June 22 (Bloomberg) -- The U.S. Supreme Court will consider a case that might set new limits on whistleblower lawsuits against drugmakers, biotechnology companies and other businesses.

The justices today agreed to hear arguments from a North Carolina water district accused in a lawsuit of fraudulently seeking federal money for storm cleanup. A federal appeals court said a whistleblower could sue the district under the U.S. False Claims Act even though the central allegations had previously been made public in state documents.

The Pharmaceutical Research and Manufacturers of America and the Biotechnology Industry Organization urged the Supreme Court to take up the case, saying the lower court decision could cause lawsuits under the False Claims Act to “skyrocket.” In 2007 health-care fraud cases filed under the law resulted in $1.1 billion in settlements and judgments, according to a brief filed by two industry trade groups.

The False Claims Act lets whistleblowers press fraud claims on behalf of the federal government and then share in any recovery. The law bars suits when allegations have been publicized by the federal government. The measure isn’t clear about the effect of disclosures by state governments.

The 4th U.S. Circuit Court of Appeals said the so-called public disclosure bar applies only to federal documents and hearings. Lower courts disagree on the question.

The case before the justices involves a lawsuit by Karen Wilson, a former secretary for the Graham County Soil & Water Conservation District. Her suit alleges that four men, including a district employee, conspired to split up the federal money using no-bid contracts.

The Obama administration said in court papers that the lower court reached the right conclusion. U.S. Solicitor General Elena Kagan nonetheless urged the justices to hear the appeal and clear up lower court disagreement on the issue.

The case is Graham County Soil & Water Conservation District v. United States ex rel. Wilson, 08-304.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

Last Updated: June 22, 2009 10:16 EDT