On December 6, 2016, the Supreme Court ruled that the False Claims Act (“FCA”) does not require the dismissal of lawsuits brought by relators who violate the requirement that information regarding the FCA complaint (and alleged fraud) not be disclosed to anyone (other than the district court and Department of Justice) and remain “under seal.” In State Farm Fire & Casualty Co. v. United States ex rel. Rigsby , the Court held that district courts retain discretion to fashion an appropriate remedy based on the facts of the case.
The FCA imposes liability on anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” Notably, in order to encourage citizens to ferret out fraud, section 3730(b) of the FCA authorizes private citizens (or “relators”) to bring civil actions on behalf of the government, and retain a portion of any recovery. In doing so, however, the FCA imposes certain requirements on relators. The State Farm case focused on the “seal” requirement, which requires that complaints filed by relators “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.”
In State Farm, the Supreme Court addressed an important question for the government contract community: “What standard governs the decision whether to dismiss a relator’s claim for violation of the FCA’s seal requirement, 31 U.S.C. § 3730(b)(2)?” State Farm argued that respondent’s former counsel had, on multiple occasions, willfully violated the seal by leaking embarrassing stories to the press about fraud allegations and by revealing information about the case to a congressman, who publicly criticized State Farm. State Farm asked the Court to reverse the Fifth Circuit, which had not required the district court to dismiss the case for violation of the seal.
At the Supreme Court, State Farm relied on a Sixth Circuit precedent and argued that the statute’s text (“shall be filed in camera . . . shall remain under seal”) and history require a per se rule that any violation of the seal mandates dismissal. In the alternative, State Farm asked Court to adopt the balancing test used by the Second Circuit, which considers the interests of the government as well as defendants. In contrast, the Ninth Circuit balancing test, which the Fifth circuit had adopted in this case, only weighed the interests of the government.
The Court held that the “plain language” of the FCA does not require mandatory dismissal. The Court reasoned that notwithstanding the use of the word “shall,” the FCA did not include a specific remedy for violation of the seal, and that “[i]n the absence of congressional guidance regarding a remedy . . . the sanction for breach is not loss of all later powers to act.” The Court also held that the “structure” of the FCA indicated that the sanction for breach of the seal requirement does not mandate dismissal. The Court noted that other provisions of the FCA, such as the public disclosure bar, included a specific remedy of dismissal, and concluded that Congress “knew how to draft the kind of statutory language that petitioner seeks to read into section § 3730(b)(2).” Finally, the Court refused to impose a particular nationwide standard, holding that “whether dismissal is appropriate should be left to the sound discretion of the district court.”
The Court, in its concluding remarks, sought to address the concerns expressed by State Farm and the amici curiae, that failure to require mandatory dismissal for violation of the seal would encourage relators to harass defendants into settling claims by leaking embarrassing stories to the news media. The Court noted that “sanction remains a possible form of relief.” Nonetheless, given the extreme set of facts and strong evidence of bad faith in this case, this reassurance is unlikely to provide much comfort for government contractors.