On December 6, 2016, the US Supreme Court issued a unanimous decision in the case of State Farm Fire & Casualty Co. v. U.S. ex rel. Rigsby, holding that a violation of the False Claims Act's (FCA) seal provision does not necessarily mandate dismissal of a private party's lawsuit. The Court resolved a circuit split over the question, adopted the majority position, and held that "[t]he FCA does not enact so harsh a rule." Instead, the Court explained, "[i]n general, the question whether dismissal is appropriate should be left to the sound discretion of the district court." But even though dismissal is not automatically required, dismissal and lesser sanctions "remain a possible form of relief" if seal violations cause "reputational harm" to FCA defendants. In the end, the Court declined to decide what standard district courts should use when considering remedies for seal violations, expressly leaving that for later cases to resolve.
Under the FCA's "qui tam" provisions, a private party known as a "relator" can file a suit on the Government's behalf, alleging fraud against the United States; in the event of a monetary judgment or settlement, the relator can share in the proceeds.
However, relators must follow certain procedures when filing their qui tam complaints. At issue in Rigsby was the FCA's seal requirement, which provides that "[t]he complaint shall be filed in camera, shall remain under seal for at least 60 days, and shall not be served on the defendant until the court so orders."
At the time of Hurricane Katrina, petitioner State Farm Fire & Casualty Company (State Farm) issued two insurance policies pertinent to this case: flood insurance policies with payments backed by the federal government, and general homeowner's policies backed by State Farm. Two former State Farm contract claims adjustors alleged that State Farm had instructed them and others to misclassify wind damage as flood damage, supposedly in order to pass the cost of claims along to the Government. In April 2006, these adjustors (the relators) filed an FCA complaint under seal in Mississippi federal district court. The district court extended the original 60-day seal on several occasions, and in January 2007, it partly lifted the seal to share the complaint with another court hearing similar allegations. In the August 2007, the district court unsealed the case in its entirety, and soon after, the Government declined to intervene in the action, leaving the relators to litigate the case.
In 2006, before the district court partly lifted the seal, the relators' then-attorney sent an email to journalists at ABC, the Associated Press, and the New York Times, revealing the complaint's existence and sharing a sealed evidentiary filing. These press outlets then ran stories about the fraud allegations but did not reveal the existence of the FCA suit. The relators also met with a Mississippi Congressman who later made public remarks about the fraud allegations, again without mentioning the FCA suit.
In 2011, State Farm moved to dismiss the qui tam complaint based on these seal violations. The district court denied State Farm's motion. In doing so, it applied a three-factor balancing test derived from Ninth Circuit's 1995 decision in United States ex rel. Lujan v. Hughes Aircraft Co.,[[n:67 F.3d 242, 245-47 (9th Cir. 1995).]] weighing the (1) actual harm to the government, (2) the severity of the seal violations, and (3) evidence of bad faith. The case then went to trial on a claim for one damaged home, and resulted in a verdict for the relators.
On appeal, the Fifth Circuit affirmed the denial of State Farm's motion to dismiss. The appeals court acknowledged the circuit split concerning the appropriate remedy for a seal violation, but rejected a mandatory dismissal rule in favor of the district court's multi-factor balancing approach.
The Supreme Court affirmed the denial of the motion to dismiss. It cited three reasons for rejecting a rule mandating dismissal for any FCA seal violation. First, although Congress imposed the seal requirement as a mandatory rule that relators must follow, the statutory text is otherwise silent about the remedy for a violation of that rule.
The Court concluded that "[i]n the absence of congressional guidance regarding a remedy, although the duty is mandatory, the sanction for breach is not loss of all later powers to act."
Second, the Court concluded that the FCA's statutory structure shows that a seal violation does not compel dismissal in every case. The Court noted that the FCA contains several provisions that expressly require dismissing a relator's action under certain conditions, such as the first-to-file bar and the bar on claims against members of the military or the Government.
By contrast, the seal provision lacks such express language, so the Court refused to infer that Congress intended to mandate dismissal for any violation of that provision.
Finally, the Court found that a rule mandating dismissal would undermine the purpose of the seal provision, which was deemed to primarily protect "the Government's interests."
The Court concluded that the seal provision was enacted as part of reforms in the 1980s that were designed to "encourage more private enforcement suits," at a time when a lack of Government resources was undermining effective FCA enforcement. The Court concluded that "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." The Court observed that the Government submitted a brief as amicus curiae sharing this view.
The Court also rejected State Farm's second argument: that the district court failed to consider the proper factors when declining to dismiss the complaint. Without articulating what factors should have been considered, the Court held that "[i]n general, the question whether dismissal is appropriate should be left to the sound discretion of the district court."
And although the Court suggested that the Ninth Circuit's Lujan factors "appear to be appropriate," it declined to endorse any specific test because it was "unnecessary to explore these and other relevant considerations." Instead, the Court was content to let the standard evolve through later cases.
The Court concluded by recognizing that "even if every seal violation does not mandate dismissal, that sanction remains a possible form of relief."
The Court further acknowledged that district courts have "inherent power" to impose lesser sanctions as well, including monetary penalties or attorney discipline to punish and deter seal violations. In this case, however, the Court observed that the defendant did not request such lesser sanctions.
Rigsby's refusal to require dismissal for any seal violation was unsurprising. All but one of the circuit courts to consider the question had already opted for a multi-factor balancing test instead of a mandatory dismissal rule.
Nonetheless, despite Rigsby's focus on how the FCA's sealing requirement primarily serves the Government's interests, the decision also offers guidance to FCA defendants seeking to punish and deter relators from violating the seal.
Most importantly, Rigsby recognized that dismissal remains a permissible sanction for seal violations that cause "reputational harm" to defendants.
The Supreme Court commented that given the "questionable conduct" by relators' former attorney, including leaking the sealed materials to the press and making improper payments to relators, "it well may not have been reversible error had the District Court granted the motion [to dismiss] . . . . " Because the Court saw no error in relying on the Ninth Circuit's Lujan factors, district courts will likely start with those factors when assessing future arguments for dismissal over seal violations. However, Rigsby conspicuously refused to endorse Lujan outright, giving FCA defendants some leeway to encourage adapting the Lujan test to unique circumstances. The Court also gave renewed life to the doctrine of "inherent authority," citing a district court's inherent power to impose monetary and punitive sanctions for litigation misconduct.
Ultimately, Rigsby emphasized a district court's broad discretion to fashion remedies for violations of the FCA's sealing requirement. The Court's emphasis on how the seal provision protects the Government suggests that FCA defendants seeking dismissal for seal violations should ascertain whether the Government is aligned with such a request; if not, defendants should emphasize why other considerations nonetheless warrant dismissal. For example, defendants might appeal to the need to protect the integrity of judicial proceedings, and seek a criminal contempt finding for egregious violations of a court's own order to seal the case. Rigsby's minimalist decision has thus left the door open for FCA defendants to argue that district courts should be willing to implement creative sanctions for blatant violations of Congress's sealing requirement.