State Of New York v. Egon Zehnder International, Inc.

Background

American Advisory Services, LLC brought a qui tam action under the New York False Claims Act on behalf of the State of New York. The complaint alleged that Egon Zehnder International, Inc. and Egon Zehnder International AG reported income earned in the United States as income earned outside the United States. According to the complaint, this reduced the defendants’ reported New York taxable income.

The defendants removed the case from state court, and the court previously denied American Advisory’s motion to return it to state court. The court later noted that the case raised transfer-pricing issues and questions potentially important to the administration of federal and state tax systems. New York then told the court that it had reached an agreement in principle with the defendants to settle the New York False Claims Act claims and moved to intervene so it could present the proposed settlement.

American Advisory opposed intervention. It argued that the State’s request should be evaluated under the New York False Claims Act’s requirement that the State show good cause for intervening after initially declining to intervene. The State argued that Federal Rule of Civil Procedure 24 governed intervention in federal court.

Court’s Analysis

The court applied Federal Rule of Civil Procedure 24. Under Rule 24(a)(2), intervention as of right is required when the motion is timely, the proposed intervenor has a legally protectable interest related to the action, disposition of the action may impair that interest, and the existing parties do not adequately represent it.

The court concluded that New York was the real party in interest because the relator was asserting the State’s alleged injury. New York therefore had a direct, substantial, and legally protectable interest in the action. The State also identified an interest in resolving the case through its proposed settlement. Because American Advisory opposed that settlement, the court found that American Advisory might no longer adequately represent the State’s interests. The court also found the motion timely because New York filed it after reaching the settlement agreement and learning that American Advisory intended to object.

The court further stated that New York would qualify for permissive intervention under Rule 24(b)(1)(B), which allows intervention when the proposed intervenor’s claim shares a common question of law or fact with the main action. The court did not need to consider another possible basis for permissive intervention.

The court rejected American Advisory’s argument that the New York False Claims Act’s good-cause standard controlled. It held that Rule 24 answers the question of intervention in federal court and is procedural, so it governs unless invalid under the federal rulemaking statute. The court also concluded that applying Rule 24 did not undermine the New York statute’s protections for relators. The statute still required consideration of the relator’s interests in dismissal and settlement, and it could limit the relator’s participation only under specified circumstances.

Proposed Pleading

Rule 24(c) generally requires a motion to intervene to include a pleading stating the claim or defense for which intervention is sought. The court excused New York from filing a separate proposed pleading because the motion papers gave adequate notice of the basis for intervention and the State’s claims were already set out in American Advisory’s complaint.

Disposition

The court granted the State of New York’s motion to intervene. It also excused the State from filing a proposed pleading. The order did not determine whether the proposed settlement was fair, adequate, or reasonable; the court expressly said it was not prejudging that issue.