On Tuesday, the Supreme Court issued an anxiously anticipated False Claims Act (“FCA”) decision in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby, holding that a violation of the statute’s seal requirement does not trigger automatic dismissal of qui tam suits by whistleblowers, or “relators.”  The Court reasoned that, although sanctions up to and including dismissal may be appropriate for seal violations depending on the circumstances, the FCA does not tie a relator’s right to bring a qui tam suit to compliance with the seal requirement. 

While dismissal is not automatic, the Court’s decision is unlikely to open the floodgates to qui tam plaintiffs disregarding the seal requirement to try to extort an early nuisance settlement from defendants fearing reputational damage.  Indeed, the Court took care to emphasize the district court’s inherent power to impose sanctions for seal violations, and qui tam plaintiffs and their attorneys will continue to face significant risk should they seek to flout this requirement.

The False Claims Act and the Seal Requirement

Initially enacted in 1863 to combat Civil War era fraud against the Union Army, the FCA, 31 U.S.C. §§ 3729–3733, imposes substantial penalties on individuals, businesses, and other organizations that knowingly, or with reckless disregard, submit false or fraudulent claims to the federal government for payment.  The statute has become one of the primary fraud-fighting tools available to the Department of Justice (“DOJ”), but it also has a qui tam enforcement provision that deputizes private parties known as “relators” (colloquially called whistleblowers) to bring FCA actions on the government’s behalf, with the government retaining the authority to intervene.  The FCA encourages relators and their attorneys to file qui tam actions by promising plaintiffs a significant share of any government recovery (from 15% to 30%, depending on the relator’s involvement).

The FCA establishes specific procedures for the relator to follow when filing a qui tam complaint, including a requirement that the complaint must be filed under seal.  Pursuant to the statute, the complaint must remain under seal for at least 60 days, with extensions often granted at the government’s request.  The FCA’s seal provisions advance several key policy goals that are critically important to both defendants and the federal government.  For example, from the government’s perspective, the seal requirement can help to maintain the integrity of ongoing DOJ investigations.  If FCA allegations overlap with allegations already under civil or criminal investigation, the seal bars the public revelation of a qui tam action that could tip off investigation targets when the inquiry is at a sensitive stage.  With respect to defendants, the seal requirement is a bulwark against the release of untested fraud allegations that, even if ultimately proven to be unfounded and the government declines to intervene, may still inflict grievous damage to a defendant’s reputation and finances.  Indeed, a key attribute of the seal requirement is that it enables the government to investigate whether the relator’s fraud allegations have any merit and to consider whether to intervene before a potentially inflammatory complaint is made public.

The Seal Violations in Rigsby

In April 2006, the qui tam complaint in Rigsby was filed under seal, as required by the FCA.  The relators alleged that State Farm had defrauded the government by falsely classifying wind damage caused by Hurricane Katrina as flood-related damage in order to shift responsibility for paying those losses from itself under general homeowner insurance policies to the government under federal government-backed flood insurance policies.  In clear violation of the seal, the qui tam plaintiffs’ attorney leaked the existence of the FCA complaint to, among others, the national news media.  The disclosures appear to have had the intended effect:  The media publicly aired the relators’ untested allegations of fraud, albeit without mentioning the qui tam suit.  Ultimately, the government declined to intervene and the then-unsealed case proceeded, prosecuted by the relators. 

The district court denied State Farm’s motion to dismiss based on the seal violations, the Fifth Circuit affirmed, and the ruling was appealed to the Supreme Court.  

The Supreme Court’s Decision

A unanimous Supreme Court upheld the lower courts’ rulings, finding that the FCA does not “enact so harsh a rule” as requiring mandatory dismissal for seal violations.  Instead, “the question whether dismissal is appropriate should be left to the sound discretion of the district court.”  The Court’s reasoning was threefold:

• First, even though the FCA mandates that a qui tam action “shall” remain under seal until a judge permits it to be made public, the statute does not specify any particular remedy for breaking the seal, and, in the absence of Congressional guidance, “the sanction for a breach is not loss of all later powers to act.”

• Second, because “the FCA has a number of provisions that do require, in express terms, the dismissal of a relator’s action . . . ., [i]t is proper to infer that, had Congress intended to require dismissal for a violation of the seal requirement, it would have said so.”

• Third, “it would make little sense to adopt a rigid interpretation of the seal provision that prejudices the government by depriving it of needed assistance from private parties” because the requirement was part of a broader set of reforms intended to encourage private enforcement, and the legislative history indicates the provision was meant to address the government’s concern that a relator’s complaint would tip off defendants of a pending investigation.

The Court did take note of the potential grave reputational harm that State Farm and other FCA defendants may suffer when qui tam plaintiffs or their attorneys break the seal, but said that, even without automatic dismissal, the full range of sanctions is available to a district court to remedy violations in its discretion, from dismissal to monetary penalties to attorney discipline.  However, the Court did not provide any guidance as to how the district court’s discretion should be exercised.  While noting that the test for dismissal set out in United States ex rel. Lujan v. Hughes Aircraft Co. appears to be appropriate in evaluating sanctions for seal violations, the Court expressly declined to address that issue, leaving it for other, later cases. 

Conclusion

While companies operating in the healthcare, financial services, defense, and other industries that are routinely targeted by qui tam plaintiffs and their attorneys may find little to celebrate about the Supreme Court’s ruling in Rigsby, the news is not all bad.  The Court’s ruling does nothing to remove the specter of dismissal and other serious sanctions for seal violations, which should continue to serve as a deterrent.  More importantly, the decision is a stark reminder that potential exposure to FCA liability is an unfortunate reality of doing business with federal and state governments.  Accordingly, organizations that may become the target of a sealed qui tam suit must move quickly in defense of the claim and to prepare to address the public relations fallout if and when the allegations are publicly disclosed.