December 16, 2016
Any complaint filed under the False Claims Act must remain sealed for 60 days to allow the government to fully investigate the claim. Circuit courts split on whether a leak of the complaint during this 60-day period warrants, or even mandates, dismissal.
The U.S. Supreme Court recently decided this split in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby et al., No. 15-513, 2016 WL 7078622 (U.S. Dec. 6, 2016), and provided guidance as to how future FCA claims should be treated.
Since the purpose of the seal requirement is to allow the government to thoroughly investigate before deciding whether or not to pursue a claim, the court decided that a leak that does not hinder the government’s investigation — regardless of the reasons for the leak — should not alone warrant dismissal and the decision whether to dismiss the claim lies within the sound discretion of the district court.
History and requirements of the FCA
To understand why a mandatory dismissal is not appropriate, the history and purpose of the FCA must first be considered.
The concept of allowing the government to recover for fraudulent claims against it dates back to the Middle Ages, and the FCA has a long history in the United States.
In 1863, Congress first passed 31 U.S.C.A. § 3729 because of fraud concerns during the Civil War. The FCA created a cause of action against any person who knowingly submitted a false claim to the government, caused another to submit a false claim to the government, or knowingly made a false record or statement to get a false claim paid by the government. Although the FCA has been amended numerous times, its goal has remained the same.
Most FCA claims are not initiated by the government. Instead, they are brought by private individuals who sue for violations on behalf of the government. A person bringing an action under the FCA is referred to as a “relator,” and the suit is known as a qui tam action. If the relator is ultimately successful in the suit, he is awarded a percentage of the recovered funds.
An important feature of a qui tam action is confidentiality. Initially, the complaint and written information must be filed under seal and served on the U.S. attorney for the jurisdiction where the alleged fraud was committed. It must also be served on the U.S. attorney general. The seal provision prohibits the relator from publicly discussing the filing of the complaint while the government is investigating.
The purpose of the seal is to allow the government to consider the complaint before deciding to proceed with a civil case, and without notifying the target of the claim until the investigation is complete. The seal also allows the government to bring or complete any potential overlapping criminal investigation based on the facts stated in the claim.
The government typically has 60 days to complete its investigation, although it may seek an extension. 31 U.S.C.A. § 3730(b)(3).
If the government declines to pursue the claim action, the relator may proceed with the claim individually.
The question presented in State Farm was whether a violation of the seal requirement mandated dismissal of the claim.
In interpreting the FCA’s seal requirement, five federal appeals courts considered the question and split three different ways.
The 6th U.S. Circuit Court of Appeals held that a violation of procedural requirements mandates dismissal regardless of whether the government’s investigation was hindered. United States ex rel. Summers v. LHC Grp., 623 F.3d 287 (6th Cir. 2010).
The 2nd Circuit and 4th Circuit held that dismissal is required only if the violation incurably frustrates the congressional goals served by the seal requirement. United States ex rel. Pilon v. Martin Marietta Corp., 60 F.3d 995 (2d Cir. 1995); Smith v. Clark/Smoot/Russell, 796 F.3d 424 (4th Cir. 2015).
The 9th Circuit applied a balancing test and said dismissal is required only if the violation causes actual harm to the government. The key factors the 9th Circuit considered in the balancing test are the harm suffered by the government, the relative severity of the seal violation, and whether there is evidence of bad faith or willfulness. United States ex rel. Lujan v. Hughes Aircraft Co., 67 F.3d 242 (9th Cir. 1995).
The 5th Circuit followed the 9th Circuit’s approach in deciding State Farm. United States ex rel. Rigsby v. State Farm Fire & Cas. Co., 794 F.3d 457 (5th Cir. 2015).
State Farm v. Rigsby
The relators in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby et al. were sisters Cori and Kerri Rigsby, two independent claims adjusters who provided services to State Farm after Hurricane Katrina.
The Rigsbys alleged that State Farm misadjusted federal flood claims in Mississippi by claiming that wind damage to their insureds’ homes was caused by flooding. While wind damage would have been covered by State Farm’s insurance, flood damage fell under the federal government’s National Flood Insurance Program. State Farm allegedly filed claims for coverage under the federal government’s program instead of paying for damage that was covered under its policies.
A two-week bellwether trial was held concerning one particular house in Mississippi, and it was determined that State Farm submitted a fraudulent claim of $250,000 to the government when it should have paid for wind damage.
Prior to trial, State Farm filed a motion to dismiss, claiming that the relators violated the seal requirement. Specifically, it alleged that the relators leaked the complaint to the media and to a Mississippi congressman in an effort to help their claim and smear State Farm’s name.
The government acknowledged that the seal requirement was violated during the 60-day investigation period. However, it claimed the disclosure was made by counsel without the Rigsbys’ assistance or knowledge and that it did not impact the government’s investigation.
The U.S. District Court for the Southern District of Mississippi denied State Farm’s motion. The 5th Circuit affirmed the District Court’s opinion, but it noted the conflict among the circuits.
On May 31 the U.S. Supreme Court granted certiorari to consider the seal requirement and resolve the split.
State Farm argued that the balancing test used by the 5th Circuit and 9th Circuit is contrary to established law regarding statutory prerequisites to suit.
It also claimed the balancing test contravenes the statutory objective of the seal requirement — namely, that it is extremely difficult to prove there was actual harm to the government as a result of the disclosure. Therefore, State Farm argued that relators may be encouraged to disclose the complaint when it might help their case to do so because there is no real penalty for violating the seal requirement.
State Farm encouraged the high court to adopt the 6th Circuit’s mandatory dismissal standard. State Farm said the Rigsbys should be sanctioned with the dismissal of their claim because they used their complaint to paint State Farm as an insurance company that took advantage of those devastated by Hurricane Katrina.
The government argued that the disclosure violations did not actually inform the public about the complaint until after the 60-day period. It also said the disclosure failed to tip off State Farm to the investigation. The government claimed that State Farm admitted it had not heard of the lawsuit until it was served, and consequently, the violations could not have impaired the government’s ability to investigate.
Additionally, the government said dismissal would be inappropriate because the violations were not severe. The confidential materials were kept under seal for a substantial period of time, and the disclosure was made by counsel, not by the Rigsbys.
In addition to the briefs filed by State Farm and the government, numerous amicus briefs were filed on behalf of interested groups, such as the American Tort Reform Association, the U.S. Chamber of Commerce and the National Whistleblower Center.
The high court heard oral argument Nov. 1, and issued its opinion Dec. 6.
How the court ruled
The Supreme Court considered two important factors when considering which circuit’s test should apply and whether the 5th Circuit ruled appropriately: the wording of the disclosure requirement, and the purpose behind keeping these types of complaints under seal.
Unfortunately, the text of the FCA fails to provide much clarity. It does state that complaints “shall” remain under seal, which the court recognized is a mandatory requirement, but does not explain what the sanction should be for violating this requirement. Nowhere does it state that violations compel dismissal, and it does not provide the court with guidance as to how it should treat a disclosure.
While State Farm pointed to other procedural requirements that the Supreme Court has determined warrant dismissal, the court did not find these arguments to be persuasive and distinguished those circumstances from the FCA.
The most important argument to the court was the purpose of the FCA and that a mandatory dismissal because of a disclosure violation would be counterproductive to that purpose. This type of sanction would pit the government’s interests against each other, because it would make it harder for the government to recover for fraudulent claims, and would deter qui tam relators from initially coming forward.
The government is more interested in recovering for fraudulent claims than it is in secrecy. The seal requirement was included because of the government’s interest in pursuing claims.
Using the requirement to block meritorious claims runs directly counter to the reason for the requirement in the first place. State Farm’s interpretation would allow those who commit fraud to avoid punishment or repayment based on a technicality, and would keep the government from furthering the act’s purpose.
As the court noted, “it would make little sense to adopt a rigid interpretation of the seal provision that prejudices the government by depriving it of needed assistance from private parties.”
One question the high court did not elaborate on in its opinion is whether the 9th Circuit’s balancing test should be directly applied.
The high court stated that while the factors considered by the 9th and 5th circuits “appear to be appropriate, it is unnecessary to explore these and other relevant considerations.”
Rather than providing guidance on what factors should be considered in deciding whether to dismiss a claim, the court merely left the decision up to the sound discretion of the lower courts and review should only be for an abuse of discretion.
The FCA has played an important role in helping the government identify fraud and recover from those who attempt to unlawfully take from the government.
The high court’s decision may have an impact on how relators and the targets of their claims approach the 60-day seal period.
Perhaps relators will be more likely to leak their complaints since there is not a high risk of dismissal. Targets of FCA claims may also become more proactive in trying to uncover complaints filed against them during the confidentiality period.
While there is potential for some disruption during the investigation period, ultimately the goals of the FCA will continue to be met through the process already in place.
As long as the purpose of the FCA is not impaired by a disclosure, regardless of the reasons or the circumstances, courts will likely allow claims to proceed rather than dismiss them on a technicality.
The court also left open the possibility that lower courts could use other sanctions short of dismissal for violations, even though that type of remedy was not requested in this specific case.
The court’s decision solidifies district courts’ discretion to decide whether sanctions are appropriate based on the circumstances rather than instituting mandatory dismissals.