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False Claims Act Seal Violation Doesn’t Mean Automatic Dismissal of Case

State Farm Fire and Casualty Co. v. United States ex rel. Rigsby is the perfect case for an eight member Court. So simple a unanimous Court issued an opinion in about a month after oral argument.

The False Claims Act (FCA) allows third parties to sue on behalf of the United States for fraud committed against the United States. Per the Act a FCA complaint is kept secret “under seal” until the United States can review it and decide whether it wants to participate in the case.

In State Farm Fire and Casualty Co. v. United States ex rel. Rigsby the Supreme Court held unanimously that if the seal requirement is violated the complaint doesn’t have to be dismissed.

While the Supreme Court has yet to rule whether states and local governments can bring FCA claims, local governments, but not state governments, can be sued for making false claims against the federal government.  

State Farm insurance adjusters alleged that after Hurricane Katrina, State Farm instructed them to falsely determine houses and property were damaged by flooding, instead of by wind. State Farm had to pay for wind claims and the federal government had to pay for flooding claims.

While the claim was under seal the adjusters’ attorney disclosed the FCA complaint to national journalists. While the news outlets issued stories about the fraud allegations they didn’t reveal the existence of the FCA complaint. Likewise, the adjusters met with a Congressman who also spoke publically about the purported fraud without mentioning the FCA lawsuit.  

In an opinion written by Justice Kennedy the Court concluded the FCA doesn’t require the “harsh” result of dismissal for a seal violation. When the FCA states that a complaint “shall” be kept under seal it specifies no remedy for a seal violation. But in other sections the statute explicitly requires dismissal for other actions of those bringing FCA claims. Also the seal requirement was adopted so the defendants in a complaint wouldn’t be alerted to a pending federal investigation. “Because the seal requirement was intended in main to protect the Government’s interests, 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.”

Dismissal remains a possible remedy for seal violations but the Court didn’t articulate a test for when it is the appropriate remedy. It did state that the test the Fifth Circuit applied, balancing the actual harm to the federal government; the severity of the violation; and evidence of bad faith, appeared “appropriate.” Under this test the Fifth Circuit ruled the complaint in this case should not be dismissed.

Is the Court’s ruling favorable to states and local governments? To the extent FCA claims can be brought against local governments a test mandating or strongly favoring dismissal for seal violations would have been better. But to the extent states and local governments may bring FCA claims or otherwise benefit from them the Court’s ruling is favorable.

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