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U.S. Supreme Court Parses the False Claims Act’s Seal Requirement in Whistleblower Case

Whistleblower Case
DD

Demme Doufekias

February 8, 2017 11:46 AM

Under the FCA, realtors (whistleblowers) file cases on behalf of the federal government that are sealed to allow the government to investigate claims and determine whether there is a sufficient basis for the federal government to intervene in the case. The relevant portion of the FCA states that a qui tam complaint “shall be filed in camera” for at least 60 days, but does not provide a remedy if the seal requirement is violated. In addition to providing time for the government to decide whether it will intervene, the seal requirement is also intended to allow the government to address issues raised by any parallel criminal investigation of the claims that may exist but is unknown to civil litigants.

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 relators themselves were aware of all of their attorney’s actions, and the government could not confirm that the disclosures caused harm to the government. As a result, the district court did not dismiss the complaint when State Farm argued for this remedy as a result of the seal violations. The case went to a bellwether trial on a single claim, resulting in a jury verdict against State Farm for $250,000. After trebling damages as required under the FCA and adding attorneys’ fees, the verdict against State Farm on the single test case grew to just over $3 million.

There is no question that the realtors’ attorney violated the seal requirement and that the relators may have been aware of at least some of their lawyer’s behavior. The issue facing the Supreme Court is what to do about it. Not surprisingly, there is a three-way circuit split about the appropriate remedy for a violation of the seal requirement. The Sixth Circuit holds that the appropriate remedy is a mandatory dismissal of the complaint. The Second, Fourth, Fifth, and Ninth Circuits employ balancing tests that differ, the most relevant difference being that the Ninth Circuit test (which the Fifth Circuit ultimately applied) requires a showing of actual harm to the government as a result of the violation. Applying the Ninth Circuit test, the district court and the Fifth Circuit here did not dismiss the complaint, even after acknowledging that conduct by the relators and their attorney was egregious.

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 realtors are likely to use violations of the seal requirement to expose the defendant to negative media coverage (as they did here) and force settlement, creating opportunities for abuse under a statute that already provides massive penalties. Notably, the Supreme Court asked the United States to file an amicus brief, in which it argued against mandatory dismissal but also took the position that it would not have been error for the district court to dismiss the complaint in this case.

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.

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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.

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