On December 6, 2016, the Supreme Court determined in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby that violation of the statutorily mandated seal requirement, 31 U.S.C. § 3730(b)(2), in a qui tam False Claims Act case does not automatically require dismissal, but instead the district court has discretion to determine the appropriate sanction under the circumstances – whether it be dismissal or a less severe sanction. See here for Arent Fox’s past coverage of the case.

In an opinion delivered by Justice Kennedy, a unanimous Supreme Court held that the District Court did not abuse its discretion by denying State Farm’s motion to dismiss. Notably, although the Court rejected an automatic-dismissal rule, it did not adopt any particular standard by which a district court should determine whether dismissal, or another sanction, is appropriate for violation of the seal requirement. Instead, the Court analyzed whether the District Court abused its discretion in not granting dismissal and determined that the court did not do so. The Court therefore resolved a split on whether violation of the seal mandates dismissal, but left for future cases the exact standard to apply in determining whether dismissal is warranted.

District Court Denies Motion to Dismiss for Seal Violation

As discussed in our last post about the case, in a sealed complaint filed under the qui tam provisions of the FCA, former insurance adjusters (the relators) alleged that State Farm had submitted false claims for payment to the federal government by misrepresenting wind damage caused by Hurricane Katrina as flood damage. Flood damage would be covered under the federal National Flood Insurance Program; wind damage would be covered by the State Farm homeowners’ policies.

While the complaint was under seal, the relators’ counsel violated the FCA’s seal requirement by revealing the existence and contents of the complaint to national news organizations, including ABC, the Associated Press, and The New York Times. State Farm’s motion to dismiss the complaint for violating the seal requirement was denied by the District Court, based on the Ninth Circuit’s discretionary three-factor test set forth in United States ex rel. Lujan v. Hughes Aircraft Co., 67 F.3d 242, 245-46 (9th Cir. 1995). The Lujan test considers the harm to the government from the violations, the severity of the violations, and evidence of willfulness or bad faith in determining whether dismissal is an appropriate sanction. The Second and Fourth Circuits, like the Ninth Circuit, had also adopted discretionary tests. See Smith v. Clark/Smoot/Russell, 796 F.3d 424, 429-30 (4th Cir. 2015); United States ex rel. Pilon v. Martin Marietta Corp., 60 F.3d 995, 998-1000 (2d Cir. 1995).

On appeal, the Fifth Circuit affirmed the District Court’s ruling and endorsed the Lujan test. See United States ex rel. Rigsby v. State Farm Fire & Cas. Co., 794 F.3d 457 (5th Cir. 2015). State Farm then petitioned the Supreme Court for a writ of certiorari, which was granted over the Solicitor General’s opposition.

Supreme Court’s Unanimous Decision to Affirm

On December 6, 2016, the Supreme Court unanimously affirmed the Fifth Circuit’s decision, upholding the District Court’s denial of State Farm’s motion to dismiss.

At the outset, the Court rejected the automatic-dismissal rule proposed by State Farm, stating that “[t]he FCA does not enact so harsh a rule.” Slip op. at 6. The Court acknowledged that the seal requirement is “a mandatory rule the relator must follow,” but the Court observed that the FCA “says nothing, however, about the remedy for a violation of that rule.” Id. The structure of the FCA and the purpose of the requirement, the Court opined, both support a discretionary test. Examining the FCA’s structure, the Court explained that Congress used express language mandating dismissal for violations of the public-disclosure bar and the first-to-file bar, and thus the same limitation should not be inferred for the seal requirement—which includes no such language. The Court also noted 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,” given that the seal requirement was intended to protect the government’s interests. Id. at 7.

Next, the Court held, in two short paragraphs, that “the District Court did not abuse its discretion by denying [State Farm’s] motion [to dismiss], much less commit plain error.” Id. at 10. The Court concluded, “[i]n general, the question whether dismissal is appropriate should be left to the sound discretion of the district court.” Id. Declining to adopt a multi-factor test, the Court nevertheless seemed to approve of the Lujan factors, stating, “[w]hile the factors articulated in [Lujan] appear to be appropriate, it is unnecessary to explore these and other relevant considerations. These standards can be discussed in the course of later cases.” Id.

Finally, the Court addressed State Farm’s argument that defendants can suffer reputational harm when the seal requirement is violated. Importantly, the Court clarified that, “even if every seal violation does not mandate dismissal, that sanction remains a possible form of relief.” Id. The Court then endorsed other possible sanctions, adding, “District Courts have inherent power, moreover, to impose sanctions short of dismissal for violations of court orders. Remedial tools like monetary penalties or attorney discipline remain available to punish and deter seal violations even when dismissal is not appropriate.” Id. Because State Farm had not requested any sanction other than dismissal, though, the Court held that “the question whether a lesser sanction is warranted is not preserved.” Id.

Defendants Should Continue to Consider All Options When Faced with Seal Violations

Although violation of the seal does not mandate dismissal, the Supreme Court left open the possibility of dismissal or other sanctions as a result of a bad faith violation of the seal. Indeed, in dicta the Court suggested that had the District Court granted State Farm’s motion, dismissal due to the “questionable conduct” of the relator’s prior attorney might not have been reversible error. A defendant that is subject to an FCA complaint brought under the qui tam provisions thus should remain vigilant of the seal requirement, determine whether the relator has complied with the requirement, and seek all available sanctions, including but not limited to dismissal, if the relator or relator’s counsel acted willfully or in bad faith by impermissibly violating the seal.

The Court’s decision to not provide or endorse a test for determining when dismissal is appropriate means that while future courts after Rigsby may apply a multi-factor test—like the one announced in Lujan—when determining whether to impose dismissal or another sanction following a violation of the seal requirement, the focus on review will remain on whether the district court abused its discretion in imposing (or not imposing) the relevant sanctions. As a result, future requests for sanctions for violation of the seal requirement should not only address the multi-factor test under Lujan, but also the relevant test for imposition of sanctions by the district court.