On Dec. 6, 2016, the U.S. Supreme Court released its opinion in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby, 137 S. Ct. 436 (2016), the first decision of its November argument session. This case dealt with the seal requirement of the False Claims Act (FCA), and the High Court rejected a categorical rule requiring mandatory dismissal in instances where the seal requirement has been violated.
When a relator files a FCA complaint alleging that a government contractor has committed fraud, the complaint remains under seal while the government decides if it wants to intervene in the litigation. In this case, however, the relator’s former lawyer leaked details of the complaint to several media outlets, violating the automatic seal. All agreed that this was an intentional violation of the seal requirement. The question became what penalties should arise from this violation.
The FCA instructs that a suit “shall” be kept under seal until allowed to be made public by a judge. But the Act says nothing in particular about penalties for breaking that seal. State Farm argued that, because the seal requirement was included in the section of the FCA creating a private right of action, the two clauses should be considered together and the case should be automatically dismissed.
The district court decided not to dismiss the complaint, noting that the violation did not prejudice the government and the offending lawyer had already been removed from the case. The U.S. Court of Appeals for the 5th Circuit affirmed, rejecting a 6th Circuit holding that dismissal is mandatory for any violation of the seal requirement. The Supreme Court unanimously (8-0) affirmed, ruling that the FCA does not “enact so harsh a rule” as automatically requiring dismissal when the seal is broken.
In his opinion, Justice Kennedy rejected State Farm’s argument, holding that the seal requirement and the private right of action clause are not tied in conditional terms. He further noted that the FCA’s own structure indicates that Congress did not intend for a seal violation to mandate dismissal, as the statute contains a number of provisions that do explicitly require dismissal if violated, allowing for an inference that lawmakers “would have said so” if they wanted automatic dismissals to extend to seal violations. And, “[i]n the absence of congressional guidance regarding a remedy, ‘[a]lthough the duty is mandatory, the sanction for breach is not a loss of all later powers to act.’” Rigsby, 137 S. Ct. at 442 (quoting United States v. Montalvo-Murillo, 495 U.S. 711, 718 (1990)).
Additionally, the seal requirement was enacted as part of FCA reforms intended to encourage more private enforcement. The legislative history connected to such reforms shows that lawmakers were mostly concerned that breaking the seal could tip off a Defendant about any related investigation and harm the government’s interests. For these reasons, the Court held that “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. at 443.
Justice Kennedy remarked that dismissal still remains a discretionary option for district courts, alongside other remedial options that can be used to punish and deter seal violations. But the Court did not rule on whether another penalty would be warranted in the Rigsby case, as State Farm did not request any alternative sanction and thus had not preserved the issue for appeal.
Sources: Law360.com and scotusblog.com
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