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Can loose lips sink ships? Or put another way, if a relator or his agent breaches the seal provision of the False Claims Act, must the case be dismissed? This is the issue currently pending in the United States Supreme Court where the Court recently heard oral arguments in State Farm v. United States ex rel. Rigsby.
In Rigsby, the relators, two sisters who had been insurance adjustors for State Farm, alleged that State Farm defrauded the federal government by claiming that Hurricane Katrina-related claims were ones eligible for coverage by the United States, thus getting State Farm off the hook for the insurance claims. A jury agreed with the relators, finding that the federal government had been defrauded of $250,000, and State Farm was ordered to pay $758,000 in damages under the FCA’s treble damages provision. The sisters were awarded $227,000 by the United States as a relator share for disclosing the fraud under the False Claims Act. The verdict was later affirmed on appeal by the U.S. Court of Appeals for the Fifth Circuit.
State Farm is asking the Supreme Court to dismiss the case because the relators’ (now former) attorney revealed the allegations to several members of the media while the case was still under seal. State Farm’s position is that a violation of the FCA’s seal requirement necessarily mandates that the FCA qui tam case be dismissed. The U.S. Department of Justice and the relators argue that the court has discretion and should apply a balancing test, using factors such as bad faith, harm to the government, reputational harm to the defendant, and severity of the violation. Those who attended the argument report that the Court seems poised to unanimously reject State Farm’s argument and adopt some type of balancing test. The transcript of the argument confirms this view.
Regardless of how the Court rules, relators and their counsel violate the mandatory seal provision of the False Claims Act at their peril. The FCA expressly states that the complaint shall be filed under seal, and it remains in that posture until the Court enters an order unsealing the action. Unless and until it does so, violations of the seal order are punishable by contempt and other sanctions. Whether the sanction involves the case being dismissed or not, the DOJ takes the position that a relator’s breach of the seal may decrease the award/ relator share paid to the relator in a successful case. While the briefs and the oral argument transcript discuss many nuances and interesting questions (e.g., is it only the fact that there is a complaint filed in court that is subject to the seal or are the underlying allegations also covered by the seal?), the fact remains that relators and their counsel must be vigilant and careful while the seal is in place.