Sixth Circuit: Whistleblower's retaliation case barred by settlement in prior state action

by Ben Vernia | July 5th, 2014

On July 2, the Court of Appeals for the Sixth Circuit, in U.S. ex rel. Awad v. Chrysler Group, LLC, affirmed the dismissal of a whistleblower’s retaliation suit because he had previously settled a state court termination case.

The whistleblower in the case was Chrysler’s former regional controller for Latin America, and he alleged that during the bankruptcy of the former car company (which resulted in the creation, with government assistance, of the defendant Chrysler Group, LLC), he was instructed to appraise the company’s Columbia operations at $1.5 million, rather than the $100 million he believed it to be worth. The whistleblower had previously filed a state court action alleging that the company had wrongfully terminated him for pretextual reasons. Eight days after bringing the state court case, he filed a federal qui tam under the False Claims Act, alleging that company executives had instructed him to undervalue the subsidiary, in violation of government mandates that the new company keep accurate books and records. The federal suit also alleged retaliation in violation of the False Claims Act and state law.

After the government declined to intervene in the case, the whistleblower voluntarily dismissed fraud and False Claims Act conspiracy allegations, proceeding alone on the retaliation claims. [Comment: The Court of Appeals’ opinion omits a full description of this portion of the case’s procedural history.]

Chrysler moved to dismiss the case on the grounds that the state court settlement established res judicata over the qui tam action, and the district court agreed.

On appeal, the Court first looked to Michigan law concerning the broad preclusive effect of a prior action on claims between the same parties, and noted that in Michigan, settlements and consent judgments are final judgments for purposes of res judicata. The court further noted that the relator had not appealed the district court’s decision that federal courts have exclusive jurisdiction over False Claims Act suits.

In the district court, the relator had argued that he could not have brought his retaliation claims in the state court case because the qui tam suit of which they were originally a part would have been subject to dismissal because the state court case comprised a public disclosure and he was not an original source. The district court had found that the prior case was a public disclosure, but concluded that the relator was an original source of the allegations.

The Sixth Circuit disagreed with the district court’s analysis of the public disclosure issue, concluding that because the state court action related to the whistleblower’s termination, it was insufficient to have put the government on notice concerning the fraud he subsequently alleged in the qui tam. Because it was not a public disclosure, the court reasoned, it need not determine whether the relator was or was not an original source.

The Court nevertheless affirmed the district court’s dismissal of the case on the grounds of res judicata. Under Michigan’s “transactional” approach to preclusion (in contrast with an “evidence” analysis), subsequent claims arising from the same factual transaction as the prior suit are barred. Because both cases related to the whistleblower’s employment with and termination from Chrysler, the second was barred by the first, regardless of differences between the legal theories raised in each.

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