Relator, Linda Nicholson, brought a False Claims Act lawsuit against a retired psychologist, a non-profit shelter for adolescent children, and a family-owned pharmacy for allegedly submitting claims to Medicaid for the drug Celexa which were not eligible for reimbursement because the drug was allegedly intended for off-label use. The Government moved to dismiss the case because the potential recovery was not large enough to justify the resources needed to litigate the case. The U.S. District Court in the Northern District of Illinois granted the Government’s motion. See United States ex rel. Nicholson v. Spigelman, Case No. 10 C 3361, 2011 WL 2683161 (N.D. Ill. July 8, 2011).
31 U.S.C. § 3730(c)(2)(A) of the False Claims Act provides: “The government may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.” The Circuit Courts are split on whether this provision gives the Government an unlimited right to dismiss any case it so desires.
The D.C. Circuit held that it does, stating that this section “‘gives the government an unfettered right to dismiss an action,’” rendering the government’s decision to dismiss essentially “‘unreviewable.’” Swift v. United States, 318 F.3d 250, 252 (D.C.Cir.2003). The District Court noted that dicta from the Fifth Circuit follows the D.C. Circuit.
The Ninth, Tenth, and Second Circuits, however, have used a two-part test: “(1) identification of a valid government purpose; and (2) a rational relation between dismissal and accomplishment of the purpose. If the United States satisfies the two-step test, the burden switches to the relator to demonstrate that the dismissal is fraudulent, arbitrary and capricious, or illegal.” United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir.1998).
The Seventh Circuit has not decided which standard applies, but the District Court found that dismissal was appropriate even under the Ninth Circuit test. In this case, Nicholson alleges actual damages of only $320 for five false claims, but has argued that a government investigation would reveal thousands of false claims. The Government argued that the cost of litigation would “cost the United States more in expenses than it can possibly recover” and that litigation would “require substantial government participation” that “would divert the government’s limited resources from more substantial and important investigations.”
Applying the two-part test, the District Court held that (1) “the government’s goal of minimizing its expenses is still a legitimate objective, and dismissal of the suit furthers that objective;” and (2) the government’s cost-benefit calculation cannot be deemed “arbitrary or capricious.” Essentially, the District Court reasoned that it was not arbitrary and capricious for the government to seek recovery from the deep pocket – the drug manufacturer Forest Laboratories – and forego litigation against potentially judgment proof defendants. The District Court stated: "[T]he three defendants in this case—a retired psychologist uninsured against fraud, a non-profit shelter for adolescent children, and a family-owned pharmacy—likely lack the resources to satisfy any reasonably substantial judgment. Thus, even if Nicholson has correctly assessed the magnitude and legal merit of this case, the government’s actual recovery is likely to be quite small."