Under the FCA,
In State Farm, the relators were two sisters who processed Hurricane Katrina claims for StateFarm. Their lawyer hired a PR firm and engaged in deliberate behavior to publicize the allegations while the case was still under seal, including sending the evidentiary disclosures underlying the complaint to ABC for a 20/20 piece; to The New York Times, the Associated Press, and other news sources; and to a Mississippi Congressman, who ultimately held a press conference about then-unproven allegations against State Farm. It was not clear that the
There is no question that the
State Farm argues that a mandatory dismissal rule is appropriate because the text, structure, history, and purpose of the FCA require it. State Farm also argues that, if the Fifth Circuit’s decision is allowed to stand, the failure to credit flagrant violations of the seal requirement will essentially invite future whistleblowers to do the same, causing great reputational harm to defendants in an effort to get them to settle before the government has even decided whether or not to intervene in the case. Also, State Farm points out, if the whistleblower plaintiffs are dismissed, the government still has the right to bring a case, so the overall goals of the FCA (to prevent fraud and recover amounts fraudulently claimed from the federal government) remain intact.
Respondents argue that the FCA does not provide a specific remedy; much require dismissal of the complaint, if there is a violation of the seal requirement, and that mandatory dismissal would give a “proven fraudster” a windfall when the violations of the seal requirement did not cause any actual harm or prejudice to the government. They argue that the purpose of the seal requirement is to allow the government time to investigate and decide whether to intervene without the defendant knowing about and undermining a federal investigation, possibly with a criminal component. Thus, if there is no harm to the government, the violation has not frustrated the purpose of the seal requirement, and consequently, there is no justification for such an extreme remedy as dismissal.
Numerous amicus briefs were filed, predominantly in favor of mandatory dismissal. In general, the amici argue that private
The crux of the arguments turns on how and how much the Court should weigh the “harm to the government” factor. Many of the amicus briefs raised the fact that the likelihood of proving actual harm to the government in such circumstances is very difficult. State Farm’s attorneys were able to identify only one case in which the government had taken the position that a violation of the seal requirement had caused actual harm. State Farm also argued that the government is unlikely to take such a position because it is rarely in the government’s interest to do so. In this case, for example, the government was not willing to say one way or the other whether it had suffered actual harm as a result of the violations. Furthermore, State Farm pointed out, the government intervenes in a very small (less than 25 percent of cases), so the likelihood of actual harm is even more remote, but the danger of reputational harm to the defendant as a result of unproven allegations is a significant concern if the seal requirement is violated. The United States as amicus also noted that, in a Senate Report underlying revisions to the FCA, the Senate acknowledged that it was unlikely actual harm to the government could be shown if the seal requirement was violated.
Demme Doufekias is co-chair of Morrison & Foerster’s securities litigation, enforcement, and white-collar criminal defense practice group and a member of the firm's False Claims Act investigations and defense practice group. She is based in Washington, D.C.