The Supreme Court's unanimous decision in State Farm Fire and Casualty Co. v. United States ex rel. Rigsby addresses sanctions for violating the seal provision of the False Claims Act (FCA).

The State Farm relators (whistleblowers) were insurance claim adjustors who worked for a company hired by State Farm to adjust Hurricane Katrina property damage claims. The claims at issue arose under Federal Government backed insurance policies that covered flood damage and general homeowner insurance policies that covered wind damage. The relator's complaint centered on allegations that State Farm had instructed adjusters to misclassify wind damage as flood damage in order to shift the ultimate insurance obligation to the federal government.

This insight addresses the potential impact of the Court's decision on FCA defendants, and begins with some background on the FCA.

Background on the False Claims Act

The FCA imposes civil liability for knowingly submitting to the federal government a false or fraudulent claim for payment or approval, or a false record or statement that is material to a false or fraudulent claim. Qui tam provisions which are set forth at 31 U.S.C. § 3730 allow private party whistleblowers, known as relators, to file a FCA action "for" and "in the name of" the United States. The goal of the qui tam provisions is to augment the Department of Justice's limited resources by encouraging private enforcement suits for fraud against the government.

The penalties for a violation are severe. A FCA defendant can be liable for treble damages, plus hefty civil penalties, plus attorney's fees and costs.

The United States, through the DOJ, can intervene at any time and take responsibility for proceeding with the qui tam suit. By statute, if the government intervenes, the district court can reward the relator between 15% and 25% of the proceeds or settlement. If the government declines to intervene, a district court can award the relator between 25% and 30% of the proceeds or settlement.

The DOJ intervenes in only about 25% of qui tam suits. Judgments and settlements are much higher when the DOJ intervenes. Since 1987, judgments and settlements have been $26 billion in cases where the DOJ intervened or otherwise pursued and less than $1 billion when the government did not intervene, even though the DOJ declines to intervene in the large majority of cases.

The key targets of qui tam relators and their counsel are the health care industry, government contractors, and federal grant recipients.

The State Farm case involved a qui tam filed under the seal provision. The FCA seal provision was added in 1986 to encourage more qui tam suits to support the government's efforts. Section § 3730(b)(2) states that "A copy of the complaint and written disclosure of substantially all material evidence and information the relator possesses shall be served on the government. The complaint shall be filed in camera and shall remain under seal for at least 60 days and shall not be served on the defendant until the court so orders." The qui tam seal provision allows the government time to investigate the relator's allegations and decide whether to intervene. According to the DOJ, Congress added the seal requirement at its request and solely for the DOJ's benefit in order to avoid tipping off an unknowing qui tam defendant. The DOJ often requests multiple time extensions beyond the initial 60-day seal period to conduct its investigation, sometimes extending the seal period for years. During this time, defendants must comply with government document requests issued through Civil Investigative Demands (CIDs).

The State Farm case

The specific issue in State Farm was whether a seal violation by a relator or her counsel requires automatic dismissal of the relator's qui tam suit. The Supreme Court asked whether "any and all violations of the seal requirement mandate dismissal."

In State Farm, the relators filed their qui tam suit in camera in April 2006 in Mississippi. As required by the statute they served the DOJ with their complaint and initial factual disclosure under seal. In January 2007, the district court partially lifted the seal to allow disclosure of the suit to an Alabama district court in a related matter. In August 2006, the district court fully lifted the seal.

The DOJ declined to intervene after investigating the relator's fraud allegations against State Farm. Prior to lifting of the full seal, the relators' counsel deliberately disclosed the suit and its allegations to several national media organizations, a member of Congress, and a public relations firm. In January 2011, State Farm moved to dismiss the suit on the ground that the seal had been violated deliberately. State Farm's motion to dismiss was denied.

The Fifth Circuit, affirmed the district court's denial of dismissal. The Fifth Circuit held that the DOJ has not been harmed because the violations came after partially lifting the seal; the violations not as severe as failing to file the suit at all under seal; and the violation was committed by the relators' counsel not relators themselves.

The Supreme Court granted certiorari and oral argument was held on November 1, 2016. On December 6, 2016, in a unanimous decision authored by Justice Kennedy, the Court held that dismissal for qui tam seal violations is not mandatory, but instead should be left to the discretion of a district court in each case. The Court further held that the district court did not abuse its discretion in the State Farm case despite the relator counsel's intentional violations of the seal requirement.

The Court's analysis:

· The FCA is not an act so harsh a rule that although the seal requirement is a mandatory rule, the statute says nothing about a remedy for a violation of that rule, and if Congress had intended dismissal for a seal violation, it would have said so in the statute. Id. at 6.

· Because the seal requirement was intended to protect the government's interest, it would make little sense to adopt a rigid interpretation that prejudices the government by depriving it of needed assistance from private parties. Id. at 7.

The opinion indicates that a seal violation does not mandate dismissal, but dismissal remains a possible form of relief available at the district court's discretion.

Insights

The Court's decision can potentially undermine the integrity of the FCA's seal provision. It may also undermine the DOJ's qui tam gatekeeper function. By not requiring dismissal for deliberate violations of the seal provision, the Court's decision may encourage some relator's counsel to publicly disclose details about the case to pressure defendants to settle before the DOJ decides whether to intervene. When government does not intervene, relator recoveries are much lower. Whistleblowers accordingly benefit by settling before a decision on intervention by the DOJ has been made. Defendants will want to mitigate financial and reputational harm flowing from bad publicity.

By encouraging early settlements before DOJ review, the decision may also risk short circuiting DOJ's ability to settle directly with the defendant even if the relator objects.

The Court's decision also fails to distinguish between negligent and intentional seal violations. A negligent violation would be, for example, where a relator's attorney doesn't even know about the seal requirement. This is different from a deliberate and egregious seal violation by an unscrupulous attorney or relator, as in the State Farm case. (In fact, Justice Alito commented that it would be difficult to imaging a worse example of a bad faith seal violation.)

In State Farm, the government argued the seal violation was "minor" compared to not filing suit under seal at all. However, it seems that a deliberate seal violation is far worse than an inexperienced attorney negligently failing to file a qui tam suit under seal.

The seal requirement is not just to protect the government's interest but also to protect the interests of the unknowing defendant who is the subject of unproven fraud allegations in a complaint that is supposed to be maintained under seal while the government investigates and decides whether the allegations are enough to merit DOJ intervention. The Senate report cited in the opinion states that sealing the initial private civil false claims complaint protects both the government and the defendant's interests, without harming those of the private relator.

Although a deliberate violation of the seal provision does not result in automatic dismissal, the remedy is still available at the district court's discretion. FCA defendants should also propose alternative remedies that fall short of dismissal in the event of a seal violation by relator's counsel.