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By Peter Hayes
A hard-charging New York law firm was conducting discovery in personal injury litigation against a number of chemical and other companies in Alabama several years ago when it came across some interesting data.
As it turns out, attorneys for Kasowitz Benson Torres LLP say, several of the companies they were suing for product liability, fraud and conspiracy failed to report chemical dangers to the Environmental Protection Agency under the federal Toxics Substances Control Act.
Fast forward to today. The firm’s founder, Marc Kasowitz, continues to grab the national and international spotlight for his vigorous defense of President Donald Trump against claims related to Russia’s alleged hacking of the 2016 election.
Meanwhile, other attorneys at Kasowitz’s firm are attracting significant attention of their own albeit in the much smaller, but nonetheless big-ticket, world of U.S. toxics litigation.
The firm has donned the cap of whistle-blower and has grabbed onto, and run with, a law that dates to the Civil War to aggressively pursue novel, potentially multi-billion-dollar claims against four of the companies it was looking into in the Alabama case—BASF Corp., Covestro LLC (formerly Bayer Material Science LLC), The Dow Chemical Co., and Huntsman Intl. LLC.
The case, if successful, could open the door to a new frontier of big money suits against major corporations for the non-reporting of chemical dangers.
Kasowitz’s firm alleges in its False Claims Act suit that, for nearly a decade, the four companies opened themselves up to high reporting penalties by concealing from federal regulators the dangers of isocyanates chemicals ( Kasowitz v. BASF, D.D.C., No. 16-cv-2269).
The chemicals, which can pose respiratory injuries at low levels, are used in the production of polyurethane products, including foam, paint and spandex clothing, the firm says, and their risks should have been reported under TSCA’s Compliance Audit Program.
If it wins its case, Kasowitz’s firm could reap a big chunk of the billions of dollars it alleges are owed under the federal False Claims Act, also known as the Lincoln Law, that dates to the 1800s and was designed to allow whistle-blowers to report private contractors who defraud the federal government.
For their part, BASF, Covestro, Dow and Huntsman say in a court filing that they have no liability under the FCA because the federal government has never actually imposed any penalties against them.
“The problem for the Kasowitz firm is that, as the FCA’s text and history and settled case law make clear, defendants have no duty to pay penalties—and so there is no FCA liability—unless and until the federal government, subject to administrative and judicial review, says so,” the companies say.
They also say that, “to read the FCA as the Kasowitz firm does would strip the federal government of enforcement discretion, and let bounty-hunter relators decide when a statutory violation warrants a penalty.”
A “relator” is what a whistle-blower is called under the federal law.
Presiding Judge Rosemary M. Collyer of the U.S. District Court for the District of Columbia is currently weighing whether the case should proceed to trial.
No matter which side of the argument proves persuasive, no one disputes the novelty of the law firm’s litigation.
“It’s creative, nuanced litigating,” defense attorney Irene Hantman with Verdant Law PLLC in Washington said.
“Will more be filed? It depends,” she said. “As far as I’m aware, it is a novel claim they’re bringing. If successful, we’ll see more like it.”
Hantman’s practice focuses on the domestic regulation of chemicals. She has written extensively on TSCA issues and previously worked in the EPA’s Waste and Chemical Enforcement Division which handles TSCA and other environmental enforcement matters.
Given that hundreds of companies have participated in TSCA’s CAP program, Hantman said, there are lots of potential defendants out there.
“The companies that participated in the CAP program are big chemical manufacturers that have been sued many times in personal injury actions, so arguably someone could wander through personal injury litigation to find [more of] these cases,” she said.
If the Kasowitz firm wins, it could start calling around to other law firms involved in toxics law litigation and say, “Have you done any litigation that might run into this and want to go in on a FCA case?” Hantman said.
But the suit also faces long odds as a dismissal of the only other suit of its kind was recently upheld by a federal appeals court in New Orleans.
At issue in the Kasowitz case is whether a whistle-blower, known as a “relator” under the False Claims Act, may pursue a “reverse” FCA claim against a company for violating its environmental reporting obligations under TSCA when the government hasn’t actually imposed a penalty.
A reverse FCA claim is an assertion that a person or company had an obligation to pay the government, but failed to do so. And whistleblowers may receive up to 30 percent of the recovery.
In the Kasowitz case, the law firm argues that, even though the EPA never actually imposed any failure-to-report fines against BASF, Bayer, or Huntsman’s, each of the four companies is still “separately liable to the United States government for billions of dollars in civil reporting penalties, which continue to accumulate by tens of thousands of dollars daily.”
Under TSCA, the EPA may assess a civil penalty up to $37,500 for each violation, and each day the failure continues.
The Kasowitz relators argue that BASF, Bayer and Dow violated their CAP agreements under TSCA, and Huntsman’s knew “that the EPA needed Huntsman’s previously-unreported substantial risk information.”
It is not the first time the argument has been made that the FCA can be used to recover penalties never actually levied under TSCA.
In Simoneaux v. DuPont, 5th Cir., No. 16-30141, a former employee alleged DuPont violated the reverse provision of the FCA by concealing or avoiding an obligation to report a gas leak as required under the federal toxics reporting law.
The U.S. Court of Appeals for the Fifth Circuit dismissed that case in December 2016, finding a penalty that hasn’t been assessed by the EPA can’t form the basis for a reverse FCA violation.
In both Simoneaux and the Kasowitz case, the federal government opposed the claims, arguing that unassessed statutory penalties are not a basis for reverse FCA Liability.
Attorneys interviewed by Bloomberg BNA say the claims turn on a 2009 amendment to the FCA, which redefined an “obligation” to pay as “an established duty, whether or not fixed.”
The Kasowitz firm’s complaint alleges that the companies had an obligation to report that began on the date of the 2009 amendment and that “each day since ... these companies have continued actively and knowingly to conceal and avoid their individual obligations, which have continued to increase.”
But defense and plaintiffs’ counsel disagree on the reading of the 2009 amendment language, attorney Kirsten Mayer, partner with Ropes & Gray in Boston told Bloomberg BNA.
“Does that mean there is an `obligation’ to pay under the statute, even if the pertinent government agency has not imposed a discretionary fine? Defendants say no—'whether or not fixed’ goes to the amount; the duty to pay something must be established,” Mayer said.
Mayer represents major pharmaceutical and medical device companies on matters including FCA litigation. In Mayer’s opinion, “It’s not that close a call.”
“To say that EPA’s ability to impose civil penalties amounts to an obligation to pay when EPA has not actually imposed penalties seems crazy,” she said.
“If you look at the legislative history, some legislators proposed defining ‘obligation’ to include ‘contingent duties,’ but that was removed,” Mayer said.
“As these cases are litigated, I don’t believe the relators will get much traction for this theory. But I expect they will keep trying to make it work until the courts shut it down,” Mayer said.
But other attorneys say that, given the novelty of the claims in the Kasowitz case, the jury is still out on how the courts will view them.
“The overwhelming majority of False Claims Act cases are traditional misrepresentation cases meaning there is little case law on reverse claims,” Brian Mahany, an attorney who represents whistle-blowers in FCA cases, told Bloomberg BNA.
“Until 2009, most courts would simply not entertain a reverse false claim if a fine had not already been imposed. That is because most fines are not set but represent a range of penalties dependent on the number of days a company is in violation and the seriousness of the violation,” he said.
“That all changed in 2009 when Congress amended the False Claims Act,” said Mahany with MahanyLaw in Wisconsin.
While both the Fifth Circuit in Simoneaux, and a federal court in the Virgin Islands in a video gaming case, found that fines not yet imposed don’t give rise to a reverse false claim, Mahany said, “many other courts have not yet weighed in.”
“Bottom line? Big business won the first couple rounds but the fight is far from over,” he said.
Another prominent whistle-blower attorney, Reuben Guttman, said Kasowitz’s firm has an uphill battle.
Guttman is a founding member of Guttman, Buschner & Brooks PLLC.
“In Kasowitz, the question is whether there is an obligation. There is a potential to impose penalties. But no obligation until there is a judgment against you,” Guttman said.
“I just don’t see boot strapping the FCA into this regulatory scheme,” he said.
But what’s really at the heart of these suits, Guttman said, is an effort to enforce laws that aren’t being enforced.
“It’s symptomatic of the concern that regulators aren’t doing their job,” he said.
As for the government itself, no one seems particularly surprised at its opposition to the Kasowitz firm’s claims in the case.
Plaintiffs’ attorney Frederick M. Morgan, Jr. with Morgan Verkamp LLC in Cincinnati said the Justice Department’s position opposing reverse claims makes sense.
The United States’ position is “that enforcement of laws which incorporate discretionary penalty imposition as part of its enforcement regime should be left to the government’s enforcement apparatus,” said plaintiffs’ attorney Frederick M. Morgan, Jr.
“I think the government has a point,” said Morgan with Morgan Verkamp LLC in Cincinnati. “And DOJ certainly views part of its role as protecting the prerogatives of federal agencies,” Verkamp told Bloomberg BNA.
Morgan’s practice focuses on FCA whistle-blower cases. He has served as counsel in cases against Boeing, HCA, General Electric, General Dynamics, Lockheed, Dyncorp, and Solvay, among others.
“While I haven’t dug deep, I don’t think there’s anything in this brief which varies materially from what they’ve said for years,” he said.
David Engstrom, a professor at Stanford Law School in California, agreed.
“I think it’s become a little too fashionable to assume that government officials are empire-builders who always seek to expand the size and reach of government–and, by extension, to maximize fines collected or the amount of funds that flow into federal coffers, " Engstrom told Bloomberg BNA.
He also said that, “Conservative critics of the statute have long said that the law is not meant to be an all-purpose regulatory statute and have complained in particular about efforts by the relator’s bar to turn even relatively small and technical regulatory violations into sources of FCA liability, with its treble-damages provision.”
“So it’s possible that DOJ is taking the position it is taking because it wants to police the bounds of the FCA and sees these cases as an unnecessary incursion into a regulatory regime that can stand on its own,” Engstrom said.
The Justice Department didn’t respond to requests for comment.
And as far as the propriety of Kasowitz’s firm itself bringing these FCA claims, as opposed to representing a whistle-blowing client, Engstrom said it’s unusual, but not unheard of, for law firms to serve as whistle-blowers in FCA suits.
“The FCA is silent on the question of whether lawyers can serve as relators,” or whistle-blowers, he said.
“Some courts have barred lawyers from serving as relators, drawing inferences from the purposes of the statute or its legislative history. But most courts allow it,” Engstrom said.
“Of course, where lawyers learn of potentially actionable fraud in the course of a representation, they have to be careful to maintain duties of confidentiality to their clients,” Engstrom said.
“But this isn’t implicated in what I understand to be the typical case, in which lawyers learn of potential fraud being committed by an opposing party. In such a case, there are unlikely to be confidentiality or privilege concerns,” he said.
For now, litigators on both sides of the aisle, and beyond, are waiting and watching to see how Judge Collyer in the District of Columbia rules on dueling motions for summary judgment filed in the case.
Defense attorney Lee Ann Schell with Adams & Reese, L.L.P. in New Orleans, who served as co-counsel for DuPont in Simoneaux, is one of those attorneys tracking the Kasowitz case with interest.
“The Simoneaux ruling, being the first from a United States Court of Appeals, will likely weigh heavily in the District of Columbia’s analysis,” she said.
“Should that court and the D.C. Circuit fall in line with Simoneaux, it will go a long way to discourage cases like these,” said Schell.
Judges are being cautious about allowing reverse FCA suits for unassessed penalties, whistle-blower attorney Joel Androphy with Berg & Androphy in Houston said.“I think they should allow them. But courts don’t want to open the flood gates,” he said.
“Still, some circuits are more liberal than others,” Androphy said. “And nobody knows whether it will work unless you try.”
Attorneys representing BASF, Covestro, Dow Chemical and Hunstman Intl. either didn’t respond, or declined to respond, to requests for comment.
Plaintiffs’ counsel in Simoneaux and Kasowitz also didn’t respond to requests for comment.
(An earlier online version of this story incorrectly identified Covestro LLC as Covestro AG in the fifth paragraph.)
To contact the reporter on this story: Peter Hayes in Washington at PHayes@bna.com
To contact the editor responsible for this story: Steven Patrick at firstname.lastname@example.org
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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