Protecting Anonymity: The Pros and Cons of Filing as an LLC

Whistleblowers Seeking Anonymity by Forming an LLC

For individuals seeking to blow the whistle on fraud against the United States, one of the most common concerns is how filing a qui tam may damage their reputations or career prospects going forward.  In the short term, the False Claims Act itself provides protection.  Unlike almost all other civil litigation, FCA cases are filed under seal, and are not served on the Defendant while the government investigates the allegations.  The case then remains under seal while the government investigates—a process that can often last for years.  In addition to protecting the confidentiality of the Government’s investigation, this seal period also provides much needed time to the whistleblower (e.g. to find a new job, if she is still working for a defendant at the time of filing).

But sooner or later, the qui tam complaint will come out from under seal, which generally means that the identity of the whistleblower, as well as her specific allegations, will become a matter of public record. 

Potential whistleblowers often ask if there is any way to avoid this eventual unmasking—either through the use of a pseudonym such as John or Jane Doe, or by forming a separate legal entity (e.g. a Limited Liability Corporation or some other type of company or partnership) to list on the qui tam complaint, rather than the individual.

Filing a qui tam under a pseudonym is typically not advisable.  There is a strong presumption in favor of open and transparent legal proceedings in federal court.  And both judges and the Justice Department have shown hostility over the years to whistleblowers trying to file and litigate FCA cases as John or Jane Does.    

Proceeding through an LLC or other corporate entity is more complicated, and lawyers who represent whistleblowers have differing opinions as to the relative risks versus the benefits of this strategy.  On the benefit side, there is no presumptive prohibition against an LLC or similar entity serving as a named party in litigation—so long is it is a real, active entity.  Nor does the Justice Department seem to have the same hostility to such entities as it does to John or Jane Doe relators.

That said, there are risks to proceeding under an LLC as well.  For one thing, the laws governing such entities vary from state to state, and some afford more privacy than others.  As a result, forming such a company may require extra time and cost on the front end and potentially bringing in additional legal counsel familiar with the nuances of state business entity law.  There may also be potential tax implications—which may again require the involvement of an attorney well versed in such matters.

And if two or more Relators jointly form a corporate entity to file a whistleblower case, the potential risks and complexities are even greater.  For example, if a new member joins the LLC or an existing member leaves after the case is filed, is it still technically the same entity?  And if the answer is no, might the “new” entity be precluded from sharing in any reward under the First-to-File Doctrine of some other FCA restriction?  These are not hypothetical questions.  They have been litigated in the FCA context and the analysis can be quite complex, turning on both the particular facts and the specifics of the state business entity laws involved.

In short, pursuing a qui tam using a corporate entity such as an LLC is possible, but it is an option that carries many potential risks of its own.  It is certainly not something that a potential whistleblower should take lightly or without fully discussing those risks versus rewards with qualified FCA counsel.