Daily Archives: September 27, 2014

FCA Successor Liability

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Can I still pursue a False Claims Act Qui Tam action if the intended corporate target has been sold to, or merged with, another company? Under FCA Successor Liability law that depends on two things: (1) where you are filing your False Claims Act Qui Tam lawsuit; and (2) what are the terms of sale or merger and the economic realities of the transaction.

There are essentially two competing legal positions on this issue. One is known as the “traditional rule”; the other has been called the “substantial continuity rule.” The traditional rule is more difficult for whistleblowers to satisfy. Under traditional common law rule of successor liability, a corporation that acquires the assets of another corporation does not take the liabilities of the corporation from which the assets are acquired unless one of four exceptions applies: (1) the successor expressly or impliedly agrees to assume the liabilities of the predecessor; (2) the transaction may be considered a de facto merger; (3) the successor may be considered a mere continuation of the predecessor; or (4) the transaction is fraudulent. With regard to the third exception, a corporation is not to be considered the mere continuation of a predecessor unless, after the transfer of assets, only one corporation remains, and there is an identity of stock, stockholders, and directors between the two corporations.

The substantial continuity rule is easier for a whistleblower to establish. Under it one needs to prove only that: (1) that the new company had notice of the whistleblower’s claim before the sale or merger transaction; and (2) the business operations of both the old and new companies are essentially the same, for example the employees of the new company are doing the same jobs in the same working conditions under the same supervisors and the new company has the same production process, produces the same products or provides the same services, and basically has the same body of customers or clients. The notice requirement can be met in some cases simply by showing continuity in ownership and/or senior management.

Federal courts in different parts of the United States have applied one or the other of these competing rules to FCA cases. Recently, the US District Court in the Eastern District of Virginia applied the more stringent traditional rule in US ex rel. Bunk v. Birkart Globistics, No. l:02-cv-1168(AJT/TRJ) (Sept. 9, 2014).  In contrast, the US District Court in the District of D.C. applied the more lax substantial continuity test in United States ex rel Fisher v. Network Software Assocs., Inc., 180 F. Supp. 2d 192 (D.D.C. 2002).

The practical take away from this analysis: have a clear understanding of the legal technicalities of the sale or merger (especially in terms of how the old company’s liabilities are treated), know what the business operations and organizational structures were before and after the transaction, and choose a court that has favorably decided the successor liability question, as well as other legal issues relevant to your case, in the past.