Supreme Court Finds That Courts Have Discretion to Fashion Remedy for Violations of False Claims Act Seal Provision: State Farm Fire & Casualty Co. v. U.S. ex rel. Rigsby

Dear Readers:

The Supreme Court today handed down its unanimous decision in State Farm Fire & Casualty Co. v. U.S. ex rel Rigsby et al, and affirmed the 5th Circuit's ruling that a relator's violation of the False Claims Act's "seal" provision, 33 U.S.C. § 3730(b)(2), does not require dismissal of the relator's qui tam complaint. I assume this ruling was widely anticipated since, as the Court pointed out, there is nothing in the False Claims Act's "text and structure" that requires dismissal of a relator's qui tam in the event a relator violates the seal. As to what sanction, including dismissal, may be appropriate for a violation of the seal, the Supreme Court left that to the "sound discretion of the district court." 

For those seeking further details about the Rigsby decision, I commend to you Ronald Mann's analysis of the Court's opinion found on SCOTUSblog: Opinion analysis: Justices reject automatic dismissal for seal violations in False Claims Act cases.

A. Brian Albritton
December 6, 2016

Refusing to Extend the Seal: Court Refuses Requests to Extend Seal of Qui Tams for Informal Discovery or Settlement Negotiations

Section 3730(2), Title 31, of the False Claims Act ("FCA") provides that when a qui tam relator files an FCA complaint under seal, the case may remain under seal for "at least 60 days" while the government investigates and decides on whether or not to intervene. It is the rare case that remains under seal only 60 days, however, and in some cases, the government keeps the qui tam under seal for years, even over the objection of the relator. For example, one case in the Middle District of Florida, the Wasserman case, was filed under seal in 2004, but the government did not unseal it until 2010.

Ben Vernia at False Claims Counsel blog recently wrote about one federal district court judge in South Carolina who has given notice that the court will no longer agree to these automatic extensions of the seal for qui tams. In a recent "standing order," U.S. District Court Judge Joseph Anderson, Jr. observed that in "recent years, this court has extended the seal period, at the request of the government, on eight occasions in two actions," only to be informed by the government after all that time that it was not going to intervene in those cases.

Judge Anderson noted that the 4th Circuit observed that there are four reasons why Congress adopted the sixty-day seal period: "(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." Am. Civil Liberties Union v. Holder, 673 F.3d 245, 250 (4th Cir. 2011). Judge Anderson, however, noted that "none of the foregoing reasons for extending the seal period involve discovery of documents from the putative defendant or settlement negotiations." In turn, the Court observed further that the FCA's legislative history provides that "with the vast majority of cases, 60 days is an adequate amount of time to allow Government coordination, review and decision."

In light of these considerations, Judge Anderson stated that in deciding whether "good cause" exists to continue the seal after 60 days, "henceforth, the court will no longer consider informal discovery and/or settlement negotiations as sufficient grounds for extending the seal period."

If widely adopted, Judge Anderson's position would radically change FCA practice both for relators and qui tam defendants.

A. Brian Albritton
December 16, 2013

Recent False Claims Act Articles That Are Worth A Read

This week I came across two articles on the web concerning the False Claims Act which I commend to readers.

First, I recommend the "2012 Mid-Year False Claims Act Update" recently published by Gibson Dunn as it provides a good, succinct summary of False Claims Act highlights thus far in 2012.  The Update addresses such topics as (i) legislative action, both federal and state, and discusses several states that recently amended their statutes as well as numerous other proposed state bills; (ii) surveys recent significant False Claims Act settlements in health care, mortgage and financial services, and procurement and defense industries; and (iii) case law developments and trends, discussing many of the cases highlighted in the blog such as Davis and Schweizer along with recent cases addressing the False Claims Ac "first to file" bar and "public disclosure" bar.

Second, I commend to you the article,"False Claims Act Investigations:  Time for a New Approach?" published in October 2011 by John Bentivoglio, Jennifer Bragg, Michael Loucks, and Gregory Luce, all partners at Skadden Arps.  The article observes that companies subject to False Claims Act investigations are hampered in their ability to defend themselves since most such investigations are conducted under seal, and the government is able to investigate and use its limited resources at a timetable that suits it.   While a qui tam is under seal, the article point out "the government and the whistle-blower have an advantage" because "a company does not know the precise nature of the allegations pending against it and does not have the power of discovery and the right to defend that it is afforded by the federal court system once the suit has been disclosed and the litigation engaged."  During this time, the article argues, government and the whistleblower can use the all-to-common extended seal period to keep the defendant in the dark as to precise nature of the allegations against it and to gather the evidence they need. 

Given the advantages to the government and whistleblower of an extended seal period, the article asserts that "companies presently faced with a pending false claims investigation might consider whether a more aggressive strategy of forcing the government’s disclosure of the litigation (the unsealing of the complaint and other documents in the file) will better inform the company’s ability to defend itself: to engage in the process of discovery permitted by the Federal Rules of Civil Procedure."  In turn, the article contends that several cases and legislative history permit defendants to challenge the government's justification for keeping  a qui tam matter sealed.

Companies faced with False Claims Act investigations have a hard choice, and most prefer, as the article acknowledges, to settle or where possible, to dispose of the matter while under seal, thereby controlling the effects of bad press as well as other collateral damage.  At the same time, I think that every False Claims Act defense counsel has experienced the frustration of trying to defend a qui tam that is under seal because they are in the dark as to the allegations against the client and the government refuses to disclose the substance of the alleged fraud it is investigating.  From the vantage of the defendant, the government appears to employ a lengthy seal period to build a case at its leisure and to avoid having to actually litigate the matter.  I would certainly be interested in hearing of any instances where defendants sought to unseal a matter on behalf of their client in order to force the matter into civil litigation as the article suggests.

A. Brian Albritton
July 18, 2012

U.S. Tax Court Rules that IRS Whistleblower Claimant May Remain Anonymous but Refuses to Seal Case

As discussed previously, courts increasingly refuse the request of relators to seal their False Claims Act (“FCA”) cases when the government declines to intervene and they seek to dismiss.  See blog entries 11/14/11, 10/31/11. The U.S. Tax Court recently addressed this issue of protecting the identity of a tax whistleblower in a Tax Court case and arrived at a very different conclusion:  the tax whistleblower may remain anonymous but it refused to seal the case. See Whistleblower 14106-10W v. Commissioner of Internal Revenue, United States Tax Court, 137 T.C. No. 15.   The Tax Court based its decision in large part on the fact that the Internal Revenue Service’s Whistleblower Program does not protect whistleblowers from retaliation and that the Internal Revenue Service (“IRS”) treats whistleblowers as confidential informants.

The case arose out of claim made to the IRS by a whistleblower that his former employer had underpaid its tax.  The IRS denied the petitioner’s claim for a whistleblower award, and the whistleblower challenged that denial in Tax Court.  

As described on its website, the IRS has a “Whistleblower Program,” 26 U.S.C. § 7623(b), that “pays money to people who blow the whistle on persons who fail to pay the tax that they owe. See 26 U.S.C. § 7623(b).  If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.”  The IRS program further provides that if “the whistleblower disagrees with the outcome of the claim, he or she can appeal to the Tax Court.”  Unlike the False Claims Act, however, if the IRS declines to pursue the claim, the whistleblower does not have an independent right to proceed with the claim against the defendant. 

In the Tax Court case, the Whistleblower filed a motion for protective order requesting the court to protect his identity and to seal the tax case.  The Whistleblower alleged that even though he no longer worked for the taxpayer, he feared retaliation by his former employer.  He also claimed that he would be professionally ostracized if his identity as a whistleblower were disclosed.  

In a lengthy and well-reasoned decision, the Tax Court surveyed federal law on whether and when courts can permit litigants to remain anonymous and can seal a case.  The Tax Court further noted that the IRS treats whistleblowers as “confidential informants” and that courts frequently protect the identify of informants.

The Tax Court granted the Whistleblower’s request to protect his identity, remain anonymous, and to redact identifying information, noting:

petitioner has demonstrated a risk of harm that far exceeds in severity mere embarrassment or annoyance. The retaliation, professional ostracism, and economic duress which petitioner reasonably fears are, we believe, no less severe than the harm posed to attorneys and doctors suing to enjoin disciplinary proceedings, unsuccessful job applicants suing to protect their reputation, public aid recipients, or Native Americans joining in a lawsuit pitting their personal interests against those of their communities--all cases in which plaintiffs have been allowed to proceed anonymously.

A key consideration that the Tax Court cited in protecting the Whistleblower’s identity was that the IRS Whistleblower program does not have an anti-retaliation protections like other whistleblower statutes have, such as the False Claims Act.  As the Tax  Court observed: 

the False Claims Act contains an antiretaliatory provision. See 31 U.S.C. sec. 3730(h). Moreover, almost all the States have enacted statutes protecting employees in the public and/or private sectors who report illegal conduct.  In stark contrast, section 7623 contains no antiretaliatory provisions.