What are the consequences of violating the False Claims Act’s seal requirement?
Cori and Kerri Rigsby sued State Farm Fire & Casualty Company under the False Claims Act (“FCA”), alleging that State Farm defrauded the federal government while paying out claims related to the damage caused by Hurricane Katrina. The district court and the Fifth Circuit found that the Rigsbys’ attorney violated the FCA’s seal requirement by distributing documents to several news outlets, but declined to dismiss the Rigsbys’ suit after applying a three-part balancing test to evaluate whether dismissal was warranted. The Supreme Court granted certiorari to resolve the circuit split over what standard governs the decision to dismiss a relator’s claim for violation of the FCA’s seal requirement. The United States, on behalf of the Rigsbys, points to the FCA’s test, structure, legislative history, and purpose, to argue that only discretionary sanctions apply to a violation of the seal requirement. State Farm maintains that a violation of the seal requirement must result in mandatory dismissal of the suit, rather than a discretionary balancing test. This decision may affect the prevalence of qui tam FCA suits and the government’s ability to recover from defrauding parties.
Questions as Framed for the Court by the Parties
What standard governs the decision whether to dismiss a relator’s claim for violation of the False Claims Act’s seal requirement, 31 U.S.C. § 3730(b)(2)?
In the aftermath of Hurricane Katrina, State Farm Fire & Casualty Company (“State Farm”) participated in the National Flood Insurance Program’s “Write Your Own” Program. See United States ex rel. Rigsby v. State Farm Fire & Casualty Company, 794 F.3d 457, 463 (5th Cir. 2015). This program allows private insurance companies to offer government-backed flood insurance policies to geographic areas where it would otherwise not be economical to do so. See id. State Farm also offered separate homeowner’s insurance policies that covered wind damage but excluded flood damage. See id. For properties covered by both policies, State Farm paid for all wind damage, and the federal government paid for flood damage. See id.
During this time, sisters Cori and Kerri Rigsby (“the Rigsbys”) worked as insurance claims adjusters for a State Farm contractor. See United States ex el. Rigsby at 462–63. While working on Katrina-related claims, the Rigsbys observed suspicious activities and practices and began to suspect that State Farm was intentionally misclassifying wind damage as flood damage to shift costs to the federal government. See id. at 464.
The Rigsbys subsequently initiated a qui tam action against State Farm under the False Claims Act (“FCA”). See United States ex rel. Rigsby at 464. A qui tam suit is brought by a private party, called a relator, on behalf of the government. The FCA requires that relators serve the government and file the complaint in camera and under seal to give the government the opportunity to investigate the claim and decide whether to intervene. See id. at 470. While the case was still under seal, and unbeknownst to either party at the time, the Rigsbys’ attorney intentionally distributed copies of evidentiary disclosures and engineering reports to various news outlets. See id. at 471.
At a bellwether trial, the jury found that wind alone had damaged the property at issue and that State Farm submitted a false record that defrauded the government of $250,000. See United States ex rel. Rigsby at 465. State Farm moved for dismissal on the grounds that the Rigsbys violated the FCA’s seal requirement. See id. The district court upheld the jury verdict but declined to order discovery for additional claims after finding that the Rigsbys failed to plead sufficient facts about State Farm’s alleged general scheme. See id. The Rigsbys and State Farm both appealed to the Fifth Circuit Court of Appeals.
In the Fifth Circuit, State Farm argued that the Rigsbys’ violation of the FCA’s seal requirement was grounds for automatic dismissal of the qui tam action. See United States ex rel. Rigsby at 470. The Fifth Circuit held that although the Rigsbys’ attorney violated the seal requirement, courts should use the three-part balancing test articulated in United States ex rel. Lujan v. Hughes Aircraft Co., 67 F.3d 242 (9th Cir. 1995), to determine if dismissal is appropriate. See id. at 471–72. The court therein weighed the harm to the government, the nature of the violations, and whether the violations were in bad faith. See id. at 472. The Fifth Circuit affirmed the district court and found that the government did not suffer any harm, the violations were relatively minor, and even if the attorney’s bad faith could be attributed to the Rigsbys, the other two factors weighed against dismissal. See id.
State Farm appealed, and the Supreme Court granted certiorari to determine what standard governs the decision whether to dismiss a relator’s claim for violation of the FCA’s seal requirement. See Brief for Petitioner, State Farm Fire & Casualty Company at 3.
DOES THE FALSE CLAIMS ACT’S STRUCTURE REQUIRE DISMISSAL WHEN A REQUIREMENT IS BREACHED?
State Farm argues that the Federal Claims Act (“FCA”) requires a private litigant to take certain minimal steps before litigating a claim on behalf of the government. See Brief for Petitioner, State Farm Fire & Casualty Company at 21. State Farm claims that the relator must file a complaint under seal and maintain confidentiality under that seal until the district court has lifted it. See id. at 21. State Farm highlights that Congress did not place the sealing provision in more procedural provisions of the FCA, traditionally held more susceptible to judicial modification and discretion, as proof that Congress intended relators to forfeit their actions as the consequence for violation. See id. at 27. State Farm finally argues that dismissal should not be discretionary because the notice, filing, and seal requirements of 31 U.S.C. § 3730(b)(2) do not govern a court’s transaction of business. See id. at 27–28. Rather, State Farm argues, these requirements primarily exist so that the government may investigate relators’ claims and to ensure that potential publicity does not compromise the government’s investigations into those claims. See id.
The United States, arguing on behalf of the Rigsbys, counters that State Farm’s argument is based solely on the fact that the seal requirement and the qui tam cause of action are located in the same subsection of the FCA. See Brief for Respondents, United States ex rel. Rigsby at 40. The United States argues that rather than using a formalistic approach, the Court should instead look to “contextual and historical indications of what Congress meant to accomplish.” See id. (internal quotations omitted). The United States argues that because the Court in Barnhart v. Peabody Coal Co., 537 U.S. 149 (2003), was worried that strict adherence to a formal rule would, in practice, undermine the statute’s purpose and allow the defendant to escape liability, the same theory should govern this case. See id.
DID CONGRESS INTEND FOR THE SEAL REQUIREMENT TO ACT AS A MANDATORY CONDITION PRECEDENT?
State Farm argues that, under a plain language analysis, the repeated use of the word “shall” in Section 3730(b)(2) of the FCA suggests that compliance with the seal requirement is mandatory in order to bring a qui tam action. See Brief for Petitioner at 22–23. State Farm contends that, because Section 3730 allows assignment of the government’s claim to a relator and gives that relator standing, the assignment is complete only if the relator satisfies the seal requirement. See id. at 28–29. State Farm also maintains that the legislative history of 3730 supports its argument, stating that the seal requirement is meant to both ensure recovery by the relator and protect the government’s investigations into claims. See id. at 31, 35. State Farm asserts that because the seal requirement is mandatory, it should not be subject to case-by-case judicial rebalancing of interests that Congress has already balanced in drafting the statute. See Brief for Petitioner at 36–37. State Farm argues that Section 3730(b)(2)’s lack of a specific consequence of violating the seal requirement does not preclude mandatory dismissal but that the text, structure, and legislative history of the statute do make dismissal of the claim mandatory. See id. at 37–38.
The United States counters, claiming that the FCA’s text and structure suggest that Congress did not intend to require mandatory dismissal of claims suffering from a seal requirement violation. See Brief for Respondents at 25. The United States argues that although the term “shall” creates a duty to comply with the seal requirement, it does not define a particular consequence for noncompliance, especially not mandatory dismissal. See id. at 25–26. In addition, the United States points out that the seal requirement lacks conditional language, such as “if,” that would make the relator’s right to bring the claim dependent on completion of the seal requirement and that Congress could have included such language but did not. See id. at 29. The United States relies on Brock v. Pierce City, 476 U.S. 253 (1986), where the court held that judges should not automatically impose the most drastic sanction for violation of such statutory requirements. See id. at 33. The United States argues that the very purpose of the FCA was to address issues of serious fraud by encouraging private individuals to bring suit and that the seal requirement was meant to address only a minor concern that public filing of claims would tip off targets of investigations. See id. at 30. The United States submits that by treating dismissal of the claim as the only option, State Farm would take away any other possible sanction that would better serve the FCA’s purposes: promoting qui tam suits and preventing a windfall for defendants who commit fraud. See id. at 32. Additionally, the United States argues that the fact that the FCA contains a number of requirements that expressly mandate dismissal for violations shows that Congress knew how to incorporate such remedies into the FCA, but chose not to do so for the seal requirement. See id. at 29.
IF DISMISSAL IS NOT REQUIRED, WHAT STANDARD GOVERNS A COURT’S POWER OF DISCRETIONARY DISMISSAL AND DID RELATORS BREACH IT HERE?
State Farm argues that even if the Court does not require automatic mandatory dismissal for violations of the FCA’s seal requirement, the Rigsbys’ deliberate violations of the seal requirement in this case necessitate dismissal of their claims. See Brief for Petitioner at 41. State Farm argues that the relator’s relationship with the government, in which the relator, as assignee of the claim, acts in the name of the government, increases the relator’s obligation to act in good faith and therefore amplifies the relator’s bad faith. See id. at 47–48. State Farm claims that the Rigsbys’ conduct was so egregious that it deserves dismissal even under a discretionary standard. See id. at 47–48. State Farm maintains that if a discretionary test must be employed, the Court should judge the severity of the violation on the extent and nature of the disclosure of the suit and on the number of violations. See id. at 49. Furthermore, State Farm asserts that, in addition to considering the factors included in the balancing test that the Fifth Circuit had applied, the Court should also consider the risk of harm (as opposed to actual harm) to the government and harm to the defendant. See id. at 51, 55.
The United States argues that the Lujan balancing test that the Fifth Circuit applied correctly considers all of the relevant interests: the harm to the government, the nature of the violations, and whether the violations were in bad faith. See Brief for Respondents at 45. Further, the United States argues that even if the Court requires mandatory dismissal for violations of the seal requirement, it still should not dismiss the Rigsbys’ action because the Rigsbys violated a court order rather than the seal requirement statute itself. See id. at 43. The United States explains that courts may sanction a party for violation of a court order under the Federal Rules of Civil Procedure but that those sanctions rarely include dismissal of the claim. See id. Instead, sanctions are more likely to include awarding damages or attorneys’ fees to the opposing party, fines, or disqualification of the attorney. See id. at 44.
DOES DISCRETIONARY DISMISSAL ENCOURAGE WILLFUL BREACH?
In support of State Farm, DRI-The Voice of the Defense Bar (“DRI”) argues that mandatory dismissal is required for all intentional seal violations because any discretionary test would undermine the purpose of the FCA’s seal requirement by encouraging willful breach. See Brief of Amicus Curaie DRI-The Voice of the Defense Bar (“DRI”), in Support of Petitioner, at 5–6. DRI contends that a relator’s intentional violation of the seal requirement violates both the defendant’s and government’s interests; the defendant is pressured to settle potentially meritless claims, and the government’s private investigation is made public without its consent. See id. at 15–16, 19. A bright-line rule, DRI argues, would ensure it is never beneficial to intentionally breach the seal requirement, thereby upholding the purpose of the requirement and protecting the interests of the defendant and the government. See id. at 20. The National Association of Criminal Defense Lawyers, argues further that any discretionary rule would encourage relators to violate the seal requirement intentionally if they estimate that the value of breaching the seal—putting pressure on the defendant to settle or the government to intervene—was greater than the possibility of a court dismissing the case. See Brief of Amicus Curiae National Association of Criminal Defense Lawyers, in Support of Petitioner, at 12.
The National Whistleblower Center, supporting the United States and the Rigsbys, counters that a mandatory dismissal rule would severely frustrate the government’s interests. See Brief of Amicus Curiae National Whistleblower Center, in Support of Respondent, at 12. The National Whistleblower Center notes that the statute of limitations under the FCA is six years from the date of the violation and argues that if the relator’s qui tam suit is automatically dismissed due to a seal violation outside of that six-year window, the government may be barred from bringing a new action. See id. The National Whistleblower Center argues that defendants would be incentivized to search for minor, technical seal violations and “run out the clock” before seeking dismissal to prevent the government from initiating its own action. See id. This case presents the perfect example, the National Whistleblower Center argues, because State Farm submitted the claims at issue in 2005 and 2006, and if the Court dismisses the Rigsbys’ action, the government would be unable to bring its own suit due to the statute of limitations. See id. at 13.
SHOULD COURTS CONSIDER REPUTATIONAL HARM TO THE DEFENDANT?
In support of State Farm, the Washington Legal Foundation and Allied Educational Foundation (“WLF & AEF”) argue that even if dismissal is discretionary, the Court should reject the Lujan test adopted by the Fifth Circuit because it fails to take into account reputational harm to the defendant. See Brief of Amici Curiae Washington Legal Foundation and Allied Educational Foundation, in Support of Petitioner, at 16. WLF & AEF assert that because the seal prevents FCA defendants from learning the details of the allegations against them, a seal violation can leave defendants unprepared to respond to a sudden barrage of negative media coverage. See id. at 16–17. WLF & AEF argue that this case presents the perfect example, as the Rigsbys’ attorney deliberately violated the seal in order to create a frenzy of harsh media attention to put pressure on State Farm and damage its reputation. See id. at 18.
The United States, as amicus supporting the Rigsbys, counters that the FCA’s seal requirement is not intended to protect defendants from reputational harm, and therefore such harm is not a relevant consideration in the vast majority of cases. See Brief of Amicus Curiae United States, in Support of Respondent, at 26–27. Rather, the United States argues, Congress was concerned that defendants may benefit from being alerted to the existence of a government investigation and may change their behavior or make the government’s investigation more difficult. See id. at 27. The United States argues that the actual purpose of the seal requirement is to protect the interests of the government by permitting it to conduct its investigation before the defendant is alerted to the existence of the suit. See id. The United States concedes that there may be a rare situation in which a defendant’s reputational harm is relevant because of a unique injury caused by an intentional seal violation, but the United States argues this case is not one of those situations. See id. The United States notes that none of the three violations deemed relevant by the Fifth Circuit actually alerted the public to the existence of the Rigsbys’ suit, much less caused significant reputational harm. See id.
- Amy Howe, One New Grant, One CVSG, Two Summary Reversals, SCOTUS Blog (May 31, 2016).
- Greg Stohr, State Farm Gets U.S. High Court Hearing in Katrina Billing Case, Bloomberg (May 31, 2016).
- Evan Panich, Does Violation of the Seal Requirement Require Dismissal? Supreme Court Will Decide, McDermott Will & Emery (June 2, 2016).