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State Farm Fire & Casualty Co. V. United States Ex Rel. Rigsby: The Supreme Court Rules That A Violation Of The Fca’s Seal Provision Does Not Require Dismissal

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  • Posted on: Dec 19 2016

On December 6, 2016, the United States Supreme Court ruled that a violation of the seal provisions of the False Claims Act (“FCA”) does not mandate dismissal of a relators’ complaint. In doing so, the Court affirmed the judgment of the Fifth Circuit, which, in turn, affirmed the judgment of the district court.

In State Farm Fire & Casualty Co. v. United States Ex Rel. Rigsby (which this Blog wrote about here and here), whistleblowers, Cori and Kerri Rigsby, filed a qui tam action against State Farm accusing the insurer of defrauding the government by falsely classifying wind damage caused by Hurricaine Katrina as flood damage. Prior to Hurricane Katrina, State Farm issued homeowner-insurance policies that included both flood and wind damage. The flood insurance was backed by the National Flood Insurance Program, while State Farm’s own general homeowner’s policies covered wind damage.  This meant that policyholders affected by Hurricane Katrina would receive compensation from the government for flood damage, while State Farm would be responsible for damage cause by the wind.  According to the relators, the insurer instructed its adjusters to falsely classify wind damage as flood damage in order to shift the cost of insurance payouts to the federal government.

The Rigsby sisters, claims adjusters for State Farm, filed a qui tam complaint under seal, alleging that the insurer wrongfully sought to maximize their policyholders’ flood claims in order to minimize its exposure to wind damage claims. Prior to the seal being lifted, counsel for the sisters leaked news of the existence of the complaint to media outlets who published stories about the alleged fraud.  State Farm moved to dismiss the complaint, arguing that the relators’ violation of the seal requirement mandated the dismissal of the complaint.  It did not, however, request a lesser sanction.

The district court found that dismissal was not warranted, applying a balancing test that looked at three factors: (1) actual harm to the government; (2) the severity of the violations; and (3) evidence of bad faith.  The case went to trial, resulting in a victory for the Rigsby sisters. The Fifth Circuit affirmed, and found that a seal violation does not mandate dismissal. The Supreme Court granted certiorari and affirmed.

The Supreme Court’s Ruling:

In declining to require dismissal of a complaint for violating the seal requirement, the Court found that the FCA did not require such a harsh result. The Court noted that the language of the seal provision only creates a mandatory rule the relator must follow, it does not say anything “about the remedy for a violation of that rule.” Slip op. at 6. As such, “the sanction for breach is not loss of all later powers to act.” Id. (citation and internal quotation marks omitted).

The Court found support for this finding in the structure of the FCA itself. The Court observed that the FCA contains several provisions requiring, in express terms, the dismissal of a relator’s action. E.g., §§ 3730(b)(5), (e)(1)–(2). The seal provision is not one of them. Since the Court refrains from inferring the “explicit” limitations found in other provisions of the statute to the one under review, it concluded that Congress did not intend to require dismissal for a violation of the seal requirement. Id. at 7.

This result, said the Court, was consistent with the general purpose of the seal provision, which was enacted to “encourage more private enforcement suits,” and protect the Government’s interests in pursuing investigations without the knowledge of the defendants. Id. (citing S. Rep. No. 99–345, pp. 23–24). Thus, “it would make little sense to adopt a rigid interpretation of the seal provision that prejudices the Government by depriving it of needed assistance from private parties.” Id.

Further, the Court found that the seal provision provides no textual indication that Congress “conditioned the authority to file a private right of action on compliance with [this] statutory mandate.”  Id. at 8. In fact, said the Court, there is no textual reason to tie the relator’s ability to bring an action on his/her adherence to the seal requirement.

While dismissal is not the mandatory remedy, the Court stated that a district court could order dismissal in the exercise of its discretion if the circumstances warranted it and suggested that the factors set forth by the Ninth Circuit in United States ex rel. Lujan v. Hughes Aricraft Co. “appear to be appropriate” for that consideration. Id. at 10. In Lujan, the Ninth Circuit considered such factors as whether the Government was actually harmed by the disclosure, Congressional intent to encourage litigation through qui tam actions, and the presence or absence of bad faith or willfulness of the disclosure. The Court declined to “explore” those factors “and other relevant considerations,” leaving it to “later cases” to decide the “standards” to apply when determining whether dismissal of a qui tam complaint is the proper remedy for a violation of the seal provision. Id. at 10.

Finally, the Court ruled that the district court did not abuse its discretion in denying State Farm’s motion to dismiss. The Court did not consider whether lesser sanctions were appropriate in the case because State Farm requested no other sanction than dismissal. As a result, the question was not preserved. Accordingly, the Fifth Circuit’s judgment was affirmed.

The Court’s opinion is available here:  https://www.supremecourt.gov/opinions/16pdf/15-513_43j7.pdf.

Takeaway:

In this Blog’s first article on the case, we indicated that the Ninth Circuit’s balancing approach was the most reasonable: “Balancing the violation, the reason for the violation and the impact of the violation on the government’s investigative interests seems to be the most reasonable way to ensure that meritorious cases are not dismissed over a technicality.” Although the Court did not specifically adopt the approach, it cited the approach with approval for the lower courts to use as a guidepost in determining whether dismissal is the appropriate remedy. This Blog continues to believe that the Ninth Circuit approach is the appropriate one and should serve as the guidepost for future cases.

Since the Court declined to rule out dismissal as a possible remedy for violating the seal requirement, parties should be aware that dismissal is still on the table. Thus, while the Court’s decision can be considered a win for relators, whistleblowers who wish to bring a false claim action should, nevertheless, avoid disclosing the suit to the public.  By the same token, defendants who learn through public sources that they are facing a qui tam action should identify the actual harms they incurred because of the disclosure. Since mandatory dismissal is not an option, both sides will be well advised to remember that the remedy to be assessed rests in the sound discretion of the court.

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