Case sparked by plaintiffs lawyer? Nothing wrong with that: 7th Circuit

By Alison Frankel
July 9, 2013

Until fate, in the person of a private investigator, brought her together with a Mississippi whistle-blower lawyer named Timothy Matusheski, Debra Leveski didn’t even know she could sue her former employer, the for-profit university ITT Educational Services, for supposedly duping the federal government. Leveski spent about 10 years working at ITT’s campus in Troy, Michigan, first as a recruitment officer, then in the financial aid office. She left the company in 2006 as part of the settlement of a sexual harassment suit she brought against ITT. Less than six months later, Leveski received a letter from an investigator working for Matusheski, who at the time specialized in False Claims Act suits against for-profit universities, which had come under scrutiny for allegedly enrolling students simply to receive federal student aid funding. Intrigued, Leveski called the investigator and eventually met with Matusheski.

The Mississippi lawyer told me that when his investigator first reached out to Leveski, his intention was just to find out something from her about ITT’s financial aid procedures. (He knew from public records in her harassment suit that she had worked in the company’s financial aid office.) “After listening to her talk,” he said, “I said she had a potential claim under the False Claims Act and she should ask her attorney about it.” According to Matusheski, Leveski consulted her lawyer, who sent her back to him. Leveski then did some research on FCA cases, including a previously dismissed FCA case against ITT, and on Matusheski. In July 2007, the Mississippi lawyer filed an FCA case against ITT in federal court in Indianapolis, naming Leveski as the relator.

Does this chain of events raise your suspicions about the validity of Leveski’s suit? What if I told you that Matusheski advertised to find former financial aid and recruiting officers from for-profit institutions? Or that the whistle-blower lawyer brought a series of FCA suits on behalf of former employees he tracked down through their unrelated employment suits?

U.S. District Judge Tanya Walton Pratt certainly took a dim view of Leveski’s suit, which the Justice Department declined to join. Even though a previous judge twice denied motions to dismiss by ITT’s lawyers at Gibson, Dunn & Crutcher, Pratt tossed the case in August 2011, concluding that the old FCA case against ITT that Leveski had reviewed before filing her suit amounted to a public disclosure of the practices Leveski alleged. Leveski didn’t add sufficient detail to distinguish her claims from the previous suit, the judge said, and didn’t have enough direct and independent knowledge to be considered an original source of new information. Pratt mentioned the dismissal of two of Matusheski’s other FCA suits in the August 2011 ruling, but the judge really ripped into the plaintiffs lawyer in a subsequent opinion in March 2012 awarding ITT $394,998 in attorneys’ fees from Matusheski, Leveski’s local counsel at Plews Shadley Racher & Braun and a late entry to the case, Motley Rice. Pratt wrote that Matusheski had “tiptoed around sanctions awards” in two previous FCA cases against for-profit educational institutions, which made his decision to proceed with the substantially similar Leveski case “risky, if not ridiculous.”

“Matusheski’s tactics are far worse than the garden-variety ‘ambulance chasing,’” Pratt wrote.

“At least in those scenarios, the lawyer has some guess that the prospective plaintiff may have a viable case – he or she has, after all, suffered some harm. Here, by contrast, Matusheski plucked a prospective plaintiff out of thin air and tried to manufacture a lucrative case. And, given Matusheski’s extensive track record (which includes an apology to a federal court in a very similar case), the court is persuaded that some type of monetary penalty is necessary to deter Matusheski and those attorneys who assist in his schemes from engaging in this type of conduct going forward.”

Those are mighty harsh words – but according to a ruling Monday by a three-judge panel of the 7th Circuit Court of Appeals, they’re completely unwarranted. Appellate Judges Daniel Manion and John Tinder and U.S. District Judge John Lee (sitting by designation) said in an opinion by Tinder that Leveski’s case should not have been dismissed. She raised enough new and specific claims to distinguish her suit from previous public disclosures, the judges said, and moreover was an original source of direct and independent knowledge of ITT’s practices even though she did not hold a position of authority at the company. “Leveski’s case appears to be substantial, not frivolous,” the 7th Circuit said.

The court used its discretion to remand the case to a new, unspecified trial judge who will now get to review pending discovery and summary judgment motions filed by Leveski’s counsel at Motley Rice (as well as cross-motions by ITT). Motley partner Mark Labaton, who argued before the appeals court, told me that he believes the for-profit education industry is rather like the pharmaceutical sales industry, in which a lot of salespeople engaged in similar behavior without realizing it was wrong. In the pharma business, once sales representatives understood that their practices could serve as the basis of whistle-blower suits, they began filing FCA complaints raising specific allegations from original sources.

The 7th Circuit also reversed the attorneys’ fee award against Leveski’s lawyers. For one thing, the appellate judges said, Leveski’s claims weren’t frivolous and unsubstantiated so there’s no basis for sanctions against her counsel. And for another, there’s nothing wrong with suits sparked by lawyers, according to the panel. “Just because a party first learns that she may have a valuable legal claim from an attorney seeking her business does not mean that the party’s case is bogus,” the opinion said. “The annals of legal history are full of examples of lawyers playing a vital role in encouraging parties to litigate. If done in a proper manner – that is, within the confines of the applicable rules of professional conduct – there is nothing about such attorney involvement that negates the validity of a suit.” (In a footnote, the judges said they’d specifically asked ITT at oral argument what rule of professional conduct Matusheski had supposedly violated, and ITT couldn’t cite any.)

Labaton of Motley Rice said it’s no surprise that lawyers investigating an industry would have more knowledge of a whistle-blower’s rights than people working in the industry. “What Ms. Leveski knew are the facts,” Labaton said. “All the lawyer told her is that there may be a law that precludes the conduct she witnessed.” (Frederick Emhardt of Plews Shadley said he always thought Judge Pratt’s sanctions order was wrong and that the case has merit.)

ITT counsel Wayne Smith of Gibson Dunn told me he believes the appeals court erred in all kinds of ways, including reliance on deposition testimony that wasn’t cited to Judge Pratt. But the ruling simply gives the trial court jurisdiction, he said, and doesn’t determine the merits of Leveski’s claims. “The biggest impact of the decision is that now our client has to spend a lot of money defending a claim that we believe is frivolous on the merits,” he said.

Smith is particularly exercised about the 7th Circuit’s view of cases initiated by plaintiffs lawyers. “This is purely lawyer-driven litigation,” he said. “As a matter of social policy, is soliciting clients wrong or not? This panel of the 7th Circuit believes it’s not. I believe it is.”

And Matusheski? He told me he’s “thrilled” that the 7th Circuit cleared his name. “I was very disappointed that the district court would write an order that had falsehoods about me,” he said. “It’s pretty horrible when someone says something about you that’s not true and because it’s in a court case you can’t say it’s all BS.”

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The Seventh Circuit’s decision in this case is a breath of fresh air for all whistleblowers.

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