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The U.S. Supreme Court To Resolve A Circuit Split Over Whether A Violation Of The FCA Seal Requirement Mandates Dismissal Of A Qui Tam Complaint

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  • Posted on: Jun 13 2016

Catastrophic events often bring out the best in people. Sometimes, however, such events bring out the worst in people. The events that followed Hurricaine Katrina stand as reminders of the latter, at least according to Cori and Kerri Rigsby, two sisters who filed a False Claims Act (“FCA”) complaint against State Farm Fire and Casualty Co. (“State Farm”), among others.

The Rigsby sisters, two experienced claims adjusters, alleged that State Farm and other insurance companies were falsely billing the federal government for flood insurance claims when, in fact, the claims were based on wind damage. According to the sisters, the insurance companies fraudulently changed the classification of a claim without sending an inspector to the affected site in order to collect reimbursement from the federal government.

A few weeks after Hurricane Katrina, the Rigsby sisters inspected the home of Thomas and Pamela McIntosh in Biloxi, Mississippi. The McIntoshes held two insurance policies with State Farm: (1) a Standard Flood Insurance Policy (“SFIP”), which excluded payment for wind damage; and (2) a homeowners’ policy, which excluded payment for flood damage. In September 2005, a State Farm supervisor approved the payment of $350,000 ($250,000 for the home and $100,000 for personal property) under the SFIP. Three days later, State Farm sent checks to the McIntoshes.

In April 2006, the Rigsby sisters filed a qui tam complaint against the insurance companies, alleging that the insurers wrongfully sought to maximize their policyholders’ flood claims (which were paid with government funds) in order to minimize wind claims (which are paid by the insurer). Following motion practice, a trial was held on a single, bellwether false claim – the McIntosh claim. The jury concluded, among other things, that the McIntosh property sustained no compensable flood damage and that the government therefore suffered damages of $250,000 as a result of State Farm’s submission of false flood claims for payment on the McIntosh home. The district court denied State Farm’s motions for a new trial and judgment notwithstanding the verdict, and ordered State Farm to pay more than $3 million in damages and attorneys’ fees.

After the ruling, State Farm moved to dismiss the action due to alleged violations of the FCA’s seal requirement. State Farm argued that the Rigsby sisters and their attorneys had disclosed the existence of the qui tam action to a variety of news outlets while the case was under seal. State Farm charged that the Rigsby sisters and their then-lawyer, Dickie Scruggs, violated the statutory seal by engaging in a media campaign in which they discussed the allegations in the qui tam complaint in order to “demonize and put pressure on State Farm to settle” the action.

The district court declined to dismiss the complaint on the basis of the seal violations, and the U.S. Court of Appeals for the Fifth Circuit affirmed that decision, holding that the seal violations did not warrant dismissal. Thereafter, State Farm filed a writ of certiorari to the Supreme Court.

In filing the writ of certiorari, State Farm asked the Supreme Court to review the Fifth Circuit’s affirmance of the district court’s decision, especially since there were three separate circuit court (Ninth, Second and Fourth, and Sixth) standards governing the dismissal of a qui tam complaint following a violation of the FCA’s seal requirement.

The Fifth Circuit adopted the Ninth Circuit’s approach, which requires dismissal only if the seal violation caused actual harm to the government – in essence, a “no harm, no foul” approach. The Second and Fourth Circuits, by contrast, require dismissal only when a seal violation “incurably frustrate[s]” the congressional goals underlying the seal requirement, including the ability of the government to fully evaluate the propriety of an enforcement suit and determine whether the suit involves matters already under investigation. Finally, the Sixth Circuit requires dismissal when there is a violation of the seal requirement no matter the circumstance, thereby rejecting any form of balancing test.

On May 31, 2016, the Supreme Court granted certiorari in State Farm Fire and Casualty Co. v. United States ex rel. Cori Rigsby and Kerri Rigsby.

IMPLICATIONS:

Resolution of the circuit split will materially impact the rights of whistleblowers and defendants to whistleblower claims. If the Sixth Circuit’s approach prevails, then defendants would have a greater ability to seek dismissal of FCA claims when relators violate the seal requirement. By contrast, a ruling in favor of the approach advanced by the Ninth Circuit or the Second and Fourth Circuits would be relator friendly because even when there is a violation of the seal requirement, as long as there is no harm to the government or the government’s ability to investigate is not frustrated in any way, then there would be no dismissal.

Of course, there is no way to know how the Supreme Court will rule. However, it is important to note that seal violations occur under many circumstances, including, but not limited to, failing to file the complaint under seal and inadvertently disclosing the allegations. 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.

The Supreme Court is expected to address the case in the next term.

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