On April 26, 2012, the New York State Court of Appeals issued its first decision addressing the five-year-old New York State False Claims Act, N.Y. State Fin. Law § 187 et seq. ("NYS FCA"). In State of New York ex rel. Grupp v. DHL Express (USA), Inc., No. 71, 2012 WL 1429252 (N.Y. April 26, 2012), the Court held that an NYS FCA qui tam case, which alleged that DHL falsely charged the State for air shipments when it was actually transporting the packages by ground, was preempted by federal air and carrier laws.1 In reaching this conclusion, the Court acknowledged the punitive nature of the NYS FCA, a finding that may be useful to defendants seeking to challenge retroactive application of the statute.
Background
The NYS FCA was enacted in 2007, based on the federal False
Claims Act as it then stood. Both FCAs allow private
whistleblowers, as well as the government itself, to file suit to
redress fraud against the government (with the NYS FCA covering
both fraud against the State and fraud against local governments
within the State); both provide for treble damages plus per-claim
penalties; and both award whistleblowers a share of any money
recovered as a result of their action. However, the NYS FCA is in
some respects broader and in some respects narrower than its
current federal counterpart.2
Grupp arose out of a contract under which DHL agreed to
provide New York State with courier services using air and ground
transportation. The relators own a trucking company that served DHL
as an independent contractor, providing it with ground shipping
services. In their complaint, the relators claimed that DHL
submitted false claims by (1) asserting that packages were
delivered by air and imposing a jet-fuel surcharge when the
packages were actually delivered by truck, and (2) imposing a
diesel-fuel surcharge even when independent contractors (including
relators' company) incurred the fuel costs.
After the New York State Attorney General declined to intervene,
DHL moved to dismiss the complaint, arguing it was preempted by the
Airline Deregulation Act of 1978 ("ADA"), 49 U.S.C.
§ 41713(b)(1), and the Federal Aviation Administration
Authorization Act ("FAAAA"), 49 U.S.C. §
14501(c)(1). The trial court denied the motion, concluding
that the market-participant exception to federal preemption
applied.3 907 N.Y.S.2d 772 (Sup. Ct., Erie County
2010). The Appellate Division reversed and dismissed the
complaint, rejecting applicability of the market-participant
doctrine. 83 A.D.3d 1450 (NY App Div. 4th Dep't 2011).
The Court of Appeals' Decision
The Court of Appeals affirmed. First, relying on the broad
preemption provisions of the ADA and FAAAA,4 as
interpreted in several U.S. Supreme Court decisions, the New York
court rejected the whistleblowers' argument that their NYS FCA
claims avoided preemption because they sought only to enforce the
State's proprietary interests against fraud and thus were based
on a general law that does not prescribe the rates, routes, and
services of airlines and carriers. See Grupp, 2012 WL
1429252 (citing 49 U.S.C. §§ 14501(c)(1), 41713(b)(1);
Rowe v. New Hampshire Motor Transp. Assoc., 552 U.S. 364
(2008); American Airlines, Inc. v. Wolens, 513 U.S. 219
(1995); Morales v. Trans World Airlines, Inc., 504 U.S.
374, 383 (1992)).
Then the court turned to the relators' invocation of the
market-participant exception to the preemption doctrine. Noting
that this exception "recognizes the important distinction
between the actions of a state in its dual regulatory and
proprietary capacities," Grupp, 2012 WL 1429252, the
court explained that "when a state or municipality acts as a
participant in the market and does so in a narrow and focused
manner consistent with the behavior of other market participants,
such action does not constitute regulation subject to
preemption," id. (quoting Cardinal Towing &
Auto Repair, Inc. v. City of Bedford, Tex., 180 F.3d 686, 691
(5th Cir. 1999)). But "a governmental entity does not
escape federal preemption, even when assuming the role of private
actor," the court reasoned, "if it 'us[es] its power
in the marketplace to implement governmental policies,'"
Grupp, 2012 WL 1429252 (quoting Council of City of New
York v. Bloomberg, 6 N.Y.3d 380, 442 (2006)). The court
held that while "the State procured services from DHL in its
proprietary capacity," "plaintiffs' reliance on the
FCA, which establishes public policy goals and is thus, regulatory
in nature, renders the market participant exception inapplicable to
this case." Grupp, 2012 WL
1429252.5
In considering the market-participant doctrine, the court
recognized the punitive purpose of the NYS FCA:
[R]ather than redressing the harm actually suffered, the statute's imposition of civil penalties and treble damages evinces a broader punitive goal of deterring fraudulent conduct against the State. That is, instead of compensating the State for damages caused by DHL's purported scheme and addressing its narrow proprietary interests, the FCA would punish and consequently deter such future conduct . . . .
Id. This observation by New York's highest court may provide good ammunition for defendants challenging retroactive application of the NYS FCA as unconstitutional on ex post facto grounds, an argument we explained in another recent client alert.6
Footnotes
1. This appears to be the first time any state's highest court has considered whether a federal statute preempted claims under the state's civil false claims act. One other state's intermediate appellate court considered this question, in another case involving Grupp and DHL, and reached the same conclusion as the New York State Court of Appeals. See DHL Express (USA), Inc. v. State of Florida ex rel. Grupp, 60 So.3d 426 (Fla. App. 2011) (claims preempted and market-participant exception not applicable).
2. WilmerHale False Claims Act Alert, " New York Attorney General Files First-of-its-Kind Lawsuit, Casting Spotlight on Recent Developments in State and Local False Claims Acts" (Apr. 23, 2012) (comparing NYS and federal FCAs).
3. When a state or local government acts participates in the market in a narrow and focused manner consistent with other market participants' behavior, such action does not constitute regulation subject to preemption. E.g., Cardinal Towing & Auto Repair Inc. v. City of Bedford, Texas, 180 F.3d 686, 691 (5th Cir. 1999).
4. 49 U.S.C. § 14501(c)(1) (preempting state laws that relate to "any motor private carrier, broker, or freight forwarder with respect to the transportation of property"); 49 U.S.C. § 41713(b)(1) (preempting state "law, regulation, or other provision having the force and effect of law related to a price, route, or service, of an air carrier that may provide air transportation under this subpart").
5. Two of the court's seven members dissented on the ground that they would apply the market-participant exception.
6. WilmerHale False Claims Act Alert, supra n.2.
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