On November 1, 2016, the Supreme Court heard oral arguments in State Farm and Casualty Co. v. United States ex rel. Rigsby on the question of what standard should govern the decision whether to dismiss a relator’s claim for violation of the False Claims Act’s (“FCA”) seal requirement, which mandates that any FCA action brought by a whistleblower be filed with the court under seal and not publicly disclosed until the government has had an opportunity to investigate the allegations in the complaint and determine whether to intervene. This is the third year in a row that the Court has heard a case involving the FCA and, while Rigsby is not likely to be a blockbuster ruling like last year’s implied certification decision in Escobar (description available here), the case presents an opportunity for the Court to address a three-way circuit split.
When deciding on the standard that should govern, the Court will have to weigh competing policy considerations. On the one hand, relators and their counsel should not be allowed to act with impunity by violating the seal in bad faith in order to gain a tactical advantage in settlement talks. At the same time, the Court during the argument seemed to recognize that the government only has the resources to intervene in select cases and so the government relies heavily on relators to pursue recoveries. As such, the government’s interests could be harmed if a relator is automatically dismissed from a case because of an insignificant or technical violation of the seal. Indeed, the Rigsby case illustrates the tension between these competing policy considerations. Here, relators’ counsel violated the seal in bad faith, but he then withdrew from the case, and the relators went on to win a judgment against State Farm. Should that violation have caused the relators’ action to be dismissed altogether? If not, was any type of sanction warranted? Those questions and others were before the Court at oral argument.
The Seal Violation in Rigsby
The Rigsby case arises from the aftermath of Hurricane Katrina. Sisters Kerri and Cori Rigsby, the relators, worked as claims adjusters at E.A. Renfroe, which had been hired by State Farm to inspect damage to home owners’ properties on the Mississippi coast and adjust their insurance claims. According to the Rigsby sisters, State Farm fraudulently classified many losses as flood damage rather than wind damage because water damage claims would be covered by the federal flood-insurance program administered by FEMA. The Rigsbys filed a qui tam complaint under seal, as required by 31 U.S.C. §3730(b)(2) of the FCA.
The Rigsby sisters were represented by plaintiffs’ attorney Richard Scruggs, a prominent trial attorney who went on to serve prison time on bribery charges. (Scruggs was purportedly the inspiration for John Grisham’s novel the King of Torts because of his successes litigating asbestos and tobacco cases). Similar to the tactics he used when litigating class action cases, Scruggs attempted to use the media to shape public opinion to pressure State Farm into a settlement while the case was still under seal. In what all parties agreed to be an intentional violation of the seal requirement, Scruggs disclosed the sealed filing to a member of Congress and various national news organizations, including ABC, CBS, and the New York Times, in an effort to generate negative media coverage against State Farm.
When the complaint was later formally unsealed by the district court, State Farm moved to have the case dismissed on the grounds that the relators’ counsel had repeatedly and intentionally violated the FCA seal requirement. The district court declined to dismiss relators’ complaint, and the case proceeded to a bellwether trial, in which the jury found that State Farm had violated the FCA. The jury found that the federal government had been defrauded in the amount of $250,000, and after statutory trebling and penalties, State Farm was ordered to pay $758,000 in damages. State Farm appealed to the Fifth Circuit, where the question about the standard for dismissal due to a violation of the seal requirement was a matter of first impression within the circuit.
The Circuit Split
31 U.S.C. § 3730(b)(2) provides that a copy of the relator’s complaint and written disclosure of material evidence shall be served on the government under seal, shall remain under seal for at least 60 days, and not be served on the defendant until so ordered by the court. As described by the Fourth Circuit in Am. Civil Liberties Union v. Holder, Congress adopted the 60–day period for several reasons:
(1) to permit the United States to determine whether it already was investigating the fraud allegations (either criminally or civilly); (2) to permit the United States to investigate the allegations to decide whether to intervene; (3) to prevent an alleged fraudster from being tipped off about an investigation; and, (4) to protect the reputation of a defendant in that the defendant is named in a fraud action brought in the name of the United States, but the United States has not yet decided whether to intervene.
673 F.3d 245, 249–50 (4th Cir. 2011) (citing S. Rep. No. 99–345, at 24–25 (1986)). The statute does not specify, however, what if anything should happen if the seal is violated. Federal courts faced with that issue have applied three tests:
- a per se rule that mandates dismissal. See U.S. ex rel. Summers v. LHC Grp., Inc., 623 F.3d 287, 298 (6th Cir. 2010);
- a rule that considers whether the violation frustrates the congressional goals served by the requirement. See, e.g., U.S. ex rel. Pilon v. Martin Marietta Corp., 60 F.3d 995 (2d Cir. 1995); and
- a balancing test that focuses on whether the violation actually harms the government. See, e.g., U.S. ex rel. Lujan v. Hughes Aircraft Co., 67 F.3d 242 (9th Cir. 1995).
The Ninth Circuit’s balancing test weighs three factors to evaluate whether dismissal is proper: (1) whether the disclosure actually harmed the government; (2) the nature and severity of the violation; and (3) the presence or absence of bad faith or willfulness.
In Rigsby, the Fifth Circuit acknowledged the divergent opinions of the Second, Sixth, and Ninth circuits on the issue, and opted to apply the Ninth Circuit’s three-factor balancing test. The court concluded that because State Farm was not tipped off about the complaint, the violation did not harm the government. The court reasoned that the violation was not severe because the media did not publicize the existence of the case under seal. With respect to the final factor, bad faith, the court acknowledged that the Rigsbys’ counsel acted in bad faith, but it declined to impute his conduct to the Rigsbys. In sum, the Fifth Circuit held that the factors weighed in favor of the Rigsbys, and that dismissal was not warranted. On May 31, 2016, the Supreme Court agreed to review the case.
Argument Before the Supreme Court
Arguing before the Court on behalf of petitioner State Farm, Kathleen Sullivan encouraged the Court to adopt a per se rule that violations of the seal requirements mandate dismissal. She pointed out that the seal requirements are quite simple—the relator must file under seal, serve only the government, and maintain the seal until it is lifted. Sullivan asserted that, in spite of the simplicity of these requirements, the Rigsbys clearly and deliberately violated them in bad faith without consequence. In such a case, Sullivan argued that dismissal was the only appropriate sanction, and that the “toothless” balancing standard used by the Fifth Circuit invited “open season on deliberate, bad faith leaks to the press” because of the difficulty of showing government harm.
The justices were quick to point out that the statutory purpose of the seal requirement was to protect the government’s ability to conduct investigations, not to protect the relator. In light of that purpose, they were concerned about the harm that a per se rule requiring dismissal would cause the government. Sullivan countered that the government could intervene even if relators’ case was dismissed. Justice Ginsburg appeared unconvinced, noting that dismissal of the relators’ case would put the government to the choice of expending resources to pursue the case itself or letting it go.
The justices also tested the limits of a per se rule by asking whether dismissal was too harsh where a complaint was inadvertently disclosed to one person, or where there was no harm to the government. Sullivan pushed back against Justice Kagan’s question about whether the amount of harm the breach caused should be taken into account: “Your honor, we don’t tend to let drug dealers off if the thing they think is marijuana that they are selling turns out to be oregano,” Sullivan said. “We do care about state of mind at the time, and we don’t just look to the accident or happenstance that it didn’t cause harm in fact.” But Chief Justice Roberts noted that it was difficult for State Farm to argue that the disclosure from the Rigsbys’ lawyer harmed the government when the Solicitor General was siding with the Rigsbys and arguing that the verdict should be upheld.
Counsel for the Rigsbys, Tejinder Singh, argued that a per se rule requiring dismissal for every seal violation would be a “dramatic overreaction.” Instead, district courts should have discretion to apply appropriate sanctions, including dismissal if warranted. He pointed to the small number of cases involving seal violations to show that mandatory dismissal is not necessary to prevent State Farm’s predicted “open season” on violations. Because the statutory purpose of the seal requirement was to protect the government, Singh argued that courts, in exercising their discretion, should consider whether the government wants the case to proceed, although it need not give the government “blind deference.”
Justice Breyer noted that, in addition to protecting government investigations, the seal requirement protects defendants from learning that they are being sued by reading it in the New York Times. He further voiced concern that seals apply not just to FCA cases, but to cases involving national security, trade secrets, and other highly sensitive matters. Singh acknowledged the importance of these issues, but stated that they could be served by allowing district courts discretion to apply the appropriate sanctions.
John Bash, an assistant to the U.S. solicitor general, did not address the per se rule adopted by the Sixth Circuit and instead went straight to discussing what the discretionary standard should be. Bash argued that courts should have the same basic flexibility they are given to handle violations of protective orders. Bash emphasized that the purpose of the seal requirement was to protect the government, and courts should consider harm to the government and the severity of the violation, including intent or bad faith. In response to Justice Breyer’s concerns, Bash stated that harm to the defendant could also be considered.
If Tuesday’s argument is any indication, the challenge for the Court will be to articulate a standard that affords the lower courts flexibility to consider harm to the government, bad faith, the nature of the seal violation and harm to the defendant. The Court’s decision is expected by June 2017. Crowell & Moring plans to monitor developments closely and will provide an updated post when the Court’s decision is announced.