United States: Supreme Court To Consider Implications of Seal Violation in FCA Lawsuits

On May 31, 2016, the Supreme Court granted certiorari in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby, No. 15-513. At issue is 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)?"

The False Claims Act ("FCA") imposes liability on anyone who "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval." Notably, Section 3730(b) of the FCA authorizes private citizens or "relators" to bring civil actions on behalf of the government, and retain a significant share of any recovery.  In doing so, however, the FCA requires relators to file complaints under seal "for at least 60 days."

The government frequently requests, and receives, extensions beyond this 60-day period—in fact, the period under seal can frequently last as much as two years or more while the Government conducts its investigation. While those government investigations are being conducted, relators occasionally violate this seal—sometimes inadvertently, sometimes to conduct a media campaign to advance their interests, e.g., to obtain financing for their litigation.

A three-way circuit split exists on this question. In United States ex rel. Lujan v. Hughes Aircraft Co., the district court dismissed an FCA action after finding that the relator had violated the seal by disclosing the pending litigation to a national newspaper. The Ninth Circuit reversed. Noting that "[n]o provision of the False Claims Act explicitly authorizes dismissal as a sanction for disclosures in violation of the seal requirement," the court considered the statutory purpose of the seal, and concluded that the court should apply a balancing test to determine whether dismissal is appropriate. Under this standard, dismissal is appropriate only if the seal violation causes actual harm to the interests of the government. In United States ex rel. Rigsby v. State Farm Fire & Cas. Co., the decision pending Supreme Court review, the Fifth Circuit adopted the Ninth Circuit's balancing test.

In contrast, under the standard applied by the Second Circuit in United States ex rel. Pilon v. Martin Marietta Corp., dismissal is appropriate if the disclosure "frustrate[s] the statutory purposes" behind the sealing requirement. According to the Second Circuit, this includes not only the government's interest in not impeding the government's interest by "tipping off" defendants, but also the defendant's interest in avoiding reputational harm by the premature unsealing of a meritless case. The Fourth Circuit also adopted this standard, in Smith v. Clark/Smoot/Russell.

Finally, the Sixth Circuit, in United States ex rel. Summers v. LHC Grp., Inc., rejected all of these balancing tests. Having determined that the text and structure of the FCA precludes applying a judicially-devised balancing test, and Sixth Circuit applies a per se rule that any violation of the seal mandates dismissal.

The State Farm case will be considered the following term. Should the Court apply the Sixth Circuit's per se rule, defendants will have another tool for dismissing FCA suits prior to discovery.

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