Judge Julio Fuentes of the U.S. Court of Appeals for the Third Circuit. (Photo: Carmen Natale/ALM)

The U.S. Court of Appeals for the Third Circuit has reopened a False Claims Act case against a company providing tutors to public school districts after the suit was dismissed under the entire controversy doctrine.

The appeals court said allowing the underlying decision to stand would encourage potential False Claims Act defendants to “smoke out” whistleblower suits by suing potential relators and then settling those claims with the purpose of barring a qui tam action. A district court judge dismissed the underlying lawsuit against American Tutor of Hillsborough because, in the seven years when that case was pending under seal, a settlement was reached in the company’s state-court defamation suit against the whistleblower.

The relator, Jean Charte, worked for American Tutor from 2005 to 2007, first as a tutor and then as a regional district manager. Charte told superiors in the summer of 2007 that she was concerned about certain questionable billing practices by the company. She was fired the following September. Charte then contacted the state Department of Education and the U.S. Department of Education to complain about the company’s billing practices.

In the fall of 2008, American Tutor sued Charte in state court for defamation, tortious interference with advantageous economic relations, and product disparagement. In January 2009, she answered the suit and made a counterclaim for defamation. The parties reached a settlement in 2012 with no payments made between them, and the case was dismissed.

Meanwhile, Charte filed her qui tam suit against American Tutor and its principals in June 2010, accusing it of submitting bills to school districts for students who were absent, for tutoring services that were not received and for inflating the number of students participating in tutoring.

While the case was pending, a principal of American Tutor, Jim Wegeler, was charged with tax evasion and tax fraud. Charte moved to intervene in that case and to receive a portion of the $2 million penalty paid by Wegeler, but U.S. District Judge Anne Thompson dismissed that claim. An appeal of that ruling is pending in a separate case before the Third Circuit.

The qui tam suit remained under seal for more than seven years until 2017, when federal officials said they would not intervene. In April 2018, Thompson granted American Tutor’s motion to dismiss, saying Charte engaged in “just the kind of litigation gamesmanship the entire controversy doctrine is designed to prevent.”

On appeal, Third Circuit judges Julio Fuentes and Thomas Ambro supported reversal. Fuentes, writing for the court’s majority, noted that Charte followed every statutory requirement applying to qui tam relators, including filing the suit under seal and not disclosing its existence until cleared by the court to do so.

“It would therefore be a Catch22 for us to consider her failure to inform American Tutor of the qui tam action as weighing in favor of application of the entire controversy doctrine,” Fuentes wrote.

Circuit Judge Thomas Hardiman, in his dissent, said that American Tutor and its principals, “who thought they were settling their dispute with Charte—are entitled to repose in this lawsuit.” Hardiman said that deference is owed to Thompson’s finding that Charte engaged in “gamesmanship” by purporting to settle her disputes with American Tutor and then seeking to activate the qui tam case.

Hardiman further criticized Charte for failing to notify the judge in her state court case of her pending qui tam suit against American Tutor in federal court. He said that “alerting the state court ex parte (before filing in either federal or state court) would have given it the opportunity to ensure a fair adjudication of the entire controversy.”

Sean Byrnes of Byrnes O’Hern & Heugle in Red Bank, who represented Charte, was pleased with the ruling. “I’m happy we had our day in court. I’d rather it happened five years ago, but we’re going to move forward. We think our facts are strong and our case is strong,” he said.

Michael Bevacqua Jr. of Mandelbaum Salsburg in Roseland, who represented American Tutor and its principals, did not return a call about the case.