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Tel: +1.617.3790702 E-mail: pc@CarrigCounsel.com

VIA FEDERAL PORTAL February 3, 2013 CC:PA:LPD:PR (REG-141066-09), Room 5203 INTERNAL REVENUE SERVICE PO Box 7604 Ben Franklin Station Washington, DC 20044 ATTENTION: Ms. Meghan M. Howard CC:PA:LPD:PR (REG-141066-09), Room 5203

PROPOSED REG §§301.7623-1 -- 301.7623-3. Dear Ms. Howard: The following are our comments and remarks concerning the above, respectfully submitted for your consideration. General. We urge you to reconsider the discouraging approach taken in these Proposed Regulations. It is a racing certainty that the Tax Court and Court of Appeals for the DC Circuit will overturn many of the interpretations contained in these regulations, if promulgated in their present form. At a minimum the anti-whistleblower interpretations contained in these Proposed Regulations will lead to litigation that will (i) waste valuable IRS resources and (ii) flood the Tax Court and Court of Appeals with pointless and useless litigation. That is exactly what high-end tax cheats want: for the IRS to deploy its scarce resources against itself in effect, rather than using those resources pursuing tax cheats. After I read the Preamble to these Proposed Regulations, I experienced the sinking feeling that, after many gestures of goodwill toward whistleblowers and claims by some that the IRS had “turned a corner” in its attitude to whistleblowers, the IRS had reversed course. One was left with the distinct impression the IRS was pedaling backwards, and had institutionally blindfolded itself. After reassuring missives from then-Deputy Commissioner Steven Miller in mid-2012, these Proposed Regulations gave one the impression that the IRS had reconsidered its mid-2012 position, and was attempting to eviscerate the program and thwart Congress by discouraging knowledgeable whistleblowers from coming forward with high-quality information. In this age of iterative media reports of wide-scale suspected tax evasion by major corporations and other well-advised “taxpayers,” and an enormous fiscal shortfall that is hobbling this great nation, the IRS Whistleblower Program represents the best mechanism in many years for an obviously outmaneuvered IRS to reclaim lost public

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respect, were it properly deployed. Yet instead of capitalizing on the tremendous opportunity offered by the program, IRS senior management seems intent on capsizing it, at least insofar as the strategic thinking of senior IRS management is reflected by the content of the Proposed Regulations. What is the IRS so afraid of institutionally at a senior management level that it refuses to wholeheartedly embrace this program? Could it be the same thing that Lanny Breuer just got fired for after his being “outed” by Frontline—not wishing to offend deep-pocketed, prospective employers in the private sector by doing their jobs properly? I am not suggesting this is the case with the IRS, but the attitude reflected in these regulations is baffling. In my experience the IRS rank and file who work the cases, and the IRS Whistleblower Office personnel, are professional, enthusiastic and diligent. So what is informing the discouraging attitude reflected in these regulations, particularly acute for a statute vitally important to the nation’s fiscal well-being? I suggest that the IRS take a look at the parallel (and overlapping) tax whistleblower program administered by New York Attorney General Schneiderman’s Taxpayer Protection Bureau (run by a gentleman named Randy Fox). The NYAG approach is measured, aggressive and welcoming to tax whistleblowers and their information. The NY Taxpayer Protection Bureau has the vision to see the value of insider information and treats whistleblowers accordingly. New York law enforcement appreciates it doesn’t have the internal expertise to fight sophisticated tax cheating, so they use sophisticated tax whistleblowers to bridge that knowledge gap, so far with enormous success. The New York approach seems to be that there is no shame in not knowing about some sophisticated tax scheme, but it is entirely shameful to ignore that the problem exists once it has been pointed out. The IRS should follow suit. Another point of contrast between NYAG and the IRS, is that in the former program, communication is open, frank and productive. In contrast, the IRS’s “black box” approach, where it does not discuss or share anything with whistleblowers, surely is wanting. How can the IRS effectively operate an information-sharing program where there is no sharing of information by the parties? More than anything else, the IRS needs to address the communication breakdown. Comments and Remarks. Our select comments and remarks are confined to a few obvious points raised by the Proposed Regulations. 1. Planner and Initiated: Prop. Reg. §301.7623-4. Attached is a copy of a letter dated July 4, 2012, outlining my comments on this issue. The current regulation conceivably can capture anyone who “drafted” any part of a tax scheme “who knew or had reason to know” of the “tax implications” for the transaction, even if he or she did not have “authority” to effect it. Insensibly, that wide net captures everyone who had any detailed knowledge of the reported transaction—tax whistleblowers are tax professionals and wouldn’t be working on the reported scheme unless they appreciated its

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“tax implications,” which is the basis for their reporting the transaction to the WBO in the first place! Stated differently, does the IRS want to encourage whistleblowers to come forward who don’t understand or, in any meaningful way, appreciate the tax implications of the thing they are reporting? For that is the necessary corollary of the approach taken here. There is already a well-established body of law under the False Claims Act (31 USC §§ 3729-3733) on this topic, and the IRS seems to want to re-invent that particular wheel? Why? Surely, the closer the whistleblower is to the “action,” the better his or her information will be. Isn’t that precisely the kind and quality of information the IRS should want? 2. Proceeds Based On: Prop. Reg. §301.7623-2. We respectfully suggest the interpretation reflected in this regulation impermissibly narrows the scope of the statute by adding “only” to the statutory language. The proposed regulation requires the WBO to pay rewards only when the IRS takes action it would not otherwise have taken “but for” the whistleblower’s information. In contrast, the statute itself simply requires the IRS to use the whistleblower information for the action for the whistleblower to be entitled to reward. The interpretation adopted by the Proposed Regulations impermissibly allows the IRS to take the whistleblower’s information, use it, claim at the end of the day that it would have taken the action it took anyway even without the whistleblower’s information (e.g., “it was in our original audit plan for this kind of taxpayer”), and, therefore, the whistleblower is out of luck for reward. We urge you to correct this patently unreasonable and unfair regulatory overreach. 3. NOLs: Prop. Reg. §301.7623- We wrote about this issue in our original submission letter dated March 28, 2011, a copy of which is attached, and the content of which we reiterate here. NOLs are valuable tax assets that should form part of “collected proceeds” since reduction of an NOL will result in a tax payment by the Target at some point. Trafficking in NOLs is rife right now with many “taxpayers” carrying enormous NOLs in the wake of the financial meltdown. This trafficking needs to be stopped and whistleblowers can help you do so, but they need to be incentivized to help. In the Preamble at page 12, you suggest that the “computational rule does not attempt to assign a present value to these attributes, given that whether, when or to what extent they may affect a taxpayer’s liability or the amount of collected proceeds cannot be determined in advance of their actual use.” I interpret this to mean that you consider it too complicated to track or value NOL usage currently, and this complexity provides another reason NOL reduction shouldn’t form the basis for whistleblower rewards. I disagree. Even if the IRS is not prepared to “present value” NOL reduction, it would be very easy to pay a reward based on any additional “collected proceeds” attributable to the NOL reduction for say 10 years. This could be accomplished by comparing the tax that would be paid by the Target with and without the NOL reduction, the positive tax collection differential (surely “collected proceeds” by any stretch) forming an additional reward base for the whistleblower? The computation mechanism could be incorporated into any

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settlement agreement with the whistleblower to avoid disputes down the road on the computational front, and it the whistleblower could agree to waive appeals, etc. so as to end potential disputes about the calculation of additional payments to the whistleblower. What’s hard about that? 4. Award for less Substantial contribution: §301.7623-4(c)(2). IRS Public Disclosure Bar. IRC §7623(b)(2) provides that

(A) IN GENERAL. In the event the action described in paragraph (1) is one which the Whistleblower Office determines to be based principally on disclosures of specific allegations (other than information provided by the individual described in paragraph (1)) resulting from a judicial or administrative hearing, from a governmental report, hearing, audit, or investigation, or from the news media, the Whistleblower Office may award such sums as it considers appropriate, but in no case more than 10 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action, taking into account the significance of the individual's information and the role of such individual and any legal representative of such individual in contributing to such action. (B) NONAPPLICATION OF PARAGRAPH WHERE INDIVIDUAL IS ORIGINAL SOURCE OF INFORMATION- Subparagraph (A) shall not apply if the information resulting in the initiation of the action described in paragraph (1) was originally provided by the individual described in paragraph (1).

Therefore, the statute, and applicable legal precedent discussed below, requires the following levels of analysis (or decision tree) to resolve this issue:

1. Was there “public source information” on which the action could have been based;

2. If YES, did that public source information disclose a “specific allegation” upon which the whistleblower based his action;

3. If YES, was the whistleblower’s action based “principally” on that disclosure; and

4. If YES, did the IRS proceed based on what the whistleblower provided even if that

specific allegation was in the public domain. If the answer to Paragraph 4 is also YES, then there should be no reward reduction based on a reasonable interpretation of the wording and intent of the public disclosure bar.

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FCA Public Disclosure Bar. The “public source” bar originated in the False Claims Act, which, in relevant part bars qui tam actions that are “based upon the public disclosure of allegations or transactions,” 31 USC§3730(2)(4)(A), unless the whistleblower qualifies as an original source for those publicly disclosed allegations or transactions. An "original source" is defined in 31 USC §3730(e)(4)(B) as "an individual who has direct and independent knowledge of the information on which the allegations are based." The leading case interpreting the FCA “public disclosure bar” is U.S. ex. rel. Springfield Terminal Ry. v. Quinn, 14 F. 3d 645 (1994 CA DC Cir.), attached hereto for ease of reference. The Federal Circuit reasoned that the FCA “bars suits based on publicly disclosed ‘allegations or transactions,’ not information.” The court thought that the publicly information disclosed in the case, pay vouchers and telephone records, “were not in and of themselves sufficient to constitute ‘allegations or transactions’ of fraudulent conduct within the meaning tie FCA….” Id at 653. The court thought the “term ‘allegation’ connoted a conclusory statement implying the existence of provable supportable facts.” Id. at 654. It then went on to note that

Our reading, however, does not rest on plain meaning alone. "In determining the meaning of the statute, we look not only to the particular statutory language, but to the design of the statute as a whole and to its object and policy." Crandon v. United States, 494 U.S. 152, 158, 110 S.Ct. 997, 1001, 108 L.Ed.2d 132 (1990). Many potentially valuable qui tam suits would be aborted prematurely by a reading of the jurisdictional provision that barred suits when the only publicly disclosed information was itself innocuous.

Analyzing whether the whistleblower was the “original source” for the publicly disclosed allegation or transaction within the distinct meaning of the FCA, said the court,

[s]ignificantly, the "original source" provision requires the relator to possess direct and independent knowledge of the "information" underlying the allegation, rather than direct and independent knowledge of the "transaction" itself. On the basis of plain meaning, then, we find that § 3730(e)(4)(B) does not require that the qui tam relator possess direct and independent knowledge of all of the vital ingredients to a fraudulent transaction. * * * If we were to equate "information" with "transaction," we would undo both Congress' careful choice of wording and its manifest intent to reverse the result in United States ex rel. Wisconsin v. Dean, 729 F.2d 1100 (7th Cir.1984), a case in which the misrepresented state of affairs (paperwork seeking reimbursement for indigent psychiatric care) had already been presented to the government by an alleged perpetrator of Medicaid fraud. We think it clear, in light of the aims of the statute, that "direct and independent knowledge of information on which the allegations are based" refers to direct and independent knowledge of any essential element of the underlying fraud transaction.

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IRC §7623(b)(2) adopted the FCA’s public disclosure bar, but it circumscribed the proscribed public disclosure bar to “specific allegations” rather than the FCA’s “allegations or transactions,” and is, therefore, much narrower in scope than the broadly equivalent FCA bar. Proposed Regulatory Interpretation. Prop. Treas. Reg. §301.7623-4(c)(2)(ii) conflates “public source information” with “specific allegation,” and impermissibly broadens the statutory “cut-back” for information based principally on for publicly disclosed “specific allegations” by reading the latter requirement completely out of the statute. Specific Allegation. The regulation directs the Whistleblower Office to:

analyze the administrative file to determine whether any of the information provided by the individual contained public source information and, if it did, whether the action described in paragraph (c)(1) of this section was based principally on the public source information. The Whistleblower Office will make this determination on the extent to which the public source information described a tax violation or facts and circumstances from which a tax violation reasonably may be inferred. If the Whistleblower Office determines that the action was based principally on public disclosure….

For the IRC §7623(b)(2) “public disclosure bar” to apply, the statute requires the whistleblower’s information to be based on a specific allegation. In the context of Title 26, the insertion of the word “specific” before the word allegation, logically requires the allegation be, well, tax specific—a specific “conclusory statement implying the existence of provable facts” in the words of the court in Quinn. A “specific allegation” cannot be “inferred” (meaning deduced, constructed or derived?) from facts and circumstances, I respectfully suggest—a “specific allegation” plainly exists or it does not, but cannot be constructed or deduced from surrounding facts, based on the Quinn definition. From a controversy-avoidance perspective, I note that the biggest dunce in the world can “infer” something when he knows what to find! The discussion about whether something is a “public source” will occur when the IRS has already received “collected proceeds” based on the whistleblower’s information – at the end of the process when all the facts are available, in other words. So the inference will be easy to draw especially for those who, to a cynical eye, might be very focused on finding some way of connecting particular dots. I respectfully suggest that each of those situations will end up in litigation that the IRS will lose, if the approach of the Proposed Regulations is continued in final regulations. At some risk of belaboring my point, whether the whistleblower based his report on “publicly disclosed information” is relevant only if that publicly disclosed information contained a specific allegation of the reported tax misconduct, not whether the information

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generally might have described something tax-connected that could have been a reportable tax violation under IRC §7623(b)(1). Assuming the whistleblower had based his report on specific allegation of tax misconduct contained in a public source, the question then becomes whether the whistleblower’s report to the IRS was based “principally” on that specific allegation. Principally is not defined by Section 7623. And if we get to the point that the whistleblower based his information principally on a publicly disclosed specific allegation, the analysis then turns to whether the whistleblower was the IRS’s “original source” of the information that provided the basis for IRS action under Section 7623(b)(1). Original Source. Prop. Treas. Reg. §301.7623-4(c)(2)(i) states that “[i]f the individual is the original source of the public source information, however, then the award percentage will [not be reduced].” This is not a correct interpretation of the statute. Based on the precise statutory language, the issue is whether the IRS acted on the information provided by the whistleblower, not whether the whistleblower was the source of the public disclosure itself as the Proposed Regulation states. Therefore, if the IRS takes action based principally on information that would otherwise be subject to the public disclosure bar (i.e., “publicly disclosed specific allegations”), the whistleblower is an “original source” and may not have his or her reward reduced pursuant to the public disclosure bar. That may be distasteful to the IRS, but it is what the statute states. This interpretation makes sense in the unique context of the IRS as a governmental agency where specific privacy considerations applicable to “taxpayer information” prevent it from taking action itself based on media reports and such like. It also makes sense in the broader context of the public disclosure bar, which is designed to prevent parasitic lawsuits (see discussion in Quinn) for information already in the government’s possession. In contrast, the concern about parasitic lawsuits does not apply where the IRS theoretically should have the information forming the basis for the action, but in fact did not have it. If the IRS does not have the information necessary to commence an action in its actual possession, even if that information was in the public domain, the whistleblower should not suffer a reward reduction, I respectfully suggest. Please contact me if you would like further information. Respectfully Submitted,

Patrick Carmody

VIA Federal eRulemaking Portal March 28, 2011 INTERNAL REVENUE SERVICE P.O. Box 7604 Ben Franklin Station Washington, DC 20044 ATTENTION: Ms. Kristen N. Witter

Re: Comments on Proposed Treasury Regulations Section 301.7632-1(a)

CC: PA: LPD: PR (REG-131151-10) Dear Ms. Witter: We write to comment on proposed regulations under Section 7632 of the Internal Revenue Code (“IRC”) that were published in the Federal Register on January 18, 2011 (the “Proposed Regulations”). The Proposed Regulations address the definition of “proceeds of amounts collected and collected proceeds” for purposes of IRC s. 7632. We commend the Internal Revenue Service (“IRS”) for the substantial advances that the Proposed Regulations made to encourage and appropriately reward individual whistleblowers who report tax misconduct to the IRS’s whistleblower office. Specifically, we praise the clarifications provided by the Proposed Regulations that “collected proceeds” includes situations where, as a result of the whistleblower’s information, the taxpayer’s (i) overpayment credit balance is reduced and (ii) claim for refund is denied. We submit that you retain those clarifications in the final regulations, their being within the spirit and intent of IRC s. 7632. The following are our specific comments:

1) Refund Claims. Proposed Regulation Section 301.7632-1(a)(2): “amounts collected prior to receipt of the information if the information provided results in the denial of a claim for refund that otherwise would have been paid.” (Emphasis Added). We suggest you delete the words “prior to receipt of the information” as is immaterial when the information is provided so long as it is the cause of the “collected proceeds” attributable to the refund claim. We submit that including those additional words may, unnecessarily and unintentionally, generate disputes between whistleblowers and the IRS.

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For example, suppose a whistleblower’s information leads to an IRS audit and assessment. The taxpayer pays the taxes and files a refund claim, which the IRS successfully contests. The whistleblower provided the information before the taxpayer pursued the refund claim and should be entitled to an appropriate reward. Arguably, that whistleblower’s reward entitlement would be unclear under the present wording, a condition eliminated without loss of meaning by striking the superfluous words.

2) Criminal Sanctions. Proposed Regulation Section 301.7632-1(a)(2): “tax penalties and interest.” We suggest you clarify that “penalties” includes criminal penalties and sanctions by specifically adding “including criminal penalties and sanctions” to the existing phrasing. Although this seems self-evident from the statutory language, the Internal Revenue Manual (“IRM”) excludes criminal sanctions from the whistleblower award amount. See IRM 25.2.2.1.7. Also, we suggest you clarify that amounts paid to whistleblowers as a consequence of criminal sanctions should be paid without duplication of corresponding civil amounts and vice versa--the whistleblower should be only rewarded once for the same collected proceeds even if the collection comes from criminal and civil sources. For example, “restitution” is frequently ordered in criminal tax cases, which component acts as a partial or complete proxy for civil taxes otherwise owed by the target taxpayer.

3) Net Operating Losses offsets/denial. Proposed Regulations Section 301.7632-

1(a)(2) does not address situations involving Net Operating Losses (NOLs). We submit that whistleblowers should be rewarded currently where the whistleblower’s information results in:

(a) full or partial denial of a taxpayer’s claimed NOL (for

example, under IRC s. 382); and (b) the taxpayer’s using an NOL to offset taxable income

attributable to the whistleblower’s information,

even if the whistleblower’s information does not result in a current inflow of dollars to the Treasury from a tax payment.1 The fiscal effect, however, is that the Taxpayer reduces a valuable tax attribute, which will accelerate its taxable income recognition that creates a current value for Treasury.

The described NOL situations are contextually different in that, in the first, the NOL itself may be the subject of the whistleblower submission, while in

1 Though it may be obvious from the context, we are focusing on situations where the taxpayer does not have an actual tax liability, or the liability is reduced due to the NOL, perhaps where the NOL is denied before the taxpayer can use it, or the NOL is used to reduce or eliminate the taxpayer’s liability for a particular year.

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the second, the taxpayer uses an NOL to reduce the tax liability attributable to the whistleblower’s information. However, we suggest this difference is not meaningful. In both situations the whistleblower’s information has resulted in the reduction or elimination of a valuable tax attribute that, absent the whistleblower’s information, the taxpayer could have used to offset against “other” taxable income and thereby reduce its overall tax liability. We submit that the described NOL situations are analogous to the “overpayment credit balance” situation contained in Proposed Regulation Section 301.7632-1(a)(2) and should be treated consistently therewith. Economically, it is difficult to meaningfully distinguish between the value created for Treasury on the one hand by transfer of portion of an “overpayment credit balance” from, on the other, reduction of taxpayer’s NOL. We suggest doing so would elevate form over substance.

Furthermore, we respectfully submit that the Congressional policy underlying the 2006 amendment to IRC s.7872 supports extending the definition of “collected proceeds” to encompass (A) NOL reduction directly and (B) taxpayers’ using NOLs to offset their tax liability. Congress intended to encourage whistleblowers to come forward to help the IRS discover and pursue tax avoidance and evasion schemes that it might be unable to discover and prevent without that assistance. Denying illegal NOL usage as one instance, and compensating whistleblowers for information that leads to the taxpayer’s use of NOLs to offset its tax liability as another, are objectives consistent with, and perhaps mandated by, that Congressional intent. Since the financial crisis of 2008/9, there appears to be an industrial scale proliferation of trafficking in NOLs (and other tax credits) involving hundreds of millions of dollars of otherwise unusable tax benefits as certain US taxpayers sell or otherwise transfer tax attributes that they themselves cannot use to taxpayers who might be able to use those attributes to reduce their tax liabilities (if the tax attribute transfer were legitimate). The schemes that have come to our attention would not withstand scrutiny for various reasons including threshold IRC s. 382 review. On the other hand, many of the transferred tax attributes are wrapped up in well-disguised structures to add a veneer of legitimacy, which will be difficult, if not impossible, for the IRS to detect and unravel without the assistance of knowledgeable whistleblowers. In some cases, aggressive taxpayers are acquiring more than one set of tax attributes on the theory that if one fails (or conceded to the IRS on examination to settle the case), the other will do the job – a sort of tax risk diversification measure. Surely, these are precisely the kind of industrial scale tax avoidance/evasion techniques that Congress intended IRC s. 7678 to aid the IRS in capturing? We suggest that without reward potential for reporting these NOL strategies, knowledgeable whistleblowers will not come forward to report malfeasance directly involving NOLs. Moreover, knowledgeable insiders will not report

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other aggressive tax planning if he or she believes the resultant tax liability will be offset by a taxpayer’s NOLs which are not included within the definition of “collected proceeds.”

An equally compelling argument applies to other tax attributes such as foreign tax credits under IRC s. 901 et seq., and low-income housing credits under IRC s. 42 et seq., as examples. The calculation methodology specifics may be appropriate for the IRM rather than final regulations, but we mention it here as it is an important component of the interaction of NOL/tax credit reduction and definition of “collected proceeds.” To avoid disputes and prolonged appeals we suggest the reward calculation methodology used for NOL denial/usage should be kept as simple as possible. One possibility to consider might be to base the reward calculation on the greater of the (1) taxpayer’s actual tax liability and (2) product of (X) amount of the denied/used NOL and (Y) taxpayer’s effective tax rate calculated before application of NOLs and other tax credits. Regardless of the complexity of integration of NOL/credits within the definition of collected proceeds, we urge you to address the issues NOLs/tax credits present, and not ‘reserve’ in the final regulations. Illegal trafficking and usage of NOLs and tax credits is rampant now, and knowledgeable whistleblower input will assist the IRS greatly in fighting this new tax avoidance/evasion theme before it gains more traction. However, knowledgeable whistleblowers will come forward to help only if “collected proceeds” attributes a reward to NOL and tax credit denial/usage independent of the target taxpayer’s tax liability in cases where the information does not generate a current tax liability.

Please feel free to contact the undersigned if you would like clarification or to discuss further any aspect of the foregoing for which you think our input might be helpful. Respectfully Submitted,

Patrick Carmody Encls.

14 F.3d 645 (1994)

UNITED STATES of America, ex rel. SPRINGFIELD TERMINAL RAILWAY COMPANY; David A.Fink, Plaintiffs-Appellants,

v.Francis X. QUINN, Defendant-Appellee.

No. 92-7157.

Argued December 14, 1993.Decided February 8, 1994.

Suggestion for Rehearing Denied April 8, 1994.[*]

United States Court of Appeals, District of Columbia Circuit.

*646 Catherine R. Connors, Portland, ME, argued the cause, for plaintiffs-appellants. With her on the briefs wasCharles S. Einsiedler, Jr., Portland, ME.

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Thomas P. Barletta, Washington, DC, argued the cause, for defendant-appellee. With him on the brief was Mary JeanAnderson, Washington, DC. Jerald S. Howe, Jr., Washington, DC, entered an appearance.

*647 Before WALD, GINSBURG and RANDOLPH, Circuit Judges.647

Suggestion for Rehearing In Banc Denied April 8, 1994.[*]

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge:

This case presents issues of first impression concerning the 1986 amendments to the qui tam[1] provisions of theFalse Claims Act, 31 U.S.C. § 3729 et seq. ("FCA"). Under these provisions, private persons acting on behalf of thegovernment may sue those who defraud the government and share in any proceeds ultimately recovered. Since 1943,the FCA has included a jurisdictional limitation on qui tam actions, the most recent form of which bars suits that are"based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in acongressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from thenews media, unless ... the person bringing the action is an original source of the information." 31 U.S.C. § 3730(e)(4)(A). Springfield Terminal Railway Co. and its President, David Fink (collectively, "Springfield"), brought suit under thequi tam provisions against Dr. Francis X. Quinn, an arbitrator appointed by the National Mediation Board ("NMB") toresolve a labor dispute between Springfield and its union, alleging that Quinn had fraudulently billed the governmentfor services not actually rendered in connection with the arbitration proceedings. The district court dismissedSpringfield's action on the grounds that it violated the FCA's jurisdictional limitation, and Springfield filed this timelyappeal. The central issue in the case is under what circumstances a qui tam action will be deemed to be "based uponthe public disclosure of allegations or transactions" within the meaning of § 3730(e)(4)(A). Because we find that thedistrict court operated under an unduly broad reading of the jurisdictional bar, we remand this case for furtherproceedings.

I. BACKGROUND

This case originated as a labor dispute between Springfield, a rail common carrier, and the union representing its

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employees. After the parties proved unable to resolve their disagreement privately, the NMB appointed a panel offederal arbitrators pursuant to the Railway Labor Act, 45 U.S.C. §§ 153-54 (1988) ("RLA"). An initial panel determinedthe dispute was properly referable to arbitration under the RLA, and a merits panel consisting of Dr. Francis X. Quinnas neutral member and one representative each from the railroad and its union began hearings in April 1988.Springfield immediately initiated an action in the United States District Court of Maine challenging the necessity for amerits panel on the grounds that the union had not satisfied all of the procedural prerequisites to federal mediation.[2]

See Springfield Terminal Ry. Co. v. United Transp. Union, 767 F.Supp. 333, 335-36 (D.Me.1991). On June 13, 1988,before the district court took any action on Springfield's suit, the merits panel issued a decision in favor of the union.See Public Law Board No. 4462 Decision and Award (June 13, 1988), reprinted in Joint Appendix ("J.A.") at 86-93.The panel left to the parties the resolution of back pay issues. When the parties again were unable to reachagreement, the panel reasserted jurisdiction and issued a series of short decisions pertaining to back pay and benefits.

Springfield filed a supplemental petition in the Maine district court seeking to set aside *648 all of the merits panel'sawards.[3] In its complaints, Springfield alleged, inter alia, that both panels had misconstrued the RLA in submitting thecase to arbitration, that the court rather than an arbitration board was the appropriate body to decide the dispute, thatSpringfield was denied due process of law because of arbitrators' ex parte communications, and that narrow judicialreview of arbitral awards violated the separation of powers doctrine of the Constitution. After obtaining the arbitrators'pay vouchers through discovery and filing the relevant discovery materials with the court, Springfield appended a claimthat neutral merits arbitrator Quinn had billed the government for activities unrelated to the arbitration proceedings. Oncross-motions for summary judgment, the Maine district court awarded summary judgment to the union with respect toSpringfield's challenges to the necessity for arbitration, but vacated the merits panel's actual awards due to the panel'sreliance on an erroneous computer database version of the Federal Railroad Safety Act of 1970, 45 U.S.C. §441(b)(1). The court then remanded the case to the merits panel for redetermination of the award under the correctversion of the statute without reaching the allegations pertaining to Quinn's billing. See Springfield Terminal Ry., 767F.Supp. at 347.

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In August 1991, two months after the Maine court's remand to the arbitration panel, Springfield filed this action in theUnited States District Court for the District of Columbia under the qui tam provisions of the FCA, 31 U.S.C. § 3729 etseq. In its complaint, Springfield alleged once again that Dr. Quinn had fraudulently billed the government for days onwhich he had not actually worked on Springfield's dispute. Springfield contended that its suspicions first arose uponinspection of Quinn's pay vouchers, which were produced by civil discovery processes in the Maine litigation. Basedupon its own involvement in the arbitration, Springfield recognized that Dr. Quinn had no arbitral function to perform onseveral of the days for which he sought pay. According to Springfield, it then conducted further investigation on its own,calling several of the numbers listed on Quinn's telephone records that had been disclosed during discovery.Springfield argues that it was this inquiry that brought to light fraudulent behavior on Quinn's part — revealing, forexample, that he had been in Canada attending a national arbitration conference for a three-day period during whichhe had billed the government for services pertaining to the arbitration. As required by the FCA, 31 U.S.C. § 3730(b)(2),Springfield provided the information forming the substance of its complaint to the Department of Justice, which issuednotice of its declination to appear on the government's behalf on December 6, 1991.

Dr. Quinn moved to dismiss the action under the jurisdictional bar of the FCA, 31 U.S.C. § 3730(e)(4)(A), whichprohibits qui tam actions that are "based upon the public disclosure of allegations or transactions in a criminal, civil, oradministrative hearing ... [unless] the person bringing the action is an original source of the information," and for aviolation of FED.R.CIV.P. 9(b), which requires that averments of fraud "be stated with particularity." Bypassing theparticularity charge, the district court granted Quinn's motion to dismiss for lack of subject matter jurisdiction under §3730(e)(4)(A) in July 1992. The court reasoned that Springfield's qui tam claim was "based upon" informationunearthed during discovery in the Maine litigation and so fell under the "public disclosure" ban of the FCA. The courtrejected Springfield's contention that the qui tam allegations were based on its first-hand knowledge of events in thearbitration proceeding and its additional investigative efforts sparked by discovery materials that were innocuous in

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their own right. Turning then to the "original source" exception of § 3730(e)(4)(A), the court held that informationobtained through discovery was of necessity obtained through an intermediary, and *649 thus did not fall within thestatutory exception. The court viewed the additional information about Quinn's activities gleaned from Springfield's owninvestigation as mere "background," and so did not engage in "original source" analysis with respect to it.

II. ANALYSIS

A.

This case requires us to chart the changed landscape of qui tam actions in the aftermath of the 1986 amendments tothe False Claims Act. The FCA's qui tam provisions, which have existed in various incarnations since 1863, providecash bounties in certain circumstances to private citizens who successfully bring suit against those who defraud thefederal government. Qui tam provisions are designed to set up incentives to supplement government enforcement, andat their best may "compare with the ordinary methods as the enterprising privateer does to the slow-going publicvessel." United States v. Griswold, 24 F. 361, 366 (D.Or.1885). On the downside, overly generous qui tam provisionspresent the danger of parasitic exploitation of the public coffers, as exemplified by the notorious plaintiff who copiedthe information on which his qui tam suit was based from the government's own criminal indictment. See United Statesex rel. Marcus v. Hess, 317 U.S. 537, 63 S.Ct. 379, 87 L.Ed. 443 (1943). Seeking the golden mean between adequateincentives for whistle-blowing insiders with genuinely valuable information and discouragement of opportunisticplaintiffs who have no significant information to contribute of their own, Congress has frequently altered its course indrafting and amending the qui tam provisions since initial passage of the FCA over a century ago.

The past serves as prologue; some familiarity with their tortuous, wending history is critical to an understanding of thelatest set of amendments to the qui tam provisions. The False Claims Act of 1863 was adopted during the Civil War inorder to combat fraud and price-gouging in war procurement contracts. See United States ex rel. LaValley v. First Nat'lBank of Boston, 707 F.Supp. 1351, 1354 (D.Mass.1988); JOHN T. BOESE, CIVIL FALSE CLAIMS AND QUI TAMACTIONS 1-3 (1993). In addition to creating stiff civil and criminal penalties for fraud, the Act allowed any person tobring suit against the offending profiteers under its qui tam provisions, promising successful qui tam plaintiffs one-halfof the damages and forfeitures ultimately recovered and collected. See S.REP. No. 345, 99th Cong., 2d Sess., at 10(1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5275. The original qui tam provisions were, in the words of an earliercourt,

passed upon the theory, based on experience as old as modern civilization, that one of the leastexpensive and most effective means of preventing frauds on the Treasury is to make the perpetrators ofthem liable to actions by private persons acting, if you please, under the strong stimulus of personal illwill or the hope of gain.

United States v. Griswold, 24 F. 361, 366 (D.Or.1885). The 1863 Act required qui tam plaintiffs to bear the costs of theirlitigation efforts, in order to discourage frivolous lawsuits. However, it contained no requirement that the allegations offraud originate from the investigative efforts of the plaintiffs themselves, and it did not prohibit plaintiffs from bringingsuits based exclusively on information that was already in the government's possession. Despite this invitation forabuse, the qui tam provisions were used sparingly during their first half-century. See LaValley, 707 F.Supp. at 1354.

In 1943, however, after a decade in which New Deal and World War II government contracts boomed and qui tam suitscorrespondingly surged, the Supreme Court in United States ex rel. Marcus v. Hess, 317 U.S. 537, 63 S.Ct. 379, 87L.Ed. 443 (1943), spotlighted the pitfalls of the overly generous qui tam provisions then in effect. In Hess, a qui tamrelator brought suit under the 1863 Act alleging that electrical contractors had engaged in collusive bidding ongovernment contracts. Prior to the plaintiff's qui tam action, the same defendants had been criminally indicted for thesame behavior and fined, after a plea of nolo contendere, a sum of $54,000. The Supreme Court nonetheless

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permitted the qui tam plaintiff's suit (and concomitant share of the bounty), reasoning *650 that, even if the qui tamplaintiff had brought no new information to the fore and had merely copied the government's indictment, the suitadvanced the purposes of the FCA by affording a recovery to the government in excess of the criminal penalty. See id.at 545, 63 S.Ct. at 385. The Court found neither express impediment to the suit in the text of the Act nor any intent toimpose one in its legislative history, see id. at 546, 63 S.Ct. at 385, and declined to establish a judicial bar on its owninitiative.

Hess inspired public outcry over the liberality of the qui tam provisions that prompted speedy congressional response.Eleven months after the opinion was handed down, President Roosevelt signed tightening amendments to the FalseClaims Act. The amendments were the product of careful compromise: the House bill would have repealed the qui tamprovisions altogether, while the Senate bill barred qui tam jurisdiction for suits based on information already inpossession of the government unless the information was "original with such person." 89 CONG.REC. 510,744 (dailyed. Dec. 16, 1943). The Senate's original source provision, however, was dropped in conference without explanation.See United States ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1153 (3dCir.1991); United States ex rel. LaValley v. First Nat'l Bank of Boston, 707 F.Supp. 1351, 1355 (D.Mass.1988); see alsoJOHN T. BOESE, CIVIL FALSE CLAIMS AND QUI TAM ACTIONS 1-12 n. 38 (1993). The final version of theamendment thus barred qui tam suits that were "based on evidence or information the Government had when theaction was brought." 31 U.S.C. § 3730(b)(4) (1982) (superseded).

Once again, the passage of time revealed that Congress, in its attempt to evade Scylla, had steered precipitouslyclose to Charybdis. The new statutory barriers substantially decreased the use of qui tam provisions to enforce theFCA, see BOESE at 1-12, and courts greeted those qui tam suits that did arise with considerable caution. The case ofUnited States ex rel. Wisconsin v. Dean, 729 F.2d 1100 (7th Cir.1984), marked the nadir of the qui tam action. In Dean,the Seventh Circuit held that the FCA barred a qui tam suit "whenever the government has knowledge of the `essentialinformation upon which the suit is predicated' before the suit is filed, even when the plaintiff is the source of thatknowledge." Id. at 1103 (citing United States ex rel. Weinberger v. Florida, 615 F.2d 1370, 1371 (5th Cir.1980)). Thecourt dismissed the State of Wisconsin's qui tam action alleging Medicaid fraud that the state's own investigation haduncovered, because the state had already reported the fraud to the federal government as required under the terms ofits participation in the Medicare reimbursement program, and had further used the information to prosecute thedefendants on state criminal grounds. Noting that the original source provision in the 1943 Senate bill had mysteriouslyvanished in conference, the court found no clear intent to preserve it in the legislative history. The court concluded that,"[i]f the State of Wisconsin desires a special exemption to the False Claims Act because of its requirement to reportMedicaid fraud to the federal government, then it should ask Congress to provide the exemption." Dean, 729 F.2d at1106.

Predictably, the National Association of Attorneys General immediately adopted a resolution urging Congress "torectify the unfortunate result" of the Dean case. S.REP. No. 345, 99th Cong., 2d Sess., at 13, reprinted in 1986U.S.C.C.A.N. at 5278. Congress responded with the False Claims Amendment Act of 1986, the avowed purpose ofwhich was "to enhance the Government's ability to recover losses sustained as a result of fraud against theGovernment." Id. at 1, reprinted in 1986 U.S.C.C.A.N. at 5266. Concerned about "sophisticated and widespread fraud"depleting the national fisc,[4] the Senate Report concluded that "only a coordinated effort of both the Government andthe citizenry will decrease this wave of defrauding *651 public funds. [Accordingly, the Senate bill] increasesincentives, financial and otherwise, for private individuals to bring suits on behalf of the Government." Id. at 1-2,reprinted in 1986 U.S.C.C.A.N. at 5266-67.

651

The 1986 amendments, representing still another congressional effort to reconcile avoidance of parasitism andencouragement of legitimate citizen enforcement actions, wrought several changes in the qui tam provisions. On theone hand, Congress clearly acted upon its expressed intention to "encourage more private enforcement suits," S.REP.No. 345, 99th Cong., 2d Sess., at 23-24, reprinted in 1986 U.S.C.C.A.N. at 5288-89, by enacting the "original source"exception that had somehow slipped through the cracks in 1943 and that probably would have saved the qui tam

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action in Dean. To enhance incentives, the amendments also increased monetary awards, adopted a lower burden ofproof, and allowed qui tam plaintiffs to continue to participate in the actions after intervention by the government. SeeUnited States ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1154 (3dCir.1991). On the other hand, Congress left in place barriers to parasitic lawsuits. The 1986 amendment changed thelanguage of the jurisdictional bar, however, so that it now reads:

No court shall have jurisdiction over an action under this section based upon the public disclosure ofallegations or transactions in a criminal, civil, or administrative hearing, in a congressional,administrative, or Government Accounting Office report, hearing, audit, or investigation, or from thenews media, unless the action is brought by the Attorney General or the person bringing the action isan original source of the information.

31 U.S.C. § 3730(e)(4)(A).

The history of the FCA qui tam provisions demonstrates repeated congressional efforts to walk a fine line betweenencouraging whistle-blowing and discouraging opportunistic behavior. The 1986 amendments inevitably reflect thelong process of trial and error that engendered them. They must be analyzed in the context of these twin goals ofrejecting suits which the government is capable of pursuing itself, while promoting those which the government is notequipped to bring on its own.

B.

The 1986 qui tam amendments set up a two-part test for determining jurisdiction. First, the reviewing court mustascertain whether the "allegations or transactions" upon which the suit is based were "public[ly] disclos[ed]" in a"criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report,hearing, audit or investigation, or from the news media." 31 U.S.C. § 3730(e)(4)(A). If — and only if — the answer tothe first question is affirmative, see Wang v. FMC Corp., 975 F.2d 1412, 1416 (9th Cir.1992), will the court thenproceed to the "original source" inquiry, under which it asks whether the qui tam plaintiff "has direct and independentknowledge of the information on which the allegations are based." 31 U.S.C. § 3730(e)(4)(B). Under thesecircumstances, if the qui tam plaintiff qualifies as an original source, the action may proceed; if she does not, the actionis barred.

In applying the jurisdictional bar to Springfield's suit, the district court answered yes to the first (public disclosure)question by focusing principally on the material Springfield received during discovery in the Maine litigation. The courtfirst equated discovery with "public disclosure" in a "civil hearing." It then determined that Springfield's suit was "basedupon" the arbitrator's pay vouchers and telephone records disclosed in discovery. Over Springfield's objection that itsown investigative efforts and personal knowledge of the arbitration proceedings had substantially contributed to theexposure of fraud, the court insisted that it was "not enough that some of the information that forms the basis of thesuit came from non-public sources.... The non-public information must be `substantive information about the particularfraud, rather than merely background information which enables a putative relator to understand the significance of apublicly disclosed transaction or allegation.'" United States ex rel. Springfield Terminal Ry. Co. v. Quinn, Civ. Action No.*652 91-2081, at 8 (D.D.C. July 14, 1992) (citing United States ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v.Prudential Ins. Co., 944 F.2d 1149, 1154 (3d Cir.1991)). The court characterized Springfield's contribution as "no morethan any other would-be qui tam litigant with the same publicly available information could have done." Id. at 9. Turningto the second question, the court determined that Springfield did not qualify as an original source for the discoverymaterials, because information produced in discovery was "by its very nature" obtained through the intermediary actionof the producing party. Id. at 10. Accordingly, the court dismissed Springfield's action under § 3730(e)(4)(A).

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1. "Public disclosure"

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In reviewing the district court's conclusions with respect to the issue of public disclosure, we agree that discoverymaterial, when filed with the court (and not subject to protective order), is "public[ly] disclos[ed]" in a "civil hearing" forpurposes of § 3730(e)(4)(A)'s jurisdictional bar. See United States ex rel. Kreindler & Kreindler v. United TechnologiesCorp., 985 F.2d 1148, 1158 (2d Cir.), cert. denied, ___ U.S. ___, 113 S.Ct. 2962, 125 L.Ed.2d 663 (1993). Such wasthe status of the pay vouchers and phone records at issue here. Although Springfield argues that the word "hearing" incommon parlance suggests relatively formal proceedings open to the general public, see Appellants' Brief at 27, thiscontention is belied by the fact that courts frequently employ the term to connote informal, "paper" proceedings. SeeUnited States v. Florida East Coast Ry. Co., 410 U.S. 224, 239, 93 S.Ct. 810, 818, 35 L.Ed.2d 223 (1973) (allowingpaper hearings after concluding that "[t]he term `hearing' in its legal context undoubtedly has a host of meanings.");KENNETH C. DAVIS, ADMINISTRATIVE LAW TREATISE § 6-22 (1978) ("[T]he word `hearing' no longer meansreceiving sound through the ears. One may now `hear' the written words on a piece of paper.").[5] It is clear fromstatutory context that the term "hearing" was intended to apply in a broad context of legal proceedings under § 3730(e)(4)(A). Otherwise, the indictment in United States ex rel. Marcus v. Hess, 317 U.S. 537, 63 S.Ct. 379, 87 L.Ed. 443(1943), would not constitute public disclosure within the meaning of the new amendments, see United States ex rel.Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1155 (3d Cir.1991), a result thatcannot reasonably be attributed to Congress.[6] If court documents could be copied at will to provide the basis for quitam suits, a half-century of precedent would be swiftly refuted without a flicker of recognition from Congress. We agreewith the district court that for purposes of § 3730(e)(4)(A), "hearing" is roughly synonymous with "proceeding."

We do, however, restrict that interpretation to discovery material such as that involved here which is actually madepublic through filing, as opposed to discovery material which has not been filed with the court and is only theoreticallyavailable upon the public's request. See Stinson, 944 F.2d at 1162 (Scirica, J., dissenting). Until discovery materialsare filed with the court, we doubt that the discovery process conducted between two private litigants could itselfconstitute a public disclosure within the meaning of § 3730(e)(4)(A). Cf. Seattle Times Co. v. Rhinehart, 467 U.S. 20,33, 104 S.Ct. 2199, *653 2208, 81 L.Ed.2d 17 (1984) ("[Discovery] proceedings were not open to the public atcommon law, and, in general, they are conducted in private as a matter of modern practice."). Certainly the incentivestructure adopted by Congress indicates otherwise. If discovery materials are not filed with the court, they are onlypotentially in the public eye. If they are not yet in the public eye, no rational purpose is served — and no "parasitism"deterred — by preventing a qui tam plaintiff from bringing suit based on their contents. To bar a qui tam suit underthese circumstances would prevent the utilization for enforcement purposes of allegations or transactions that may nototherwise come to the attention of the authorities. Although different filing rules for discovery materials in differentjurisdictions may result in some disparity as to when discovery materials fall under the public disclosure bar, we believethe aims of the FCA are best served by this dividing line.

653

2. "Based upon ... allegations or transactions"

A finding that the filed discovery material was publicly disclosed, however, does not by any means end the inquiry. Thejurisdictional provision bars only those qui tam actions that are "based upon the public disclosure of allegations ortransactions." 31 U.S.C. § 3730(e)(4)(A). Congress did not prescribe by mathematical formulae the quantum orcentrality of nonpublic information that must be in the hands of the qui tam relator in order for suits to proceed. When,as here, some information relied upon by the qui tam plaintiff is undeniably in the public domain, the task of ensuringthat qui tam suits are limited to those in which the relator has contributed significant independent information can provetricky.

We find, however, that in the context of this case the district court's interpretation of "based upon the public disclosureof allegations or transactions" erected too high a threshold for the qui tam plaintiff. In dismissing Springfield's suit, thedistrict court assumed without analysis that the pay vouchers and telephone records disclosed during discoveryconstituted "allegations or transactions" within the meaning of the jurisdictional bar. We disagree with that assumption.As the Ninth Circuit recently recognized, "Courts sometimes speak loosely of barring a qui tam suit because it is based

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on `publicly disclosed information.' But the Act bars suits based on publicly disclosed `allegations or transactions,' notinformation." Wang v. FMC Corp., 975 F.2d 1412, 1418 (9th Cir. 1992) (citing United States ex rel. Dick v. Long IslandLighting Co., 912 F.2d 13, 17 (2d Cir.1990); Houck v. Folding Carton Admin. Committee, 881 F.2d 494, 504 (7th Cir.1989), cert. denied, 494 U.S. 1026, 110 S.Ct. 1471, 108 L.Ed.2d 609 (1990)). We too find a distinction between"allegations or transactions" and ordinary "information" as a matter of common usage and sound interpretation of theFCA. The pay vouchers and telephone records disclosed during discovery — the only public information considered bythe district court — were not in and of themselves sufficient to constitute "allegations or transactions" of fraudulentconduct within the meaning of the FCA jurisdictional bar.[7]

Both plain meaning and a consideration of the aims of the statute direct this conclusion. The legislative history isadmittedly silent with regard to the significance Congress attached to its choice of words in this much-amendedsection.[8] However, in common parlance, the term "allegation" connotes a conclusory *654 clusory statement implyingthe existence of provable supporting facts. See WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY 55 (1976).The term "transaction" suggests an exchange between two parties or things that reciprocally affect or influence oneanother. See id. at 2425. On the basis of plain meaning, and at the risk of belabored illustration, if X + Y = Z, Zrepresents the allegation of fraud and X and Y represent its essential elements. In order to disclose the fraudulenttransaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e., theconclusion that fraud has been committed. The language employed in § 3730(e)(4)(A) suggests that Congress soughtto prohibit qui tam actions only when either the allegation of fraud or the critical elements of the fraudulent transactionthemselves were in the public domain.

654

Our reading, however, does not rest on plain meaning alone. "In determining the meaning of the statute, we look notonly to the particular statutory language, but to the design of the statute as a whole and to its object and policy."Crandon v. United States, 494 U.S. 152, 158, 110 S.Ct. 997, 1001, 108 L.Ed.2d 132 (1990). Many potentially valuablequi tam suits would be aborted prematurely by a reading of the jurisdictional provision that barred suits when the onlypublicly disclosed information was itself innocuous. In terms of the mathematical illustration, when X by itself is in thepublic domain, and its presence is essential but not sufficient to suggest fraud, the public fisc only suffers when thewhistle-blower's suit is banned. When X and Y surface publicly, or when Z is broadcast, however, there is little need forqui tam actions, which would tend to be suits that the government presumably has chosen not to pursue or whichmight decrease the government's recovery in suits it has chosen to pursue.[9] The cogent analysis in United States exrel. Joseph v. Cannon, 642 F.2d 1373 (D.C.Cir.1981), cert. denied, 455 U.S. 999, 102 S.Ct. 1630, 71 L.Ed.2d 865(1982), construing the pre-1986 qui tam provisions, is instructive in illuminating this tension:

To require that the evidence and information possessed by the United States be a mirror image of thatin the hands of the qui tam plaintiff would virtually eliminate the bar. On the other hand, to permit the barto be invoked when the United States possesses only rumors while the qui tam plaintiff has evidenceand information would be to permit the bar to repeal effectively much of the False Claims Act. Betweenthese extremes lies the answer.

More precisely, the answer rests in that area where it is possible to say that the evidence andinformation in the possession of the United States at the time the False Claims Act suit was broughtwas sufficient to enable it adequately to investigate the case and to make a decision whether toprosecute.

The question, properly, then, is whether the information conveyed [to the government] could haveformed the basis for a governmental decision on prosecution, or could at least have alertedlaw-enforcement authorities to the likelihood of wrongdoing....

Id. at 1377 (quoting Pettis ex rel. United States v. Morrison-Knudsen Co., 577 F.2d 668, 674 (9th Cir.1978)). Webelieve that Congress, by its careful choice of terminology in the 1986 amendments, navigated between the two

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extremes recognized in Cannon to create a standard under which qui tam actions are barred only when enoughinformation exists in the public domain to expose the fraudulent transaction (the combination of X and Y), or theallegation of fraud (Z). When either of these conditions is satisfied, the government itself presumably can bring anaction under the FCA and there is no place in the enforcement scheme for qui tam suits.

Section 3730(e)(4)(A)'s bar focuses more on the quantum of information already *655 in the public sphere than on theamount or quality of information brought forward by the qui tam plaintiff. Nonetheless, the "based upon ... allegationsor transactions" prohibition has certain additional consequences for the plaintiff's case. Obviously, if the elements ofthe fraudulent transaction (X + Y) are already public, plaintiff's additional information, even if nonpublic, cannot sufficeto surmount the jurisdictional hurdles. Thus, a qui tam action cannot be sustained where all of the material elements ofthe fraudulent transaction are already in the public domain and the qui tam relator comes forward with additionalevidence incriminating the defendant. See United States ex rel. Precision Co. v. Koch Indus., Inc., 971 F.2d 548,552-53 (10th Cir.1992), cert. denied, ___ U.S. ___, 113 S.Ct. 1364, 122 L.Ed.2d 742 (1993). Similarly, there may besituations in which all of the critical elements of fraud have been publicly disclosed, but in a form not accessible tomost people, i.e., engineering blueprints on file with a public agency. Expertise in the field of engineering would not initself give a qui tam plaintiff the basis for suit when all the material elements of fraud are publicly available, though notreadily comprehensible to nonexperts. See United States ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v.Prudential Ins. Co., 944 F.2d 1149, 1160 (3d Cir.1991) ("[T]he relator must possess substantive information about theparticular fraud, rather than merely background information which enables a putative relator to understand thesignificance of a publicly disclosed transaction or allegation."). However, where only one element of the fraudulenttransaction is in the public domain (e.g., X), the qui tam plaintiff may mount a case by coming forward with either theadditional elements necessary to state a case of fraud (e.g., Y) or allegations of fraud itself (e.g., Z).[10]

655

The parties in this case do not dispute either the amount or nature of evidence disclosed in discovery or the fact thatSpringfield relied in part upon this evidence — pay vouchers and telephone records — in formulating its complaint.Resolution of the "allegations or transactions" issue thus does not turn on "a determination of fact which only afact-finder could make but which has not been made." See United States v. Garrett, 720 F.2d 705, 710 (D.C.Cir.1983)(citation omitted), cert. denied, 465 U.S. 1037, 104 S.Ct. 1311, 79 L.Ed.2d 708 (1984). Instead, this case asks us toreview legal conclusions pertaining to the "allegations or transactions" language that the district court drew fromundisputed facts. In such circumstances we engage in independent review of the legal sufficiency of the district court'sviews and of its application of the law to undisputed facts. See Herbert v. National Academy of Sciences, 974 F.2d 192,197 (D.C.Cir.1992); Hohri v. United States, 782 F.2d 227, 241 (D.C.Cir.1986), rev'd on other grounds, 482 U.S. 64, 107S.Ct. 2246, 96 L.Ed.2d 51 (1987); cf. Auerbach v. Sverdrup Corp., 829 F.2d 175, 181 (D.C.Cir.1987) (ordering remandwhere additional facts could be introduced and inferences drawn by trial court), cert. denied, 485 U.S. 905, 108 S.Ct.1075, 99 L.Ed.2d 234 (1988).

Turning then to the case at hand, we conclude that the information disclosed via discovery cannot rise to the level of"allegations or transactions" so as to prevent the exercise of jurisdiction. Fraud requires recognition of two elements: amisrepresented state of facts and a true state of facts. The presence of one or the other in the public domain, but notboth, cannot be expected to set government investigators on the trail of fraud. In pertinent part, liability under the FCAis triggered when a person "knowingly presents, or causes to be presented, to an officer or employee of the UnitedStates Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment orapproval," 31 U.S.C. § 3729(a)(1) (emphasis added), or "knowingly makes, uses or causes to be made or used, a falserecord or statement to get a false or fraudulent claim paid or approved by the *656 Government," 31 U.S.C. §3729(a)(2) (emphasis added). Knowledge of the allegedly misrepresented state of affairs — which does notnecessarily entail knowledge of the fact of misrepresentation — is always in the possession of the government. Just sohere. Publication of the facially valid pay vouchers, already in the government's pocket, cannot by itself be sufficient todefeat qui tam jurisdiction. Indeed, the entire qui tam regime is premised on the idea that the government's knowledgeof misrepresented claims against the federal fisc (without knowledge that they are misrepresented) does not in itself

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translate into effective enforcement of the laws against fraud. See S.REP. No. 345, 99th Cong., 2d Sess., at 2,reprinted in 1986 U.S.C.C.A.N. at 5267 ("[O]nly a coordinated effort of both the Government and the citizenry willdecrease this wave of defrauding public funds.").

Nor does the additional presence of publicly disclosed telephone records alter the calculus here. The telephonerecords did not suggest any misrepresentation on Quinn's part in submitting pay vouchers. At most, the recordsprovided a convenient vehicle by which Springfield, already suspicious because of its personal experience with thearbitration, could pursue its independent investigation. Recognizing that the task of determining whether "allegations ortransactions" have been "public[ly] disclos[ed]" will never be cut-and-dried, we nonetheless are confident in this casethat the information put in the public domain by the discovery filing did not present so clear or substantial an indicationof foul play as to qualify as either an allegation of fraud or a fraudulent transaction upon which a qui tam suit could bebased.[11]

3. Original Source

Because we believe the district court erred in concluding that the pay vouchers and telephone records representedpublicly disclosed allegations or transactions within the meaning of § 3730(e)(4)(A), we do not find it necessary tocritique its original source analysis with respect to these documents. Nonetheless, we are still required to proceed toour own original source analysis for allegations of fraud placed in the public domain by Springfield itself. Springfieldfirst brought its claim alleging Quinn's fraud to the fore in the Maine litigation after conducting its own investigation ofthe circumstances surrounding the pay vouchers obtained in discovery. Because the actual allegations of fraud werethus publicly disclosed, Springfield must now qualify as an "original source" of those allegations in order to bring its quitam suit. See JOHN T. BOESE, CIVIL FALSE CLAIMS AND QUI TAM ACTIONS, 4-34 (1993).

An "original source" is defined in § 3730(e)(4)(B) as "an individual who has direct and independent knowledge of theinformation on which the allegations are based." Other courts have — we think correctly — construed this definition toimpose a conjunctive requirement — direct and independent — on qui tam plaintiffs. See United States ex rel. Stinson,Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1160 (3d Cir.1991); United States ex rel. Dickv. Long Island Lighting Co., 912 F.2d 13, 16 (2d Cir.1990); Houck v. Folding Carton Admin. Committee, 881 F.2d 494,505 (7th Cir.1989), cert. denied, 494 U.S. 1026, 110 S.Ct. 1471, 108 L.Ed.2d 609 (1990). "Direct" signifies "marked byabsence of an intervening agency." Stinson, 944 F.2d at 1160. "Independent knowledge" is knowledge that is not itselfdependent on public disclosure. See Houck, 881 F.2d at 505.

Significantly, the "original source" provision requires the relator to possess direct and independent knowledge of the"information" underlying the allegation, rather than direct and independent knowledge of the "transaction" itself. On thebasis of plain meaning, then, we find that § 3730(e)(4)(B) does not require that the qui tam relator possess direct andindependent knowledge of *657 all of the vital ingredients to a fraudulent transaction. Thus, to revert to previousanalysis, the term "information" in the "original source" context is not confined to the combination of X and Y, the twoessential elements to the transaction. This distinction also conforms to our understanding of the purposes of the Act.Rare indeed would be the case in which relators could gain "original source" status, if such were the standard,because the misrepresented state of affairs, e.g. X, would almost always have been disclosed to the governmentindependently by the alleged defrauder. If we were to equate "information" with "transaction," we would undo bothCongress' careful choice of wording and its manifest intent to reverse the result in United States ex rel. Wisconsin v.Dean, 729 F.2d 1100 (7th Cir.1984), a case in which the misrepresented state of affairs (paperwork seekingreimbursement for indigent psychiatric care) had already been presented to the government by an alleged perpetratorof Medicaid fraud. We think it clear, in light of the aims of the statute, that "direct and independent knowledge ofinformation on which the allegations are based" refers to direct and independent knowledge of any essential elementof the underlying fraud transaction (e.g., Y).[12]

657

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Applying these principles, it appears beyond question that Springfield qualifies as an original source for the allegationsof fraud it made in the context of the Maine litigation. Springfield had direct and independent knowledge of essentialinformation underlying the conclusion that fraud had been committed. Because, as stated above, the pay vouchers andphone records did not themselves suffice to indicate fraud, Springfield had to have bridged the gap by its own effortsand experience, which in this case included personal knowledge of the arbitration proceedings and interviews withindividuals and businesses identified in the telephone records. Springfield started with innocuous public information; itcompleted the equation with information independent of any preexisting public disclosure. As such, Springfield is anoriginal source within the meaning of the jurisdictional bar, and federal courts are not statutorily precluded fromentertaining its suit.

III. CONCLUSION

The district court relied upon an excessively broad reading of "based upon the public disclosure of allegations ortransactions" in dismissing Springfield's qui tam action. The remedial purposes of the FCA are inadequately served byan expansive interpretation of the jurisdictional bar that prevents qui tam suits when only innocuous or spottyinformation — insufficient in itself to constitute an allegation of fraud or to reveal the essential elements of a fraudulenttransaction — exists in the public domain. The goal of avoiding suits that merely drain the public fisc is amplyadvanced by a construction of § 3730(e)(4)(A) that bars suit only when specific allegations of fraud or the vitalingredients to a fraudulent transaction exist in the public eye.

Concerns about abuses stemming from this broader reading are partially allayed by the fact that the FCA provides forthe defendant's recovery of all reasonable attorneys' fees if the qui tam plaintiff's claim is "clearly frivolous, clearlyvexatious, or brought primarily for purposes of harassment." 31 U.S.C. § 3730(d)(4). Moreover, as in any suit, if the quitam plaintiff's action does not present valid legal issues, the courts may dismiss on conventional grounds. But thecourthouse doors do not swing shut merely because innocuous information necessary though not sufficient to plaintiff'ssuit has already been made public. We vacate the district court's dismissal and remand with instructions to proceedwith the suit.

Vacated and remanded.

[*] Rogers, Circuit Judge, did not participate in this matter.

[1] Qui tam is an abbreviation for qui tam pro domino rege quam pro seipso, which means "he who as much for the king as forhimself." JOHN T. BOESE, CIVIL FALSE CLAIMS AND QUI TAM ACTIONS 1-6 (1993). Historically, all qui tam actions have sharedthe common features of allowing private parties to initiate suit to enforce the laws in the government's stead and awarding victoriousplaintiffs part of the recovery as bounty. See Note, The History and Development of Qui Tam, 1972 WASH.U. L.Q. 81, 86-87. Qui tamprovisions first gained popularity in thirteenth-century England as a supplement to ineffective public law enforcement. See BOESE,supra, at 1-6.

[2] Specifically, Springfield contended that the union failed to adhere to customary on-property dispute handling mechanisms prior topetitioning for federal intervention, in violation of 45 U.S.C. § 153, First (i), which states that disputes "shall be handled in the usualmanner ... but, failing to reach an adjustment ... may be referred" to arbitration.

[3] Although Springfield initially included the NMB in its complaint, the NMB was dismissed as a party by order of May 3, 1989, twoyears prior to the instant action. Springfield did not raise allegations of Quinn's fraudulent billing until November 1989, and thus is notbarred by 31 U.S.C. § 3730(e)(3), which prohibits qui tam suits based on allegations or transactions that are the subject of a civil suitin which the government is already a party.

[4] Contemporaneous estimates suggested that the United States treasury was cheated out of $25 to $70 billion a year by itscontractors. See Erwin Chemerinsky, Controlling Fraud Against the Government: The Need for Decentralized Enforcement, 58NOTRE DAME L.REV. 995, 995 & n. 1 (1983) (citation omitted).

[5] Furthermore, "hearings," as provided for by statute, frequently encompass discovery procedures. See, e.g., Mail Order Ass'n v.

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United States Postal Serv., 2 F.3d 408, 414-15 (D.C.Cir.1993); Natural Resources Defense Council, Inc. v. NRC, 680 F.2d 810, 812(D.C.Cir.1982).

[6] Springfield suggests that an earlier version of the amendment barred jurisdiction over actions based on "specific evidence orspecific information which the Government disclosed as a basis for allegations made in a prior administrative, civil or criminalproceeding," Appellants' Brief at 32 (citing S. 1562, 99th Cong., 1st Sess., Sec. 2 at 3 (1985)), and argues that the use of "hearing"rather than "proceeding" in the final version of the amendment signifies that the two terms cannot be synonymous. There is nolegislative history on this issue. We find the overall differences between the two versions to be so significant — the early versionfocused only on disclosures made by the government — as to preclude any neat inferences of the sort sought by Springfield.Congress did not merely substitute the word "hearing" for the word "proceeding"; instead, it rewrote the sentence and reshaped thesubstance of the jurisdictional limitation entirely.

[7] This interpretation is not in conflict with the approach adopted by the Tenth Circuit in United States ex rel. Precision Co. v. KochIndus., Inc., 971 F.2d 548, 552-53 (10th Cir.1992), cert. denied, ___ U.S. ___, 113 S.Ct. 1364, 122 L.Ed.2d 742 (1993). The courtthere held that "an FCA qui tam action even partly based upon publicly disclosed allegations or transactions is nonetheless `basedupon' such allegations or transactions." Id. Our case presents a different question: whether the information in the public domain risesto the level of "allegations or transactions" at all.

[8] The 1986 version of the jurisdictional bar was drafted subsequent to the completion of the House and Senate reports on theproposed FCA amendments. See United States ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d1149, 1164 (3d Cir.1991) (Scirica, J., dissenting); JOHN T. BOESE, CIVIL FALSE CLAIMS AND QUI TAM ACTIONS 4-25 (1993).

[9] To be sure, these generalizations are not exact. The Supreme Court in United States ex rel. Marcus v. Hess, 317 U.S. 537, 63S.Ct. 379, 87 L.Ed. 443 (1943), recognized the benefit that even paradigmatically parasitic suits can confer when the government, forwhatever reason, chooses not to pursue a civil action for damages. See id. at 545, 63 S.Ct. at 385. Notwithstanding this potentialgood, Congress promptly amended the statute to avert the greater evil of freeloading behavior.

[10] To the extent that plaintiff comes forward only with a bare allegation unsupported by proof, the district court has ample traditionaltools with which to dismiss the case. See, e.g., FED.R.CIV.P. 9(b) (failure to state the "circumstances constituting fraud ... withparticularity."); FED. R.CIV.P. 12(b)(6) ("failure to state a claim upon which relief can be granted"); FED R.CIV.P. 56 ("no genuineissue as to any material fact," entitling movant "to a judgment as a matter of law").

[11] This is to be contrasted with the situation discussed previously in which all of the material elements of fraud — data suggestingboth the misrepresented and the true states of affairs — are in the public domain, but are in some form not readily accessible topeople lacking particular expertise. In our case, no amount of generalized technical expertise could translate the pay vouchers andtelephone records at issue here into a fraud suit.

[12] Because of the factual posture of this case, it is unnecessary for us to decide whether the qui tam plaintiff must itself have had ahand in the public disclosure of the underlying allegations or transactions. Several other courts have imposed this requirement, whichSpringfield would in any event satisfy without question. See, e.g., Wang v. FMC Corp., 975 F.2d 1412, 1418 (9th Cir.1992); Dick, 912F.2d at 16-17.

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