Leaked DOJ memo instructs government attorneys to consider dismissing certain False Claims Act qui tam actions.
On January 10, 2018, Michael D. Granston, Director of the Commercial Litigation Branch of the Department of Justice’s (DOJ) Fraud Section, issued an internal memorandum encouraging DOJ attorneys to consider using the government’s authority to dismiss False Claims Act (FCA) qui tam cases that “lack substantial merit.”1 The confidential memo, recently leaked to the press, sets forth seven factors for government lawyers to consider when evaluating whether to seek dismissal of a qui tam case.
However, whether DOJ attorneys will in fact regularly dismiss qui tam cases remains to be seen. Even a small shift in DOJ’s willingness to exercise its rarely invoked dismissal authority would be a welcome (and long overdue) development for FCA defendants. Declined qui tam cases rarely result in any recovery for the government, yet FCA defendants suffer significant financial and reputational harm by having to litigate a government fraud suit. If the memo amounts to a real policy change, DOJ may finally begin playing what it has identified as its “important gatekeeper role” in FCA actions.2
The Rise of Declined False Claims Act Cases
One unique aspect of the FCA is its qui tam provisions, which authorize whistleblowers, known as relators, to file an FCA suit on behalf of the government.3 Relators receive a share of any recovery, thus acting as private bounty hunters.4 Even if the government investigates and declines to intervene in a qui tam law suit, the FCA authorizes relators to prosecute the litigation on their own, entitling them to a larger share of any recovery. 5
In part because of the considerable financial incentive to file suit, the number of FCA cases filed by qui tam relators has skyrocketed in recent years.6 But the value (and legality)7 of declined FCA qui tam suits has been hotly debated. Despite the explosion in the number of qui tam suits filed since the qui tam provisions’ expansion in 1986, the rate of government intervention “has remained relatively static.”8
Even though the vast majority of FCA cases filed are non-intervened qui tams, non-intervened cases only account for approximately 4.5% percent of the monies recovered under the FCA in the past 10 years.9 While the government’s official position is that declining to intervene is not a statement on the merits of a qui tam action, courts (either explicitly or implicitly) often interpret it as such.10
Nevertheless, relators frequently continue to prosecute declined actions, 11 forcing government contractors to face reputational harm and expend tremendous resources litigating cases with little or no validity. Defendants often spend hundreds of thousands if not millions of dollars on discovery alone. And although defendants often prevail in these suits, they are not reimbursed for the costs and fees required to do so. This dynamic leads many defendants to settle FCA cases — even those without merit.
The Government’s Rarely Exercised 31 U.S.C. § 3730(c)(2)(A) Dismissal Authority
In addition to the government’s power to intervene and take over the prosecution of a qui tam action, the government can unilaterally “dismiss [a qui tam] action notwithstanding the objections” of a relator.12 The relator must only be “notified by the Government of the filing of the motion” and “provided with an opportunity for a hearing on the motion.”13
The statute does not set forth a standard by which the court is to review the government’s dismissal motion.14 As the memo recognizes, there is a circuit split in the standard of review that courts apply to relator challenges to dismissals. The Ninth Circuit requires the government to identify a “valid government purpose” that is rationally related to dismissal.15 The D.C. Circuit, on the other hand, provides the government an “unfettered right” to dismiss a qui tam action.16
Despite DOJ’s broad discretion to dismiss qui tam suits, the government has historically used the power “sparingly,”17 preferring instead to decline intervention without affirmatively moving for dismissal.
Seven Factors for Evaluating When to Seek Dismissal of Qui Tam Actions
The memo explains that DOJ “plays an important gatekeeper role in protecting the False Claims Act, because in qui tam cases where [DOJ] decline[s] to intervene, the relators largely stand in the shoes of the Attorney General. That is why the FCA provides [DOJ] with the authority to dismiss cases.”18 The memo further emphasizes the “significant government resources” expended in declined qui tam cases in monitoring cases and participating in discovery.19 Unmeritorious cases may also “generate adverse decisions that affect the government’s ability to enforce the FCA.”20
The memo sets forth seven factors for government attorneys to use as the basis for dismissal of qui tam actions, noting this list is “non-exhaustive.”21 Helpfully for defendants, the memo provides examples of cases the government has dismissed under each factor. The memo further instructs that the bases for dismissal described in the seven factors should be asserted separately and in addition to other bases for dismissal such as the first to file and public disclosure bars.22
The seven factors and the analysis to determine whether they apply are:
1. Meritless Qui Tams: Does the case lack merit, either on its face because of a defective legal theory or frivolous factual allegations, or as a result of the government’s investigation of the relator’s allegations?
2. Parasitic or Opportunistic Qui Tams: Does the action duplicate a pre-existing government investigation, adding no useful information to the investigation?
3. Actions Interfering with Agency Policies and Programs: Will the case interfere with an agency’s policies or the administration of its programs?
4. Controlling Litigation Brought on Behalf of the United States: Would the case create unfavorable precedent?
5. Safeguarding Classified Information and National Security Interests: Does the case involve classified information, particularly in the contexts of intelligence agencies or military procurement contracts?
6. Preserving Government Resources: Are the government’s expected costs, including responding to discovery and monitoring the litigation, likely to exceed any expected gains?
7. Addressing Egregious Procedural Errors: Is the relator frustrating the government’s efforts to conduct a proper investigation?
Takeaways for FCA Defendants
FCA defendants seeking to take advantage of the memo’s guideposts for dismissal should consider the following points:
• Rather than simply asking DOJ to decline intervention, FCA defendants should urge DOJ to seek dismissal of a qui tam action. Defendants should reframe their key arguments about the factual allegations and legal theories in the case to track one or more of the factors outlined in the memo. Presentations requesting dismissal can be bolstered by analogizing the case at hand to the case law included in the memo under each factor. Rather than pointing to the significant costs and reputational harm faced in litigating meritless suits, defendants generally will be better served by focusing on the memo’s seven guideposts.
• There may be instances when an FCA defendant would benefit from seeking a traditional dismissal rather than a dismissal under 31 U.S.C. § 3730(c)(2)(A). A weak qui tam pleading may lead to a quick FRCP 12(b)(6) dismissal and make good law that will deter future FCA suits. The court may opt to rule on the papers without a hearing, whereas a motion to dismiss by the government will provide the relator an opportunity for a hearing in front of the judge.23
• Defendants should closely monitor further developments in case law ruling on government dismissal motions. If DOJ does begin dismissing more qui tam cases, there will be an attendant increase in case law reviewing those decisions — perhaps leading to a wider circuit split regarding the appropriate standard for dismissal. FCA defendants should keep in mind case law from the relevant circuit when evaluating the likelihood of dismissal.
If DOJ does begin using its dismissal power regularly, government contractors in some instances may be spared the high costs of litigating — and sometimes settling — meritless qui tam suits. The next few years will be telling as to the memo’s practical effect: the government will keep statistics as to the number of qui tam complaints dismissed upon motion by the United States (and will hopefully include those in DOJ’s annual fraud statistics).24