Knox County Ex Rel. Envtl. Termite & Pest Control Inc. v. Arrow Exterminators Inc.

• Decision Date: 20 July 2011
• Docket Number: No. E2007–02827–SC–R11–CV.,E2007–02827–SC–R11–CV.
• Citation: 350 S.W.3d 511
• Court: Tennessee Supreme Court
• Parties: KNOX COUNTY ex rel. ENVIRONMENTAL TERMITE & PEST CONTROL, INC.v.ARROW EXTERMINATORS, INC. et al.

350 S.W.3d 511

KNOX COUNTY ex rel. ENVIRONMENTAL TERMITE & PEST CONTROL, INC.

v.ARROW EXTERMINATORS, INC. et al.

No. E2007–02827–SC–R11–CV.

Supreme Court of Tennessee, at Knoxville.

Jan. 5, 2011 Session.July 20, 2011.

Joseph G. Jarret, Knox County Law Director; Daniel A. Sanders, Deputy Law Director, Knoxville, Tennessee, for the appellant, Knox County, Tennessee.David S. Wigler, Knoxville, Tennessee, for the appellee, Environmental Termite and Pest Control, Inc.

OPINION

WILLIAM C. KOCH, JR., J., delivered the opinion of the Court, in which CORNELIA A. CLARK, C.J., JANICE M. HOLDER, GARY R. WADE, and SHARON G. LEE, JJ., joined.WILLIAM C. KOCH, JR., J.

This appeal involves a claim under Tennessee's False Claims Act. A local vendor of termite control services became suspicious that two of its competitors had overbilled Knox County for termite control services provided to Knox County's public schools. After confirming its suspicions by obtaining and reviewing public records and by hiring an attorney and private investigator, the vendor presented a detailed report of its findings to county officials who were unaware that the overbilling had occurred. When the County delayed taking remedial action, the vendor filed a qui tam suit authorized by Tenn.Code Ann. § 4–18–104(c) (2005) in the Chancery Court for Knox County. The County joined the vendor's lawsuit and eventually settled with both of the companies named as defendants in the vendor's lawsuit. When the qui tam plaintiff sought a share of the County's settlement with one of the defendants, the County asserted that the qui tam plaintiff was not eligible to receive any of the settlement proceeds. The trial court heard the matter without a jury and held that the qui tam plaintiff was an “original source” for the purpose of Tenn.Code Ann. § 4–18–104(d)(3)(A) and, therefore, was entitled to receive 28% of the settlement proceeds or $71,546.46. The Court of Appeals affirmed the trial court's conclusion that the qui tam plaintiff was entitled to recover 28% of the value of the settlement proceeds but remanded the case for the purpose of redetermining the value of the settlement proceeds. In re Knox Cnty., Tenn. ex rel. Envtl. Termite & Pest Control, Inc., No. E2007–02827–COA–R3–CV, 2009 WL 2144478 (Tenn.Ct.App. July 20, 2009). The County filed a Tenn. R.App. P. 11 application on the sole issue of whether the qui tam plaintiff is eligible to recover a portion of the settlement proceeds. We affirm the decisions of both the trial court and the Court of Appeals that the qui tam plaintiff is an “original source” and, therefore, is eligible to receive a portion of the proceeds from the County's settlement with one of the vendors.

I.

Knox County contracts with private vendors for termite control services at its eighty-four public schools. Prior to November 2000, Arrow Exterminators, Inc. (“Arrow”) had the contract. When the contract was put out for bids in November 2000, both Environmental Termite & Pest Control, Inc. (“Environmental”) and Allied Pest Control (“Allied”) submitted bids for the work. The County awarded the contract to Allied and agreed to pay Allied $2.90 per linear foot treated.

After Allied won the contract, Edward Howard, Environmental's president, noticed that the County's decision to award the contract to Allied coincided with Allied's decision to hire Fred Thomas away from Arrow. Mr. Howard knew that Mr. Thomas was a close friend of Floyd Swann, a county employee involved with evaluating and awarding the termite control contract. Based on his prior dealings with both individuals, Mr. Howard became suspicious that Mr. Swann was actively directing the contracts to Mr. Thomas's employers. From his vantage point as an insider in the termite control industry in the Knoxville area, Mr. Howard also became concerned about the perfunctory manner in which the County had been reviewing the bills submitted by both Arrow and Allied for termite control services.

In December 2000, Mr. Howard's suspicions about the County's handling of the termite control contracts prompted him to look into the matter further. He retained Daniel F. McGehee, a Knoxville attorney who had performed legal work for Environmental in the past, to advise him how to proceed.

On December 13, 2000, acting on Mr. McGehee's direction, Cheri Coldwate, Environmental's office manager, requested the Knox County Purchasing Division to provide her with information relating to the payments that the Knox County schools had made over the past four years for conventional termite treatments, bait elimination treatments, spot treatments, and contract renewals. At the same time, Environmental retained a private investigator to measure the footprints of all the buildings at the County's schools.

On January 25, 2001, Ms. Coldwate mailed Mr. McGehee her analysis of the data contained in the records she received from Knox County. She noted two irregularities in particular. First, she noted that the bills submitted by Arrow and Allied had not received the same level of scrutiny that Environmental's bills had received on its pest control contracts. Second, she noted that the actual number of linear feet of the County's school buildings requiring treatment and the contract price per linear foot was greatly exceeded by the amount of the bills submitted both by Arrow and by Allied. Ms. Coldwate specifically discussed the bills for services at eight different schools and stated that her analysis indicated that the vendors had overbilled the County for these services between $3,000 and $16,000 per school.

Based on the purchasing and payment records obtained from the County and on Ms. Coldwate's analysis, Mr. McGehee became convinced that Mr. Swann was paying the invoices for termite services without reviewing them and, as a result, that the County was being significantly overbilled. In January 2001, he met with the County's Director of Finance and Administration, two representatives of the County purchasing department, and two lawyers from the Office of the Knox County Law Director. Mr. McGehee informed these officials that he was acting on behalf of Environmental and that Environmental's analysis of the billing and payment records indicated that Arrow and Allied were significantly overbilling the County. Prior to their meeting with Mr. McGehee, none of the officials were aware of the possibility that the County was being overbilled for termite control services.

Following the January 2001 meeting, Mr. McGehee provided Knox County with an extensive and thoroughly documented report, including twenty-two exhibits, describing the details of Allied's and Arrow's fraudulent billing practices. The report concluded that the County began to receive fraudulent bills in 1997 and that Mr. Swann arranged to pay these bills more promptly than the bills of other vendors.

On February 8, 2001, Mr. McGehee met again with the County officials with whom he had met in January 2001. The Knox County Law Director also attended this meeting. Mr. McGehee provided the officials with copies of Environmental's detailed report. According to Mr. McGehee, the County officials “were pretty much stunned that somebody had taken the time to go back and research in such detail all of the false billings that were there.”

The participants in the February 8, 2001 meeting decided not to release Environmental's detailed report. The County officials were concerned that releasing the report would draw the media's attention, and they also desired to have an opportunity to request the District Attorney General to determine whether any criminal wrongdoing had occurred.¹ In addition, the participants agreed that the County's Director of Finance and Administration would obtain additional records, particularly the records regarding $80,000 in payments to Arrow for Sentricon service in 1998. The County officials also agreed to keep Mr. McGehee informed of their findings.

On February 28, 2001, after consulting with the Director of Finance and Administration, Mr. McGehee informed the County's external auditor, who was auditing the County schools, of the suspected irregularities regarding the billing and payments for termite control services at the County's schools. In March 2001, the auditor informed Mr. McGehee that the scope of her audit was not broad enough to include the matter and directed him back to the County Law Director.

Following the flurry of activity in late 2000 and the first two months of 2001, the inquiry into the irregularities in the billing and payment for termite control services at the County's schools languished for more than one year. Mr. Howard became increasingly frustrated by the County officials' failure to act. Accordingly, to move the process forward, he talked with members of the Knox County Commission to apprise them of the results of Environmental's investigation into the overbilling by Arrow and Allied.

As a result of the information provided by Mr. Howard, members of the Knox County Commission called for an internal audit of the County schools. In a report released on April 9, 2003, the Knox County Department of Internal Audit found more than $270,000 of overbilling by Allied and Arrow. This audit report was the first time that the overbilling problem was made public. The audit report understandably attracted the attention of the local news media.

The Superintendent of Schools took strong issue with the audit findings. He attributed the billing problems to shortcomings in the contracts and to the discretionary decisions of County purchasing employees to change the terms of the contracts to accommodate changed circumstances. He also denied that any County officials or service providers had acted improperly and insisted that no action should be taken against the termite control service providers.

The County Law Director continued to make no effort to recover the overpayments from Arrow and Allied. For his part, Mr....