Insight

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.

----------------------------

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.

Related Articles

Destiny Fulfilled


by Sara Collin

Was Angela Reddock-Wright destined to become a lawyer? It sure seems that way. Yet her path was circuitous. This accomplished employment attorney, turned mediator, arbitrator and ADR specialist nonpareil discusses her career, the role of attorneys in society, the new world of post-pandemic work and why new Supreme Court Justice Ketanji Brown Jackson represents the future.

Interview with Lawyer Angela Reddock-Wright

Ketanji Brown Jackson Becomes Joe Biden’s Nominee for Vacant SCOTUS Seat


by Gregory Sirico

President Joe Biden has nominated former lawyer Ketanji Brown Jackson for the Supreme Court of the United States.

Biden Nominates Ketanji Brown Jackson

Biden’s History-Making SCOTUS Nominees


by Gregory Sirico

The promise of the first Black female Supreme Court Justice in history is on the verge of reality as the top three candidates for the most recent vacant seat are announced.

Biden Promises First Black Female SCOTUS Pick

SEC Whistleblower Awards Are Spiraling. Could It Be Part of MeToo Movement?


by John Ettorre

The MeToo movement has had an unexpected impact on SEC-related whistleblower cases, and many are receiving substantial payouts for the financial fraud they are reporting.

Rise in Whistleblowing a Result of MeToo

Facebook Whistleblower Testimony Shines A Light On Credibility Factor


by Justin Smulison

Landmark whistleblower testimony was provided on Capitol Hill which may have a national—and even worldwide—effect on how governments regulate Big Tech companies.

Capitol Hill Facebook Whistleblower Testimony

Don’t Fall Asleep at the Wheel


by Paul Goatley

Identify Exhaustion or Risk Waiving a Defense.

Don’t Fall Asleep at the Wheel

What New York's Child Victims Act Means for Public Schools


by Anastasia M. McCarthy

The new Child Victims Act is expected to have a profound and long-lasting impact on public school systems.

Understanding New York's Child Victims Act

Supreme Court Decision Will Play Important Role in Shaping Defendant Privacy Rights


by Gus Kostopoulos

The primary question will likely come down to whether or not cell phone data and location records are protected interests under the Fourth Amendment.

Defendant Privacy Rights

Send, Serve, or Both


by Holly M. Polglase and Matthew E. Bown

The Supreme Court decides the meaning of Article 10(A) of the Hague Service Convention.

Article 10(A) of the Hague Service Convention

Victory for The Slants and Redskins


by Carol Steinour Young and Emily Hart

On June 19, 2017, the United States Supreme Court settled the issue of whether an offensive name—in this case, an Asian-American rock band called “The Slants”—can properly be registered as a trademark.

The Slants Legal Case Decoded

Bristol-Myers Squibb Co. v. Superior Court of California, San Francisco


by Clifford J. Zatz and Josh Thomas Foust

The decision “may make it impossible to bring certain mass actions at all.”

Bristol-Myers Squibb Co. Mass Tort

Obtaining Cell Phone Records in Civil Litigation


by Jeff S. Korek

You might think that cell phone records could help put a distracted driver behind bars. But getting them isn't so simple.

Are Cell Phone Records Used in Court?

Post-Conviction Relief


by Douglas Trant

In these post-conviction cases, we look for Constitutional violations that deprived the defendant of a fair trial and undermined confidence in the outcome.

Post-Conviction Relief

In the News: Austin/San Antonio


by Compiled by Tess Congo

A summary of newsworthy content from Austin/San Antonio lawyers and law firms.

Austin/San Antonio In the News

Supreme Court of New Jersey Affirms Rules as to Priority of Discretionary Advance Mortgages


by Mark Rattner

Supreme Court of New Jersey

Trending Articles

Announcing the 2023 The Best Lawyers in America Honorees


by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

Announcing the 2022 Best Lawyers® in the United States


by Best Lawyers

The results include an elite field of top lawyers listed in the 28th Edition of The Best Lawyers in America® and in the 2nd Edition of Best Lawyers: Ones to Watch in America for 2022.

2022 Best Lawyers Listings for United States

2021 Best Lawyers: The Global Issue


by Best Lawyers

The 2021 Global Issue features top legal talent from the most recent editions of Best Lawyers and Best Lawyers: Ones to Watch worldwide.

2021 Best Lawyers: The Global Issue

The U.S. Best Lawyers Voting Season Is Open


by Best Lawyers

The voting season for the 31st edition of The Best Lawyers in America® and the 5th edition of Best Lawyers: Ones to Watch® in America is officially underway, and we are offering some helpful advice to this year’s voters.

Golden figures of people standing on blue surface connected by white lines

How To Find A Pro Bono Lawyer


by Best Lawyers

Best Lawyers dives into the vital role pro bono lawyers play in ensuring access to justice for all and the transformative impact they have on communities.

Hands joined around a table with phone, paper, pen and glasses

What the Courts Say About Recording in the Classroom


by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?

How Palworld Is Testing the Limits of Nintendo’s Legal Power


by Gregory Sirico

Many are calling the new game Palworld “Pokémon GO with guns,” noting the games striking similarities. Experts speculate how Nintendo could take legal action.

Animated figures with guns stand on top of creatures

The Best Lawyers in Australia™ 2024 Launch


by Best Lawyers

Best Lawyers is excited to announce The Best Lawyers in Australia™ for 2023, including the top lawyers and law firms from Australia.

Australian Parliament beside water at sunset

Best Lawyers: Ones to Watch in America for 2023


by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

Inflation Escalation


by Ashley S. Wagner

Inflation and rising costs are at the forefront of everyone’s mind as we enter 2023. The current volatile market makes it more important than ever to understand the rent escalation clauses in current and future commercial lease agreements.

Suited figure in front of rising market and inflated balloon

A Celebration of Excellence: The Best Lawyers in Canada 2024 Awards


by Best Lawyers

As we embark on the 18th edition of The Best Lawyers in Canada™, we are excited to highlight excellence and top legal talent across the country.

Abstract image of red and white Canada flag in triangles

8 Different Types of Criminal Defenses in Law


by Best Lawyers

Learn about the different types of criminal defenses available in law, including innocence, self-defense, insanity and more. Protect your rights today.

Silver handcuffs laying on finger printed papers

Wage and Overtime Laws for Truck Drivers


by Greg Mansell

For truck drivers nationwide, underpayment and overtime violations are just the beginning of a long list of problems. Below we explore the wages you are entitled to but may not be receiving.

Truck Driver Wage and Overtime Laws in the US

The Upcycle Conundrum


by Karen Kreider Gaunt

Laudable or litigious? What you need to know about potential copyright and trademark infringement when repurposing products.

Repurposed Products and Copyright Infringemen

Choosing a Title Company: What a Seller Should Expect


by Roy D. Oppenheim

When it comes to choosing a title company, how much power exactly does a seller have?

Choosing the Title Company As Seller

The 2024 Best Lawyers in Spain™


by Best Lawyers

Best Lawyers is honored to announce the 16th edition of The Best Lawyers in Spain™ and the third edition of Best Lawyers: Ones to Watch in Spain™ for 2024.

Tall buildings and rushing traffic against clouds and sun in sky