The Continuing Evolution of the False Claims Act

While the 60-day sealing period is a minimum, in practice, courts routinely allow the sealing period to be extended many times. As a result, qui tam cases can remain sealed for years while the defendants and relators await the government's decision on whether to intervene; in Rigsby, the government ultimately chose not to intervene, thus allowing the relators to pursue their FCA claims as private plaintiffs.

In Rigsby, insurance claims adjustors brought a qui tam action against State Farm Insurance Co. The relators alleged that in the aftermath of Hurricane Katrina, State Farm misclassified claims as resulting from flood damage — payable under the federally backed National Flood Insurance Program — rather than wind damage, which would have been payable privately by State Farm. The relators were originally represented by noted tobacco lawyer Dickie Scruggs. In representing the Rigsby relators, Scruggs violated the sealing order by providing reporters and a member of Congress with information about the lawsuit, in an effort to pressure State Farm to settle early. State Farm argued to the trial court that Scruggs's violation of the sealing order required mandatory dismissal of the lawsuit. The trial court declined to dismiss, holding that it had broad discretion to fashion an appropriate lesser sanction.

The U.S. Court of Appeals for the Fifth Circuit affirmed the trial court's denial of State Farm's motion to dismiss. The Fifth Circuit followed the U.S. Courts of Appeal for the Ninth and Second Circuits in adopting the Lujan test, which balances three factors to determine if the violation of a sealing order requires dismissal. The court considered: “1) the harm to the government from the violations; 2) the nature of the violations; and 3) whether the violations were made willfully or in bad faith.” Rigsby, 794 F.3d at 470. While the Fifth Circuit found that Scruggs — but not the individual relators — acted in bad faith, the court also concluded that State Farm did not show significant harm to the government that resulted from the violation, although the government had declined to intervene.

Notably, the United States argued against the sanction of dismissal. Brief for the United States as Amicus Curiae, United States ex rel. Rigsby v. State Farm Fire Cas. Co. (No. 15-513). Specifically, the court noted that the news media did not publish information about the lawsuit before the seal was lifted. Thus, in spite of the leaks, the United States was able to assess the lawsuit in relative confidentiality during the pendency of the seal.

The Supreme Court affirmed the Fifth Circuit's decision, rejecting the per-se or “automatic” approach adopted by the Sixth Circuit: that any violation of the sealing order requires dismissal, even with no showing of harm. United States ex rel. Summers v. LHC Grp., Inc., 623 F.3d 287, 296-298 (2010). The Court held that, in enacting the FCA, Congress did not mandate automatic dismissal as a deterrent to leaks during the sealing period.

Petitioner State Farm further asked the Court to address what factors district courts must consider before imposing a sanction, including the sanction of dismissal. Indeed, a bulk of the Nov. 1, 2016 oral argument focused on addressing the parties' proposed standards to govern the imposition of sanctions. Ultimately, the Supreme Court declined to direct district courts as to what factors they must weigh in their analysis. Rather, the Court held that the standards applied “can be discussed in the course of later cases.” Rigsby, 580 U.S. __, __ (2016) (slip op., at 10). The Court further held that the imposition of dismissal, or lesser sanctions, is within the sound discretion of the district courts, and will only be reviewed for plain error.

The Court declined to require automatic dismissal to deter leaks, but did note that sanctions short of dismissal are available to protect the reputational damage FCA defendants may suffer when the seal requirement is violated. The Court specifically noted that even where dismissal is not appropriate, district courts are equipped with broad discretion to impose monetary penalties and attorney discipline.

Future cases will likely focus on developing a consistent set of factors district courts will employ to craft appropriate remedies. While the Supreme Court declined to mandate a specific set of factors, the Court did note that the Lujan factors used by the district court in Rigsby “appear to be appropriate.” Rigsby, 580 U.S. __, __ (2016) (slip op., at 10).

As the lower courts continue to encounter these issues, FCA defendants will likely press for a test aimed at foreseeable harm, and not limited to the actual harm suffered by the government from the breach of the sealing order. Furthermore, FCA defendants will likely argue that courts should not rely exclusively on the Department of Justice's (DOJ's) view of the materiality of a violation. Framing the remedy in such a manner makes any dismissal decision depend on the government's specific interests in the case, which could vary with policy or political changes at the DOJ. Also, the United States, as the real party in interest, has a stake in any potential recovery. A standard that gives greater weight to whether the violation was made in bad faith — rather than a hindsight view of the harm actually done — would offer to relators a greater incentive against strategic “leaks” of information aimed at increasing settlement leverage.

Statistical Sampling Evidence in FCA Cases

A second False Claims Act issue making its way through the lower courts concerns the uses of statistical sampling. Relators, and the DOJ, use statistical analysis to show both the number of false claims and the extent of monetary loss by extrapolating from a sample of claims where the relator alleges a false statement is present. The technique has been used in health care cases and recent mortgage cases.

In United States ex rel. Martin v. Life Care Ctrs. of Am., 2014 U.S. Dist. LEXIS 142657 (E.D. Tenn. 2014), the defendant, an operator of skilled nursing facilities, brought a Daubert challenge to exclude the use of statistical samples to extrapolate a total number of false claims, and estimated loss amount, associated with allegedly fraudulent billings. The government's expert used a sample of 400 patient admissions to extrapolate the number of improper claims and total overpayments for those patient admissions. The court found that the testimony was reliable under Daubert because the method used — statistical sampling and extrapolation — was well-supported and widely used in litigation; had been sufficiently published; was sufficiently precise; and was generally accepted in the scientific community.

Yet, this approach is not automatically acceptable, where the uniformity or consistency of the error is not established. In United States ex rel. Michaels v. Agape Senior Community, Inc., 2015 U.S. Dist. LEXIS 82379 (D.S.C. 2015), the District Court of South Carolina reached a different conclusion. In that case, the relators, who alleged that the defendant nursing homes submitted fraudulent claims, wanted to use statistical sampling to extrapolate the number of claims and damages to over 50,000 individual claims. The court concluded that extrapolation evidence was inadmissible because proving falsity and the amount of loss on each claim was a highly fact-intensive inquiry, requiring medical testimony and an individual review of each patient and medical file.

On Oct. 26, 2016, the United States Court of Appeals for the Fourth Circuit held oral argument on the question of whether statistical sampling can be used to extrapolate the scope of liability. At oral argument, the Fourth Circuit appeared reluctant to rule upon the issue as a question of law, but viewed the appropriateness of any statistical evidence as best left to the trial court. Indeed, two circuit judges posed the question of whether the appeal should be dismissed as improvidently granted. In the event the Fourth Circuit declines to rule, health care providers will be left without concrete guidance regarding how statistical extrapolation of claims-related damages may be addressed in any individual case. Rather, defendants will continue to attack this methodology by way of Daubert challenges, leading to a growing catalog of decisions on each side of the issue.

Conclusion

The DOJ continues to use criminal and civil False Claims Act cases as a enforcement tool of choice in a wide range of industries. As shown in Rigsby, even a decision by the government not to intervene may not end the DOJ's presence in the case, as the government may seek to be the arbiter of whether a claim is dismissed for violations of the sealing provision. Moreover, use of statistical sampling by the government and private plaintiffs will continue to be an issue of concern for defendants, as it has the potential to dilute the burden of proof and allow a party to prove liability and damages without direct, claim-by-claim evidence of improper payments. Companies that engage in transactions with federal government programs should remain vigilant about these developments and their effects on potential liability.

***** Jonathan S. Feld is a member and Jason M. Ross is Senior Councel in Dykema Gossett PLLC. Their practices focus on government enforcement actions. Christina C. Brunty is an associate in Dykema's litigation group.