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False Claims Act Seal: Supreme Court to Rule on Penalty for Violation

November 16, 2016

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.

Rigsby Concerns State Farm Attempting to Avoid Paying Katrina related Insurance Claims

In Rigsby, the relators were two sisters who had been insurance adjustors for State Farm.  They 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. It found that State Farm defrauded the federal government of $250,000.  Consequently it ordered State Farm to pay $758,000 in damages under the FCA’s treble damages provision. The government gave the relators  $227,000 as a relator share for disclosing the fraud under the False Claims Act. The U.S. Court of Appeals for the Fifth Circuit later affirmed the verdict.

Having Lost, State Farm Wants the Case Thrown Out For False Claims Act Seal Violations

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 argues that a violation of the FCA’s seal necessarily results in dismissal of the qui tam case. On the other hand, the U.S. Department of Justice and the relators argue that the court has discretion.  Thus, they believe it should apply a balancing test. That would consider 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.

Relators and Counsel Must Be Vigilant of the False Claims Act Seal

Regardless of the result here, relators and their counsel violate the False Claims Act seal at their peril. The FCA expressly states that the complaint shall be filed under seal.  The case 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 or not the court dismisses the case, DOJ takes the position it affects a relator’s share.

The briefs and the oral argument transcript discuss many nuances and interesting questions.  For example, how much of a case is sealed? Only the fact of filed complaint? What about the underlying allegations?  Nevertheless, relators and their counsel must remain vigilant and careful while the seal is in place.