Whistle-Blower Law Upheld as Constitutional in Boeing Case : Courts: The False Claims Act lets employees sue firms and share awards with the government. An appeal is predicted.

In a major victory for corporate whistle-blowers, a federal appeals court Tuesday upheld the False Claims Act, the controversial law that allows individuals to sue defense companies and other contractors on behalf of the U.S. government and then share in any damage awards.

The unanimous decision by the U.S. 9th Circuit Court of Appeals in Pasadena came in a case involving Boeing Co., in which former worker Kevin G. Kelly alleged that Boeing improperly billed the government for certain costs related to the company’s subcontractor work on the B-2 bomber and advanced tactical fighter programs.

Although some aspects of the False Claims Act have been challenged--and upheld--in past cases, the Kelly case was the most thorough review of the law by an appellate court so far, lawyers on both sides of the issue agreed.

“We are extremely happy” with the ruling, said Claire M. Sylvia, a lawyer for the U.S. Senate. Although the Justice Department did not intervene in the case, Sylvia said she helped support Kelly’s action because the Senate is “very interested in defending the constitutionality of this act.”

But Herbert L. Fenster, a Washington lawyer who represents companies fighting whistle-blower cases, said that “we’re obviously very disappointed” with the outcome. He was not involved in the Boeing case, but predicted that the decision will be appealed to the U.S. Supreme Court.

Fenster complained that such cases are expensive, yet “there isn’t any real indication that the law has done any good” in terms of curbing fraud among defense contractors.

Any recent improvements in defense companies’ adherence to rules have resulted from stronger administrative actions by the federal government, not because the False Claims Act “has forced or induced (the companies) to be more honest,” he said.

Paul Binder, a spokesman at Boeing’s Seattle headquarters, said the company was still evaluating the ruling and had no immediate comment. But Boeing maintains that “it is unconstitutional for the individual to continue the case on behalf of the government,” he said.

The False Claims Act traces its roots to the Civil War. But it was used little until 1986, when it was bolstered to attract more whistle-blowers by enabling them to share up to 30% of any damage claim paid to the government. An estimated $400 million has been recovered by the government on whistle-blower suits since the law was modified.

Kelly, who joined Boeing in 1985, was an engineer and inspector who alleged in 1989 that the company overcharged the Defense Department millions of dollars for repairs and rents of buildings leased for secret military work, including work on the B-2 stealth bomber at its Oxbow facility near Seattle.

Kelly claimed he was fired in July, 1989, because he went public with his accusations. Boeing has denied doing anything improper.

After Kelly sued Boeing under the False Claims Act that year, the Justice Department investigated the case for three years but ultimately decided not to intervene. Kelly then sued Boeing himself on behalf of the U.S. government, as the law allows.

Boeing asked a District Court judge in Seattle, Barbara J. Rothstein, to dismiss Kelly’s suit. She refused.

In its appeal, Boeing argued that the case should be thrown out because the False Claims Act runs afoul of several constitutional issues. For instance, Boeing said a whistle-blower has a conflict of interest by both aiding the U.S. government and seeking financial gain.

But the appellate court disagreed, ruling that the act does not require whistle-blowers “to fulfill the same type of public duty as government prosecutors.”

The 9th Circuit appellate court rotates the three judges who decide its cases. The opinion was written by Judge Cynthia Holcomb Hall and was supported by Judges Charles Wiggins and Edward Leavy.