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Mind the Seal or Face Dismissal

August 26, 2015

The False Claims Act contains many procedural nuances that a lawyer and a whistleblower must be mindful of when filing a FCA whistleblower or qui tam complaint. One of the most important is that the complaint filed with the court must be filed under seal and must remain under seal for at least 60 days. Indeed, it often is under seal much longer as the government may move to extend the initial seal period for “good cause” shown. Among other things, this seal period enables the government to investigate the allegations without alerting the defendant to the investigation. For example, the government may wish to undertake a covert investigation using consensual monitoring or may wish to execute a search warrant or a subpoena for documents without the defendant having an opportunity to destroy evidence.

While the FCA does not say what the consequence is when a lawyer or whistleblower violates the seal requirement, some courts have concluded that the consequence can be dismissal of the complaint with prejudice. If the case is so dismissed, the whistleblower is deprived of any share of any government recovery under the FCA. Earlier this month, the U.S. Court of Appeals for the Fourth Circuit refused to adopt a blanket rule of dismissal, holding that a lower court federal judge wrongfully dismissed with prejudice whistleblower Brian K. Smith’s suit against Clark Construction Group LLC and its Shirley Contracting Company LLC subsidiary even though his attorney had violated a statutory 60-day non-disclosure period by telling the defendants of the lawsuit within that time. See opinion at pp. 7-11.

The Fourth Circuit looked to see what, if any, purpose of the seal or the government’s investigation was harmed by the breach of the seal. If the seal breach “incurably frustrated” the purpose(s) of the FCA seal provision, then dismissal would be warranted. Id. at p. 10. The Court adopted the reasoning of the U.S. Court of Appeals for the Second Circuit, which differs from the approach of the Sixth Circuit (blanket dismissal rule) and the Ninth Circuit (a “no harm, no foul” balancing test). Id. at pp. 9-10. Reasoning that the seal period is intended to give federal investigators time to examine the allegations, prevent the alleged fraudster from being alerted to the investigation and protect the company’s reputation by ensuring mere allegations of fraud by a private citizen are not disclosed in advance of the government’s finding, and that in this case, none of these goals was placed at risk by the premature disclosure, the Fourth Circuit overturned the dismissal order.

While the whistleblower and his counsel dodged a bullet in this case, the Court made it clear that it did not condone the premature disclosure and that doing so is risky business: “We in no way minimize the significance of the violation in this case: By directly informing the defendants of Smith’s qui tam [False Claims Act] claim, Smith’s attorney risked serious interference with the government’s opportunity to investigate the alleged fraud. That risk appears not to have materialized in this case. But such disclosures have the potential to frustrate the purposes of the seal provision in a way that merits dismissal with prejudice, and qui tam claimants are well advised to comply strictly with the FCA’s seal requirements.” Id. at pp. 11-12 n. 3 (emphasis added).