In United States ex rel. Shepard, the United States District Court for the District of Colorado addressed the standard for reviewing a qui tam settlement in an intervened case and held that the government’s settlement decision is given great deference. This is important not only to the government but to FCA defendants, because cases like Shepard help prevent parties who are interested in a resolution from being held hostage by relators who are lobbying for an unwarranted recovery.

Shepard addressed a settlement of FCA claims arising from a dispute over a fence that was erected at Grand Junction Airport in Grand Junction, Colorado and paid for by the Federal Aviation Administration (FAA). The relators were two owners of hangars at the airport who alleged the Grand Junction Regional Airport Authority (airport authority) violated the FCA when it made false claims to the FAA in order to receive funding for the fence. After a two-year investigation, the government declined to pursue criminal charges but pursued a subset of relators’ civil FCA claims. The government intervened in the action solely against the airport authority and filed a motion requesting the court approve a proposed settlement between it and the airport authority; additional named defendants remained unaffected by the settlement. The relators’ objections to the settlement led to a fairness hearing.

At the hearing, the government argued that the highly deferential standard adopted in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Com., 151 F.3d 1139 (9th Cir. 1998) should apply to the settlement, whereas the relators argued the standards for judicial review of class action settlements should apply—the latter making settlements far more prone to court disapproval. Acknowledging a split of authority on this issue, the Shepard court concluded the government should have the same broad discretion to settle a case as it does to dismiss a case. After reviewing the government’s justifications for the settlement and the relators’ objections, the Shepard court applied the Sequoia Orange test and approved the settlement.

The court’s reasoning began with the FCA’s statutory text, “The Government may settle a [qui tam] action with the defendant notwithstanding the objections of the person initiating the action if the court determines, after a hearing, that the proposed settlement is fair, adequate, and reasonable under all the circumstances.” Noting that the Tenth Circuit had yet to clarify what the statute meant by “fair, adequate, and reasonable under all circumstances,” the court addressed this question. The government argued that the Sequoia Orange standard, used for review of FCA dismissals by the government, should likewise apply to qui tam settlements. Under this standard, the government must satisfy a two-part test: 1) identification of a valid government purpose and 2) a rational relation between dismissal and accomplishment of the purpose. Once these requirements are met, the burden shifts to the relator to show the dismissal was fraudulent, arbitrary and capricious, or illegal.

The relators argued that the standards for reviewing class action settlements under Federal Rule of Civil Procedure 23(e)(2) should apply. This standard requires that the settlement be “fair, reasonable, and adequate.” However, when reviewing Rule 23 settlements, the Tenth Circuit also considers additional factors: 1) whether the settlement was fairly and honestly negotiated; 2) whether serious questions of law and fact exist which would place the ultimate outcome of the litigation in doubt; 3) whether the value of an immediate recovery outweighs the mere possibility of future relief after protracted and expensive litigation; and 4) the judgment of the parties that the settlement is fair and reasonable.

The Shepard court determined that the Sequoia Orange standard was “more appropriate” for reviewing a qui tam settlement, because the government has primary responsibility for a qui tam case, including supervisory powers over the relator. Citing other decisions that stressed the government’s executive control over qui tam lawsuits, the Shepard court also pointed out that under Sequoia, the government may dismiss even a meritorious qui tam suit provided it shows a valid purpose rationally related to the dismissal. The court concluded by commenting that it saw no reason why the government should have broad discretion to dismiss a case, but not to settle it.