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United States of America v. Verizon Communications

February 23, 2012

UNITED STATES OF AMERICA,
EX REL STEPHEN M. SHEA, PLAINTIFF,
v.
VERIZON COMMUNICATIONS, INC., DEFENDANT.



The opinion of the court was delivered by: Gladys Kessler United States District Judge

MEMORANDUM OPINION

On January 17, 2007, the Relator, Stephen M. Shea ("Relator" or "Shea"), filed the pending False Claims Act Complaint alleging that MCI/Verizon ("MCI" or "Verizon") was submitting false claims for illegal surcharges on invoices submitted under two telecommunications contracts between the United States and Defendants ("FTS 2001" and "FTS 2001-Bridge Contract"). On February 18, 2011, the United States intervened and settled the action for $93.5 million (including accrued interest), thereby resolving the allegations of fraud made in Relator's Complaint. In April, 2008, the Government recovered an additional $3 million for State Universal Fund Surcharges ("SUFS") which were included in the Complaint's allegations.

When it became clear that the Government and the Relator could not agree on the Relator's share of the attorneys' fees, the Government paid the Relator $13,725,000 (about 15% of $91.5 million) as an advance on the ultimate share he would be awarded by the Court. On July 27, 2011, the Relator filed a Motion for Relator Share Award, requesting an additional $7,480,000, for a total award of over $21 million (about 22% of $96,525,411). Upon consideration of the Motion, the Government's Response, the Relator's Reply, the exhibits submitted by the Parties, and the entire record, the Court concludes that the Motion should be granted in part and denied in part; Relator is entitled to an award of 20% of his share of the settlement reached in February 2011, and 15% of the $3 million refund paid by Verizon to the Government in 2008 for the State Universal Fund Surcharges alleged in his Complaint.

I. PROCEDURAL BACKGROUND

Relator is a former managing director of TechCaliber LLC, a leading consulting firm for helping clients manage investments in telecommunication services and network infrastructure. For 18 years, Shea specialized in negotiating telecommunication contracts for large commercial clients and helping manage the costs of those contracts. Many of his clients were Fortune 100 companies. Shea Decl. ¶ 4.*fn1 Prior to filing the present Complaint, Shea had been responsible for collecting more than $50 million in overcharges for his clients from telecommunication carriers. Id. ¶ 5. While working for his private clients, which involved investigation of MCI's (later Verizon's) billing practices, he discovered the false and fraudulent claims that formed the basis of this Complaint. Id.

¶ 7, 8. Based on that investigation, his analysis of the two Government contracts in issue in this case, and the expert knowledge he had acquired over the years working in this particular area, Shea filed the present Complaint on January 17, 2007.*fn2 Id. ¶ 9-15, 18-20.

As is common in False Claims Act cases, Shea, with the very experienced qui tam counsel he hired, began meeting with the Government in order to persuade it to intervene. After numerous meetings and submission of substantial factual information and legal memoranda in late 2009, Shea and the United States began serious discussions about liability and, eventually, damages. These discussions continued for many months until March 2010, resulting in the Government's intervention in February, 2011, and final settlement of the case.

II. ANALYSIS

A. Overview of the False Claims Act

The False Claims Act ("FCA"), as amended in 1986, provides that relators, whose successful complaint produces financial gains for the federal Government, shall receive financial awards between 15% and 25% of the final settlement amount. A relator must receive the 15% minimum "even if that person does nothing more than file the action in federal court," and that 15% share is generally viewed as a finder's fee. 132 Cong. Rec. H-9382 (Daily Ed. Oct. 7, 1986, Statement, R. Berman); United States v. Stern, 818 F. Supp. 1521, 1522 (M.D. Fla. 1993). It is well established that the statute's qui tam provisions are designed to encourage individuals with knowledge of fraudulent activities against the Government to bring that knowledge to the Government's attention and, ultimately, to public view. U.S. ex rel. John Doe v. John Doe Corp., 960 F.2d 318, 321 (2d Cir. 1992).

The relator's share of an award shall be based upon "the extent to which the person substantially contributed to the prosecution of the action." 31 U.S.C. § 3730(d)(1). Percentage awards above the statutory 15% take into account whatever information, work, and help of any kind the relator provides, apart from the mere filing of the action, that leads to a recovery by the Government and substantially contributes to the prosecution of the case without harming the Government's efforts. District courts possess great discretion in making this award because of the complexities of many of the cases, the great variation in their factual settings, and the desire of Congress, in enacting the legislation, to reward the relators for their contribution to the success of the case. United States ex rel. Merena v. Smithkline Beecham Corp., 52 F. Supp. 2d 420, 449 (E.D. Pa. 1998), rev'd on other grounds, 205 F.3d 97 (3d Cir. 2000).

In U.S. ex rel. Alderson v. Quorum Health Group, Inc. ("Quorum"), 171 F. Supp. 2d 1323, 1331 (M.D. Fla. 2001), the district court set out in great detail the various factors which courts have considered in making the award. Quorum relied on those "sensible considerations" which emerge from the FCA's legislative history, the internal guidelines established by the Department of Justice, and the case law. While none of these factors binds a district court, taken together they present extremely useful and appropriate criteria for the court to consider in determining an appropriate fee award.

The legislative history of the Senate version of the 1986 amendments to the FCA, which significantly enhanced a relator's portion of her FCA recovery, identified the following factors a court should consider in determining the relator's share: the significance of the information provided by the relator, the relator's contribution to the final outcome, and whether the Government previously knew such information. S. Rep. No. 99-345, at 28 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5293 ("the Senate factors"); U.S. ex rel. Johnson-Pochardt v. Rapid City Regional Hosp., 252 F. Supp. 2d 892, 897-98 (D.S.D. 2003).

B. The Senate Factors

1. Relator's Contribution of Significant Information

Relator Shea is correct when he states that the "allegations I made in the Complaint filed in 2007 were the template for the overcharges recovered by the Government in this action." Id. ¶ 21.

The February 2011 settlement agreement provided that Verizon would receive a release of claims (in exchange for $93.5 million) for surcharges listed as "covered conduct." All the charges listed as "covered conduct," with one exception, are the same surcharges that Shea identified in 2007 when he filed his Complaint. Id. ¶ 22.

Over 80% of the $91.5 million recovery was from two specific categories of surcharges, both of which Shea had urged the Government to prioritize and focus on in the investigation it started in 2007. Id. They were the Ad Valorem Property Taxes and the Federal Regulatory Fees/Common Carrier Recovery Charges ("Federal Regulatory Fees Charges"). Id. From the very beginning, Shea directed the Government to focus on these two surcharges, thereby enabling the Government to save enormous amounts of lawyer time, auditor time, and other staff time on charges which were of far lesser significance.

Not only did Shea save the Government a great deal of time and resources and contribute to obtaining a substantial settlement, it is certainly more than likely that without this lawsuit, Verizon would have continued to overcharge the United States indefinitely, i.e., as long as it could get away with it. Id. ¶ 25.

In July of 2007, the Government requested the Relator to "set forth in a separate memorandum our position on why each surcharge [he identified] was prohibited under the Federal Acquisition Regulations ("FARs") and the contract and that we rank in priority the charges for investigation." Id. ¶ 26. In response, Shea and the experienced FCA attorneys he had hired, worked over a two week period to present the Government with the chart it had requested and a legal memorandum setting forth the factual and legal basis for the allegations about each surcharge. Id. ¶ 27.

That memorandum also emphasized that the Government should investigate, as its first priority, the ad valorem and Federal Regulatory Fees surcharges. Id. In addition to saving the Government enormous resources, the legal memorandum and chart also helped the Government's auditors to identify relatively quickly the ad valorem charges in Verizon's back-up billing data. That recognition provided a further incentive for the Government to continue its investigation. Id.

Thereafter, the Relator worked with the Government, through counsel, to draft proposed categories for subpoenas to be issued against Verizon enabling the Government to issue subpoenas to Verizon which focused on evidence of scienter within the company. Id. ¶¶ 27, 29. Shea also identified former MCI employees as potential witnesses and provided detailed information about how Government contracts were administered by MCI. Id. ¶ 38.

In addition to providing the legal services of a very knowledgeable and experienced FCA law firm, Phillips & Cohen, LLP, Shea retained Douglas Jarrett of Keller Heckman, LLP, who specialized in telecommunications law to assist his FCA counsel. Id. ¶ 30. Jarrett is a leading telecommunications attorney who represented domestic and foreign corporations and state and local governments before the Federal Communications Commission on Wireless Telecommunications and Media policy, licensing and enforcement matters. Thus, Shea was able to contribute not only his own experience and expertise, but that of a FCA law firm and a specialist in telecommunications law. Id., ¶ 30.

Shea participated fully in all aspects of the Government's investigation and settlement discussions with Verizon, and estimates that he spent hundreds of hours each year on the case, including pre-filing time. Id., ¶ 31. Shea even agreed, at the Government's request, to sign a Non- Disclosure and Confidentiality Agreement, so that he could have access to the findings of the GSA audit team and analyze their usefulness to the litigation. Id.

In late 2009, when Verizon and the United States were beginning serious discussions about liability, as well as damages, Shea reviewed a November, 2009, PowerPoint presentation which Verizon had used to present its defenses to the United States. Id. ¶ 33. In doing so, Shea worked closely with his counsel at Phillips and Cohen, as well as Douglas Jarrett, to respond to all the substantive arguments Verizon made denying its liability. On December 7, 2009, Shea and his counsel made a multi-hour presentation to the Department of Justice, identifying significant mischaracterizations made by Verizon and explaining in detail why certain surcharges, which the Government had excluded, should be included in its analysis of damages. Id., ¶ 33.

By virtue of Shea's analysis of Verizon's defenses, he and his counsel were able to convince the Government that in addition to Verizon being liable for illegal ad valorem property taxes surcharges and other franchise surcharges that are expressly excluded under the FTS 2001 contract and FARs, there was no justification for Verizon charging the Government for the Federal Regulatory Fees Charges. Moreover, the charges in this particular category had been escalating over time at increasingly high percentages. Id., ¶ 35.

2. Relator's Contribution to Final Outcome

See Section II. C. 6, 8 and 11, infra.

3. Prior Government Knowledge of Relator's Information

The Senate also indicated that the extent of the Government's knowledge of the information provided by a Relator should be considered in determining her portion of the attorneys' fees. In this case, the Government had no recognition, prior to the filing of this lawsuit, that the surcharges -- especially the ad valorem and the Federal Regulatory Fee charges -- were illegal under the FARs and the contracts, and that therefore there was absolutely no justification for their payment. Id. ¶ 24, 25. Nor did the Government understand the manner in which MCI/Verizon administered the Government contracts. While it is true that the General Services Administration ("GSA") had a team of auditors who routinely reviewed the invoices under the FTS 2001 Contract, in almost a decade of auditing that contract, GSA had not previously identified the particular overcharges Shea identified, nor even audited that section of the invoice or contract. Id. ¶ 24, 25.

C. Department of Justice Guidelines

In December of 1996, the Department of Justice issued a set of "Relator's Share Guidelines" ("DOJ Guidelines" or "Guidelines"). See 11 FCA and Qui Tam Quarterly Review at 17-19, Oct. 1997, which were developed to offer assistance to DOJ attorneys "[w]hen trying to reach agreement with a Relator as to his [or her] share of the proceeds, or proposing an amount or percentage to the court. . . ." Id. While these Guidelines are not official federal regulations, and therefore not binding on the Court, they are often considered when district courts are deciding on the appropriate percentage of the proceeds to give a relator in an FCA case. Moreover, the topics they cover are very relevant criteria for in making this decision. Quorum, 171 F. Supp. 2d at 133-34. The Court will address them one by one.

1. The Relator Reported the Fraud Promptly

Shea reported the fraud approximately two years after concluding in his own mind that there had been fraudulent conduct by the Defendant. Shea Decl. ΒΆ 20. While ordinarily this would be a significant delay in reporting the fraud, in this case it is not because Shea felt it necessary, due to the complexity of the issues, to conduct his own careful ...


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