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The Government Contractor® Information and Analysis on Legal Aspects of Procurement Reprinted from THE GOVERNMENT CONTRACTOR, with permission of Thomson Reuters. Copyright © 2016. Fur- ther use without the permission of West is prohibited. For further information about this publication, please visit http://legalsolutions.thomsonreuters.com, or call 800.328.9352. THE GOVERNMENT CONTRACTOR® Information and Analysis on Legal Aspects of Procurement Vol. 58, No. 42 November 9, 2016 The Seal Requirement—Under the FCA, [a] copy of the relator’s complaint and writ- Focus ten disclosure of substantially all material evidence and information the person possesses shall be served on the Government … shall be ¶ 390 filed in camera, shall remain under seal for at least 60 days, and shall not be served on the FEATURE COMMENT: Sealed To defendant until the court so orders. Perfection? Supreme Court Considers 31 USCA § 3730(b)(2). This requirement provides What To Do When A Relator Violates The the Government with time to investigate and FCA Seal Requirement determine whether it wants to intervene. The Government regularly seeks numerous extensions For the third term in a row, the U.S. Supreme Court while it investigates the conduct alleged in a rela- will decide a case brought by a qui tam relator un- tor’s complaint, and this investigatory period can der the federal False Claims Act. On November 1, last for years. the Supreme Court heard oral argument in State The seal requirement also reduces the risk that Farm & Cas. Co. v. U.S. ex rel. Rigsby. At issue in the existence of a suit will compromise an ongoing Rigsby is the FCA’s seal requirement. When a rela- criminal investigation. It has also been argued by tor files a qui tam complaint under the FCA, the the defense bar that the seal requirement protects a complaint must be filed under seal so that the Gov- defendant’s reputation until further investigation is ernment can decide whether to intervene before the performed. If the Government decides not to pursue defendant learns about it. In theory, this preserves the case at that time, the relator may proceed with the integrity and secrecy of any ongoing investiga- the action on its own. tion until the Government decides how to proceed. Although the importance of the seal is well- The FCA does not say, however, what should established, the case law is unsettled about what happen if a relator violates the seal requirement by should happen if a relator violates the seal require- publicly revealing allegations from the complaint ment. Rigsby will likely resolve the tension between while it is under seal and being investigated by the the circuits and establish a single test for address- Government. The Court granted review in Rigsby ing seal violations. to resolve a circuit split about what should happen The Rigsby Seal Violation—Although the when the seal requirement is violated. question before the Court may sound like a dry The regional circuits have developed three procedural issue, the Rigsby case arises from a col- tests for dealing with seal violations: (1) a bright- orful set of facts and underscores the potential for line rule that mandates dismissal, (2) a rule that relators to violate the seal in bad faith in an effort considers whether the violation frustrates the to leverage the media to extract settlements from congressional goals served by the seal require- FCA defendants. The case was brought by sisters ment, and (3) a balancing test that focuses on Kerri Rigsby and Cori Rigsby, who worked as claims whether the violation actually harms the Gov- adjusters at a company which held a contract with ernment. This FEATURE COMMENT summarizes the insurance company State Farm. Their FCA suit facts of Rigsby; describes the current state of the alleged that State Farm committed fraud in the law, including the three tests adopted by the re- aftermath of Hurricane Katrina by misclassifying gional circuits; and concludes with analysis of the wind damage as water damage. According to the arguments made during oral argument. relators’ theory, State Farm was incentivized to 4-184-274-3 © 2016 Thomson Reuters ¶ 390 The Government Contractor ® classify losses as flood damage because these claims the very existence of the qui tam right to bring would be covered by the Government under the fed- suit in the name of the Government is created eral flood-insurance program. by statute, it is particularly appropriate to have The Rigsby sisters were represented by well- the right exist in a given case only with the pre- known plaintiffs’ attorney Richard Scruggs, who conditions that Congress deemed necessary for earned a reputation as the “King of Torts” because the purpose of safeguarding the Government’s of his successes litigating asbestos and tobacco interests. cases. Scruggs also served six years in federal Id. Moreover, the Sixth Circuit recognized that a prison on charges that he bribed a judge in a case relator might file a complaint under seal and then unrelated to the Rigsby matter. In his class action expose the “defendant to immediate and hostile tort cases, Scruggs is famous for having used the media coverage” in an effort to obtain “leverage to media and public officials to shape public opinion demand that a defendant come to terms quickly.” Id. and pressure defendants into large settlements. Under the approach of the Second and Fourth Scruggs attempted to use the same tactics in circuits, dismissal is proper if a seal violation “incur- the FCA case against State Farm, and he shared ably frustrate[s]” the interests served by the seal rule, information about the suit with news publications which include shielding the defendant from meritless and a member of Congress. While the case was lawsuits and providing the Government with the abil- still under seal in the U.S. District Court for the ity to evaluate a suit fully and determine if it relates Southern District of Mississippi, the Rigsby sisters to matters being criminally investigated. See, e.g., U.S. discussed their allegations in an interview with ex rel. Pilon v. Martin Marietta Corp., 60 F.3d 995 (2d ABC’s 20/20, although they did not go so far as to Cir. 1995), 38 GC ¶ 31; Smith v. Clark/Smoot/Russell, say “we filed a lawsuit against State Farm.” When 796 F.3d 424 (4th Cir. 2015). the complaint was finally unsealed—a year after In Pilon, relator’s counsel failed to file the FCA the 20/20 interview—State Farm moved to have the complaint under seal and serve the Government. case dismissed on the grounds of relators’ “repeated Counsel also allowed the relator to discuss the com- intentional violations of the FCA seal requirement.” plaint in an interview a few hours after the case was State Farm argued that the relators leaked con- filed on an open docket. Id. at 997. The Second Circuit fidential documents to “to fuel a media campaign affirmed the trial court’s dismissal of the complaint designed to demonize and put pressure on State and reasoned that the relator’s failure to comply with Farm to settle,” and that the relators hired “one of the procedural requirements “incurably frustrated” the nation’s most prominent public relations firms the statutory purpose underlying those requirements. to assist them with this all-out campaign, which As the Second Circuit noted, there is a risk that such featured the Rigsbys in media interviews, filming, a blatant violation will tip off the defendant before and photo shoots.” The district court declined to the Government has a chance to review, but there is dismiss the relators’ complaint on the basis of the also an increased risk that a premature unsealing of seal violations, and the case proceeded to trial, a meritless case will harm a defendant’s reputation. where the jury found that State Farm had violated [A] defendant’s reputation is protected to some the FCA. The U.S. Court of Appeals for the Fifth degree when a meritless qui tam action is filed, Circuit affirmed the lower court’s decision not to because the public will know that the govern- dismiss the complaint because of the violation of ment had an opportunity to review the claims the seal requirement, and on May 31, the Supreme but elected not to pursue them. In addition, when Court agreed to review the case. a potentially meritorious complaint is filed, a The Circuit Split—As recognized by the Fifth defendant may be willing to reach a speedy and Circuit in Rigsby, there currently is a three-way cir- valuable settlement with the government in or- cuit split on the seal violation issue. der to avoid the unsealing. The Sixth Circuit has concluded that a violation Id. at 999. of the FCA’s seal requirement mandates an automatic The Ninth Circuit takes a slightly different ap- dismissal of the case. See U.S. ex rel. Summers v. LHC proach, holding that dismissal is appropriate only Grp., Inc., 623 F.3d 287 (6th Cir. 2010). In Summers, if the relator’s seal violation caused actual harm the court reasoned that since to the Government. In U.S. ex rel. Lujan v. Hughes 2 © 2016 Thomson Reuters Vol. 58, No. 42 / November 9, 2016 ¶ 390 Aircraft Co., 67 F.3d 242 (9th Cir. 1995), a relator the relator’s counsel did at the time of the disclosure, made statements to the press about the existence not the consequences; its character, not its conse- and nature of a complaint while it was still under quences; ex-ante, not ex-post.” State Farm went on seal. The Ninth Circuit developed a three-factor to argue that “actual harm to the government should balancing test to evaluate whether dismissal was not be a requirement.” proper: Justice Kagan asked what it would mean to 1.
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