Sixth Circuit Applies Sanctions Appropriately in Frivolous FCA Case

6th CircuitGuest Commentary

by Spencer Salmon, a 2015 Judge K.K. Legett Fellow at the Washington Legal Foundation and a student at Texas Tech School of Law.

On May 1, 2015, the U.S. Court of Appeals for the Sixth Circuit affirmed sanctions imposed by a lower court in a suit filed under the False Claims Act (FCA). The decision, United States ex rel. Jacobs v. Lambda Res., Inc., is an encouraging development given the ease with which the FCA can be abused and the federal judiciary’s general aversion to punishing frivolous plaintiffs and their lawyers.

The defendant, Lambda Research, is a small Cincinnati company that specializes in strengthening metal components so that they become more resistant to fatigue. In 2000, the Navy assigned a Navy engineer to test Lambda’s process, and report the results. The Navy had recently lost several aircraft due to an engine metal component failure and was exploring a replacement. Satisfied with the results of the joint test project, the Navy contracted with Lambda for their new engine component in 2007. Also in 2000, Lambda hired Mr. Jacobs as a senior engineer. He worked there until 2002, when he left to become vice-president of Ecoroll Corporation, a German competitor.

After Mr. Jacobs left Lambda and before the Navy contracted with them, Mr. Jacobs attempted to sway the Navy’s opinion of Lambda by emailing the Navy engineer to convince him to drop Lambda and hire Ecoroll to do the work. As if interfering with Lambda’s and the Navy’s relationship wasn’t enough, Mr. Jacobs also contacted the U.S. Patent Office in an attempt to invalidate Lambda’s patent. However, the Patent Office confirmed Lambda’s patent.

In October 2003, Lambda sued Mr. Jacobs for (1) stealing Lambda’s trade secrets, (2) revealing these trade secrets to Ecoroll, and (3) breaching his confidentiality agreement with Lambda. An Ohio state court judge found Mr. Jacobs liable and awarded Lambda damages and attorneys’ fees of $9.4 million.

Two months later, Mr. Jacobs countersued Lambda under the FCA, alleging Lambda had defrauded and misinformed the Navy about Lambda’s test results. The district court judge, who had likely been made aware of the circumstances underlying the suit by Lambda, forewarned Mr. Jacobs that he would impose sanctions under a provision of the FCA and Federal Rule of Civil Procedure 11 if he found that the case was frivolous or if Mr. Jacobs failed to dismiss the case if he found it had no merit. In fact, the court warned Mr. Jacobs and his attorney three times.

The case proceeded to discovery wherein Mr. Jacobs (1) failed to depose any Navy employees to support his fraud claim and (2) filed a motion to inspect and photograph Lambda’s equipment and processes. The court easily denied the motion based on the state court’s finding that Mr. Jacobs had unlawfully revealed trade secrets. His acts demonstrated harassment and his request was nothing short of ludicrous.

After determining that no reasonable juror would find a false claim, the court granted Lambda’s motion for summary judgment and sanctions. True to its word, the court sanctioned Mr. Jacobs and his attorney under FRCP Rule 11 and under a FCA provision. To support his actions, the judge explained, “[t]here is abundant evidence that the claims alleged in this case are frivolous and that Jacobs brought this action . . . as retaliation for Lambda’s successful state court action.”

On appeal, the Sixth Circuit found Mr. Jacobs’s allegations meritless, concurring with the lower court that no reasonable jury could find a false claim. Mr. Jacobs failed to present any evidence that Lambda made false statements to the Navy. In fact, the Sixth Circuit actually found ample records showing Lambda’s repeated disclosure of results to the Navy. The court determined that the “appeal [was] both baseless and brought primarily for purposes of harassment” and sanctioned Mr. Jacobs’s attorney a second time because of the frivolous appeal.

WLF applauds the Southern District of Ohio for sanctioning Mr. Jacobs and his attorney. These sanctions totaled $511,633.58 against Mr. Jacobs and $194,522.89 against Mr. Jacobs’s attorney. Kudos also go to the Sixth Circuit for not only affirming the sanctions, but also informing Mr. Jacobs’s attorney that unless he could show cause, the court would punish him for filing a frivolous appeal.

Frivolous litigation of any type undermines the American legal system and needlessly burdens the courts and defendants, but baseless False Claims Act suits are especially damaging. Allegations of defrauding a federal entity can severely sully a government contractor’s reputation, causing it not only to lose an existing contract, but also robbing it of future opportunities. The federal judiciary has a duty to aggressively deter and punish avaricious litigators. Perhaps this Lambda ruling will encourage other courts to remind parties before them, as the federal district court judge did here: “Rule 11 is there, and it’s there for a reason.”

One thought on “Sixth Circuit Applies Sanctions Appropriately in Frivolous FCA Case

  1. Pingback: Attorneys as Qui Tam Relators?: False Claims Act Doesn’t Preempt Ethics Laws and Cannons | The WLF Legal Pulse

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