, the California government knew about ClubCorps escheat issue several years before Bartlett filed his qui tam claim, and had been in the process of auditing ClubCorps over that issue. As the Court recognized, Bartlett’s qui tam claim did not add anything to the state’s knowledge, and did not ferret out a fraud of which the state otherwise was ignorant.  Thus, from a policy perspective, Bartlett’s qui tam claim was not useful to the state, and did not serve the primary purpose of the CFCA’s qui tam provision.  Admirably, the Court was not unduly influenced by that, and instead applied a correct reading of the law.  Had it stretched the language of the public disclosure bar to require dismissal of Bartlett’s qui tam claim, the Court would have done significant damage to many meritorious, useful qui tam claims.  So, contrary to the old adage, this was a case of bad facts making good law.

What does all of this mean for potential qui tam whistleblowers? In my opinion, this is a helpful decision in cases brought by whistleblowers who are not traditional “insiders.”  Sometimes a company’s fraud on the government can be discovered by people outside the company who, because of their own unique knowledge or expertise, are able to investigate and uncover such fraud.  Those “outsider” whistleblowers serve the policies behind the False Claims Act by bringing fraudulent conduct to the attention of the government, and by obtaining recoveries for the public fisc.  But the public disclosure bar, which is a highly-technical provision of the statute, can trip up such outsider whistleblowers, since those whistleblowers will often rely upon information that they obtain on the internet or through other publicly-available sources.  The decision in State of California ex rel Bartlett v Miller is helpful precedent that keeps the door open to such outsider whistleblowers.

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