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United States ex rel. Charte v. American Tutor, Inc.

United States Court of Appeals, Third Circuit

August 12, 2019

UNITED STATES OF AMERICA, ex rel. JEAN CHARTE
v.
AMERICAN TUTOR, INC.; JAMES WEGELER, JR.; JAMES WEGELER, SR.; SEAN WEGELER Jean Charte, Appellant

          Argued January 15, 2019

          Appeal from the United States District Court for the District of New Jersey (D.C. No. 3-10-cv-03318) District Judge: Hon. Anne E. Thompson

          Sean F. Byrnes, Esq. [Argued] Byrnes O'Hern & Heugle Counsel for Appellant

          Michael F. Bevacqua, Jr., Esq. [Argued] Brian M. Block, Esq. Mandelbaum Salsburg Counsel for Appellees

          Before: AMBRO, HARDIMAN, and FUENTES, Circuit Judges.

          OPINION

          FUENTES, CIRCUIT JUDGE.

         Jean Charte was sued by her former employers in New Jersey state court for defamation, tortious interference with advantageous economic relations, and product disparagement. While that lawsuit was pending, Charte brought this qui tam[1] action against her former employers on behalf of the United States and the State of New Jersey. As required by the False Claims Act, the qui tam action was filed under seal and remained under seal while the United States Government investigated the allegations and decided whether to intervene in the action.[2]

         The qui tam action remained under seal for over seven years, as the Government considered whether to intervene.[3]During this lengthy seal period, the state court action was dismissed without prejudice after the parties entered into a settlement agreement. Five years later, the Government chose not to intervene in the qui tam action, and the District Court unsealed the complaint.[4] Accordingly, pursuant to the False Claims Act, Charte proceeded with the qui tam action against her former employers.[5]

         At the summary judgment stage, the District Court found that the qui tam action was barred by New Jersey's equitable entire controversy doctrine and effectively dismissed the complaint. We disagree and conclude that the entire controversy doctrine is inapplicable. For the following reasons, we will vacate the judgment of the District Court and remand for further proceedings.

         I.

         From July 2005 until her termination in September 2007, Jean Charte was employed by American Tutor, Inc. ("American Tutor"), a family-owned corporation that provides tutoring services to school districts in New Jersey and other states. Charte initially worked as a tutor in the Asbury Park School District. The following year, in July 2006, she became a regional district manager. As District Manager, Charte supervised the tutoring services provided by American Tutor to several school districts in New Jersey.

         During her time as District Manager, Charte became aware of American Tutor's questionable billing and recruiting practices. In the summer of 2007, she began to express her concerns to James M. Wegeler[6] and Sean Wegeler, brothers who served as officers of American Tutor. That fall, in September 2007, Charte was terminated. Thereafter, Charte contacted the New Jersey Department of Education and the United States Department of Education, among others, and informed them about the practices she had observed while employed by American Tutor.

         A. The State Court Action

         Nearly one year after Charte's termination, Jim Wegeler, the owner of American Tutor, his son James M. Wegeler, [7] and American Tutor filed a complaint in the Superior Court of New Jersey against Charte and her new employers. The complaint asserted three tort claims against Charte: defamation, tortious interference with advantageous economic relations, and product disparagement.[8] It alleged, inter alia, that, after her termination, Charte made "false and defamatory statements to third parties" about Jim Wegeler, his son James M. Wegeler, and American Tutor, "including but not limited to allegations of illegal and unethical business practices."[9] The third parties were identified as American Tutor's business competitors, American Tutor's clients, school district officials, New Jersey Department of Education officials, and United States Department of Education officials.

         In January 2009, Charte answered the complaint and asserted several counterclaims, including one for defamation. Over three and a half years later, all parties in the state court action signed an "Agreement Regarding Terms of Dismissal."[10] Under the agreement, Charte and her former employers agreed to dismiss, without prejudice, all claims and counterclaims asserted in the state court action. The next month, in August 2012, the Superior Court of New Jersey dismissed the case pursuant to the agreement.

         B. The Federal Qui Tam Action

         While the state court litigation was ongoing, in June 2010, Charte filed this qui tam action in the District Court against Jim Wegeler, his sons James M. and Sean Wegeler, and American Tutor. She alleged that her former employers violated both the New Jersey and federal False Claims Acts[11] by, inter alia, submitting false claims to local school districts in New Jersey for reimbursement of tutoring services.[12] In particular, American Tutor allegedly submitted invoices for payment of "tutoring services that were never received by students" by billing "for students who were absent from tutoring services," and also billing "in numbers in excess of actual students participating" in the tutoring services.[13]Moreover, according to the complaint, the Wegelers "authorized and ratified" the alleged violations of the False Claims Acts.[14]

         In accordance with the requirements of the Acts, the qui tam action was filed under seal and remained sealed while the Government investigated Charte's claims.[15] During this seal period, Charte could not disclose the existence of the qui tam action. As a result, Charte's former employers were unaware that they held two simultaneous roles in different forums: they were plaintiffs in state court and defendants in federal court. It was during this mandatory seal period that the state court action was settled and dismissed.

         The qui tam action stayed under seal for over seven years-until October 2017, [16] when the District Court unsealed the complaint after being notified by the Government of its decision not to intervene.[17] As a result, Charte proceeded as the qui tam relator and served the complaint on American Tutor.[18]

         In February 2018, American Tutor moved for summary judgment. The next month, pursuant to its unsealing order, the District Court requested the Government's input before ruling on the motion. The Government did not oppose dismissal of the action "should the Court determine that such dismissal is appropriate under the law, so long as such dismissal is without prejudice" to the Government.[19]

         The District Court granted summary judgment to American Tutor in April 2018. Describing Charte as "engag[ing] in just the kind of litigation gamesmanship the entire controversy doctrine is designed to prevent," the Court found that, given the circumstances, it was "fundamentally fair" to apply the entire controversy doctrine and thus bar the qui tam action.[20] Charte now appeals that decision.[21]

         II.

         Before addressing the merits of this appeal, we will discuss the statutory background of the False Claims Act and the principles underlying the entire controversy doctrine.[22]

         A.

         The False Claims Act imposes civil liability on anyone who "knowingly presents . . . a false or fraudulent claim for payment or approval" to the United States Government.[23] Under the Act, "a private person (the relator) may bring a qui tam civil action 'for the person and for the United States Government' against the alleged false claimant, 'in the name of the Government.'"[24] Thus, "[t]he relator's right to recovery exists solely as a mechanism for deterring fraud and returning funds to the federal treasury."[25]

         If the Government intervenes, the relator may "continue as a party to the action," but the Government has "the primary responsibility for prosecuting the action."[26] On the other hand, if the Government declines to intervene, as occurred here, the relator has "the right to conduct the action."[27] Notably, notwithstanding its initial decision to not intervene, the Government may subsequently intervene "upon a showing of good cause."[28]

         B.

         The entire controversy doctrine is "essentially New Jersey's specific, and idiosyncratic, application of traditional res judicata principles."[29] The doctrine "embodies the principle that the adjudication of a legal controversy should occur in one litigation in only one court; accordingly, all parties involved in a litigation should at the very least present in that proceeding all of their claims and defenses that are related to the underlying controversy."[30] The purposes of the entire controversy doctrine "are threefold: (1) the need for complete and final disposition through the avoidance of piecemeal decisions; (2) fairness to parties to the action and those with a material interest in the action; and (3) efficiency and the avoidance of waste and the reduction of delay."[31]

         In determining whether a claim is barred by the doctrine, a court's "central consideration" is whether the claim "arise[s] from related facts or the same transaction or series of transactions."[32] "It is the core set of facts that provides the link between distinct claims against the same or different parties and triggers the requirement that they be determined in one proceeding."[33] Additionally, the entire controversy doctrine applies "only when a prior action based on the same transactional facts has been tried to judgment or settled."[34]

         However, the doctrine is "constrained by principles of equity."[35] It remains an equitable rule of preclusion "whose application is left to judicial discretion based on the factual circumstances of individual cases."[36] Accordingly, the entire controversy doctrine's equitable nature "bars its application where to do so would be unfair in the totality of the circumstances and would not promote any of its objectives, namely, the promotion of conclusive determinations, party fairness, and judicial economy and efficiency."[37]

         III.

         With the foregoing statutory and equitable framework in mind, we now turn our attention to this case. Here, the factual-nexus requirement of the entire controversy doctrine is satisfied; the state court action and the qui tam action both relate to American Tutor's allegedly fraudulent billing practices.[38] Nonetheless, considering the totality of the ...


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