Supreme Court to Hear Important False Claims Act Case

Adam Proujansky

Lasproujanskyt week, the Supreme Court granted certiorari to resolve an important issue for government contractors that has split the lower courts:  what standard governs whether a court should dismiss a False Claims Act (“FCA”) lawsuit
brought against a government contractor by a private qui tam relator because the relator violated the FCA seal requirement.

The FCA sets forth a number of procedural requirements for a qui tam action, including that a relator’s complaint “shall be filed in camera, shall remain under seal for at least 60 days, and shall not be served on the defendant until the court so orders.” 31 U.S.C. § 3730(b)(2).  This seal requirement gives the Government a chance to investigate the claim and determine whether to intervene in the qui tam action and/or bring criminal charges against the defendant, and prevents reputational harm to the defendant while the investigation takes place.  Although the statute provides that the complaint shall remain under seal for at least 60 days, the time may be extended, and the complaint often remains under seal for months or even years.  During this potentially lengthy sealing period, relators sometimes intentionally or inadvertently violate the seal and disclose the lawsuit.  When this happens, defendants invariably move for dismissal of the qui tam action for violation of this statutory requirement.

Lower courts have sharply disagreed regarding the circumstances in which a qui tam relator’s failure to adhere to this “seal” requirement should result in dismissal of the relator’s lawsuit, with some decisions holding that dismissal is always mandated when a relator violates the sealing requirement, others applying a balancing test that includes an evaluation of harm to the government as a result of the violation, and still others looking to whether the violation frustrated the statutory purposes served by the sealing requirement.  On May 31, 2016, the United States Supreme Court granted certiorari in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby to determine the standard governing dismissal of a relator’s claim for violation of the seal requirement.

In State Farm, the qui tam relators were insurance claims adjusters who provided services to State Farm after Hurricane Katrina. Their lawsuit alleged that State Farm falsely attributed insurance claims relating to Hurricane Katrina to flood damage, which was covered by flood policies under the Government’s flood insurance program, rather than to wind damage, which was covered by State Farm homeowners insurance policies.  In the first qui tam claim to go to trial, a jury returned a verdict against State Farm, finding that State Farm’s submission of a claim for the flood policy limits was fraudulent.  State Farm appealed, arguing that the district court should have granted State Farm’s motion to dismiss the suit because the relators and their counsel had intentionally violated the FCA seal requirement by providing the sealed complaint and sealed evidentiary disclosure to reporters and granting interviews to the media.  The Fifth Circuit affirmed the district court’s denial of the motion to dismiss, holding that dismissal was not warranted, principally because the violation of the sealing requirement was not likely to have caused harm to the Government.  In applying this standard, the Fifth Circuit ruling was in agreement with earlier Ninth Circuit precedent applying a balancing test which evaluated three factors in determining whether a case should be dismissed:  (1) harm to the Government from the violation; (2) the nature of the violations and (3) whether the violations were willful or in bad faith.  This conflicted with the Sixth Circuit, which had ruled that violation of the seal requirement mandated dismissal regardless of whether the Government was harmed as a result.  It also conflicted with Second and Fourth Circuit decisions, which looked to whether the violation of the sealing requirement frustrated the statutory purposes of the sealing requirement in determining whether dismissal was warranted.  The Supreme Court granted certiorari to resolve this conflict among the Circuits.

This is the third time in recent years that the Supreme Court has granted certiorari to decide a significant issue regarding the interpretation of the FCA.  Last Term, the Supreme Court ruled in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter that another procedural provision of the FCA, the “first-to-file” bar, only prevented new qui tam claims from being filed while related claims were live and pending, and did not bar the new claims in perpetuity as many lower courts had held – thus eliminating a basis on which many qui tam lawsuits had previously been dismissed.  This Term, the Court will decide, in Universal Health Service v. United States ex rel. Escobar, whether the FCA imposes liability based on the theory of “implied certification,” pursuant to which a defendant may be liable for violating a regulatory or contractual provision even if it makes no express false statement or false certification.  A decision in Universal Health Service is expected in the next few weeks.