The False Claims Act (“FCA”) specifically authorizes the United States to dismiss suits brought by relators under the FCA's qui tam provisions. 31 U.S.C. § 3730(c)(2)(A) (“[t]he 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”). Many have been waiting to see whether the Government would employ that authority more frequently following the Justice Department's recently issued “Granston Memo,” which reminds government attorneys of its dismissal powers and directs them to apply several factors in evaluating whether to dismiss qui tam actions. See January 10, 2018 U.S. Department of Justice Memorandum from Michael D. Granston re: Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A). The Justice Department had come under criticism as the pace of meritless qui tam suits had increased while government attorneys, in the main, declined to exercise their statutory authority and responsibility to step in and dismiss the actions to avoid both the unfair burden on defendants and the resulting waste of government resources in overseeing and responding to discovery requests in those frivolous suits. Not surprisingly, the very first “dismissal” ground to be considered under the Granston Memo is the need to curb meritless qui tam suits, while another ground is ”preserving government resources.” Id. at 3, 6.
While the Government’s statutory dismissal authority has been in place since the FCA’s 1986 amendments, its relative disuse over the years has led to underdeveloped and conflicting law over its application. Although the Government is the real party in interest in qui tam cases, even where the United States declines to intervene, the courts disagree over whether the Government has unfettered discretion to dismiss cases.
This disparate treatment by the courts is exemplified by two recent district court decisions issued on the same day. First, in a qui tam case arising out of federally insured mortgages, a district court denied the Government’s dismissal motion after criticizing the Justice Department for failing to show that it had sufficiently investigated the allegations before seeking to end the qui tam suit. See United States v. Academy Mortgage Corp., No. 16-cv-02120-EMC, 2018 WL 3208157 (N.D. Cal. June 29, 2018). Second, in United States ex rel. Maldonado v. Ball Homes, LLC, No. 5:17-379-DCR, 2018 WL 3213614 (E.D. Ky. June 29, 2018), without having to make any substantive showing, the Government succeeded in dismissing a meritless qui tam suit involving alleged false statements in connection with federally insured residential mortgages. The principal reason for the opposite outcomes in these two cases rests with the differing judicial review standards applied by each. As a result, in those jurisdictions where the courts are unwilling simply to defer to the Government’s dismissal discretion, the Government’s ability to fully implement the mandates of the Granston Memo may be impaired.
Two Dismissal Standards
Two different standards for evaluating these motions to dismiss have developed under Section 3730(c)(2)(A). First, in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998), the Ninth Circuit held that the “hearing” requirement in section 3730(c)(2)(A) authorizes judicial review of the dismissal decision, and the court adopted a rational relation standard for the exercise of the Government’s dismissal of a qui tam suit. In particular, the court imposed a two-step test for dismissal: (1) identification of a valid government purpose, and (2) a rational relation between that purpose and dismissal. Once the Government makes this showing, the burden shifts to the relator to demonstrate that dismissal is “fraudulent, arbitrary and capricious, or illegal.” Id. at 1145.
Subsequently, however, in Swift v. United States, 318 F.3d 250, 252, 253 (D.C. Cir. 2003), the D.C. Circuit specifically rejected the more searching standard set by the Ninth Circuit. Instead, the D.C. Circuit held that the Government has an “unfettered right to dismiss” the qui tam action, subject to a possible exception for “fraud on the court.” The court found support for this holding in the statutory language, which suggests the absence of judicial constraint, and in the presumption that the Government’s decisions not to prosecute are unreviewable. The court interpreted the hearing requirement as simply giving the relator “a formal opportunity to convince the Government not to end the case.” Id. at 253.
The Contrasting Academy Mortgage and Maldonado Decisions
This conflicting judicial review standard is acknowledged by the Justice Department. See Granston Memo at 3 (“The FCA does not . . . provide a standard of review for evaluating such a request for dismissal. As a result, courts have developed two differing standards.”) and 7 (“[W]hile the Department’s position has been that the appropriate standard for dismissal under section 3730(c)(2)(A) is the ‘unfettered’ discretion standard adopted by the D.C. Circuit rather than the “rational basis” test adopted by the 9th and 10th Circuits, we should argue that even the latter standard was intended to be a highly deferential one.”). This conflict is on full display in two June 29, 2018 district court decisions.
In Academy Mortgage, a district court in the Ninth Circuit was compelled to apply the Sequoia Orange standard and denied the Government’s dismissal showing. In doing so, the court focused on the adequacy of the government’s investigation, and concluded that “the Government did not perform a full investigation of the amended complaint.” 2018 WL 328157, at *1. Even though the Government submitted a declaration from a Justice Department attorney purporting to justify its claim that continued qui tam litigation would lead to a waste of limited Government resources, the Court pointed to the relator’s “undisputed” evidence that the Government “performed only a limited investigation” of the original complaint and appeared not to have “fully investigated” the expanded allegations in the amended complaint. Id. This evidence, and the relator’s assertion that her amended allegations and expanded claims “alleging nationwide misconduct over six years,” persuaded the court that the Government should have further investigated the claims added after the Government declined to intervene to “assess the potential recovery” before moving to dismiss. Id. at *1, 2. For example, the court noted that relator’s counsel interviewed 17 additional witnesses to expand the allegations in the original complaint to encompass her nationwide claims, and the court reasoned that because the government’s resources were “considerable,” it could have, and should have, “conducted a similar investigation.” Id. at *2.
In Maldonado, on the other hand, the court denied the relator’s motion for an evidentiary hearing and granted the Government’s motion to dismiss, adopting the Swift standard while concluding that even under Sequoia Orange’s more searching standard the motion to dismiss should be granted. The court noted that, even in a monitoring role, the Government’s participation in the qui tam suit as the real party in interest would require it to invest its resources in the suit from the pleading stage to discovery and mediation or settlement. However, the court also observed that the Government had extensively investigated and rejected the relator’s claim that defendants’ alleged false statements led to any false claim.
The Government obviously has a path forward in the Academy Mortgage case and should be able to garner the evidence necessary to meet the Sequoia Orange standard. But the fundamental legal question is whether any such showing is actually required by the statute. Given that the Supreme Court has made clear that the United States remains the real party in interest in qui tam actions, and given that the FCA places no burden or obligation on the Government to justify or explain to a federal court its rationale for a dismissing an action brought in its name, the D.C. Circuit’s “unfettered” discretion standard is better reasoned and supported under the law. Courts should not be imposing new impediments to the Government’s use of its statutory dismissal authority.