The False Claims Act Seal: Does It Bind and Gag the Defendant?

Whistleblowers who bring qui tam suits on behalf of the United States in False Claims Act cases are required to file their cases in camera and under seal. As a result, the complaint does not appear on the public docket, and the investigation proceeds out of the public spotlight. The DOJ likes it that way, because it may pursue its investigation in a manner that does not tip off the target of the investigation. The target also benefits from that secrecy because it avoids the reputational harm that would ensue if the public were to learn that it is the subject of a federal fraud investigation.

But while the DOJ and the target share an interest in maintaining the secrecy of the investigation, the whistleblower may not share those interests. People blow a whistle precisely because they want to draw attention to something; they want to be heard, to sound an alarm. While some whistleblowers want to remain confidential — such as one who is a current employee of the target and fears reprisal — others may think that they can use the publicity of the suit and the related investigation to pressure the defendant into a settlement, often by leveraging the defendant's desire to protect its own reputation.

Nevertheless, False Claims Act whistleblowers rarely publicize their own cases because they are incented not to: A relator who “breaches the seal” by speaking publicly about the case risks being sanctioned by the court. Those sanctions can include the denial of their right to share in the proceeds of any settlement (See, e.g., U.S. ex rel. Bibby v. Wells Fargo Home Mortg. Inc., 76 F. Supp. 3d 1399, 1416 (N.D. Ga. 2015)), and even the outright dismissal of the case with prejudice (See State Farm Fire and Casualty Co. v. U.S. ex rel. Rigsby, et al., 137 S. Ct. 436, 444 (2016)).

Whether the target of the investigation is similarly bound by the seal is far from clear. The statute and the case law say nothing about the obligations of a defendant to maintain the secrecy of the qui tam suit. On a surface level, that's not surprising: The very purpose of the seal is to ensure that the defendant isn't tipped off about the case. Congress probably did not give much thought to whether the defendant, which isn't supposed to know about the suit in the first place, is bound by the FCA's sealing provisions.

In practice, however, it is commonplace for defendants to learn about the qui tam suit during the course of the government's investigation, while the case is still under seal. While the government typically does not alert the target, at an early stage, that there is a qui tam suit pending under seal, the government will often, at a later stage, disclose the existence of the qui tam, and even disclose the complaint itself, to the target of its investigation. The government discloses the qui tam complaint to solicit the target's response to the complaint's allegations, and sometimes as part of settlement discussions. Before doing so, the government applies to the court for a “partial unsealing” order, which is an order that authorizes the government to share the complaint with the defendant.

When the target receives a copy of the sealed-yet-partially-unsealed complaint, it will likely face the question of whether it may disclose it. The question does not generate any case law because, as observed above, the defendant typically shares the government's interest in secrecy; a target of an investigation is hardly incentivized to blow the whistle on itself and disclose that it is the target of a federal fraud investigation.

But while a target may not want the world to know about the qui tam, it may well want some people to know about it. For example, a company that has insurance coverage may want or even need to disclose the qui tam complaint to its carriers, and to do so promptly, to avoid the carriers raising defenses to coverage based on lack of prompt notice of the suit. See, e.g., AmerisourceBergen v. Ace American Ins. Co., 100 A.3d 283 (Pa. Super. 2014) (holding that claim was deemed to have been made when the qui tam complaint was filed, even though the policyholder was unaware of the qui tam until years later).

Also, public companies may have obligations to disclose qui tam suits in their securities filings, depending upon their assessment of the materiality of the complaint. See John T. Boese, American Bar Association, Securities Disclosure in Qui Tam Cases; see also Michael G. Scheininger and Daniel L. Russell Jr., SEC Rules and the “Partially Unsealed” Qui Tam Complaint: Conflicting Obligations of Confidentiality and Disclosure?, American Bar Association's Civil False Claims Act and Qui Tam Enforcement 2008 CLE. And even privately held companies may have a need to disclose the complaint to their lenders or major investors, either to alert them to the significance of the matter or, conversely, to assure them that the case does not pose a significant risk.

What may the FCA defendant do? On the one hand, even after it is disclosed privately to the defendant, the complaint is said to remain “under seal,” a status that at least implies that the complaint is not meant to be made public. On the other hand, there is obviously a big difference between a defendant selectively alerting a single large investor and a plaintiff disclosing the case to the news media. Also, since one of the main purposes of the seal is to protect the government by not tipping off the target of the investigation, that purpose arguably has become moot by the government's decision to disclose the complaint to the target. U.S. ex rel. Rigsby v. State Farm Fire and Cas. Co., No. 06-433, 2011 WL 8107251, at *8 (S. D. Miss. Jan. 24, 2011) (finding that partial lifting of the seal, which authorized relators to make disclosures concerning the qui tam action in pleadings and other documents distributed to litigants and their attorneys in another litigation, rendered the seal “moot.”).

For the reasons explained below, a defendant that learns about the qui tam as a result of a disclosure by the government has a strong argument that it is not bound by the seal at all. And even if bound, it's probably not gagged from speaking about it.

The Sealing Provisions of the False Claims Act

The False Claims Act authorizes private parties to bring an action in federal court “for the person and for the United States Government.” 31 U.S.C. § 3730(b)(1). When a private person brings such a suit, the Act requires that the complaint be filed in camera, and provides that it “shall remain under seal for at least 60 days.” 31 U.S.C. 3730(b)(2). The statute directs the relator to serve the government with the complaint and a “written disclosure” of its “material evidence,” but provides that the complaint “shall not be served on the defendant until the court so orders.” 31 U.S.C. § 3730(b)(2).

The statute contemplates that the government will use the 60-day period during which the case remains sealed to investigate the allegations and to decide whether it will: 1) “proceed with the action, in which case the action shall be conducted by the Government”; or 2) notify the court that it declines to take over the action, in which case the person bringing the action shall have the right to conduct the action. 31 U.S.C. § 3730(b)(4)(A) & (B). Recognizing that the government may need more than a mere two months to investigate the allegations, the statute grants the government the right to apply to the court “for extensions of the time during which the complaint remains under seal.” 31 U.S.C. § 3730(b)(3). Such a motion may be supported by affidavits or other submissions which, like the complaint itself, must be filed in camera. The court may grant an extension of the seal period “for good cause shown.” Id.

While the seal provisions of the False Claims Act impose several mandatory obligations on relators, they do not, on their face, purport to bind anyone else. Relators are told that they “shall” file the complaint “in camera;” they “shall” serve the Government with the complaint and a written disclosure of their material evidence; and they “shall not” serve the defendant. But, these provisions impose no duties or responsibilities on the defendant. In fact, the only procedural provision that references the defendant operates to relieve the defendant of any obligation to respond to the complaint, explaining that the defendant “shall not” be required to respond to the complaint until after the complaint is unsealed and served in accordance with Rule 4 of the Federal Rules. So while the seal provisions of the FCA explicitly bind the relator, they impose no explicit obligation on the defendant.

The Nature of the Seal: A Procedural Filing Requirement or an Enforceable Gag Order?

To address whether the defendant is bound by the seal in a False Claims Act case — and if so what it means to be “bound” — it is necessary to consider the nature of the seal itself: What does it mean to say that the case is “under seal”? Further, what does it mean to say that the “sealed” complaint has been “partially” unsealed?

To begin with, the law recognizes a distinction between sealing provisions and non-disclosure provisions. When a court seals a court record, it denies the public access to a document that otherwise would be part of the public file in a judicial proceeding. The court accomplishes this by issuing a “ministerial” directive to the clerk of court to limit public access to the document, such as by manually filing the document in a sealed envelope. ACLU v. Holder, 652 F. Supp. 2d 654, 671 (E.D. Va. 2009) (characterizing the clerk's function of placing the qui tam complaint and docket under seal as a “ministerial” act).

Although standards vary, some courts will authorize the sealing of an otherwise public document upon a showing of mere “good cause.” In contrast, a non-disclosure order or provision imposes a duty directly on a party to remain silent.

While both seal provisions and “gag” provisions operate to conceal information from the public, they are evaluated under different legal standards because they address different interests. As one court explained: “Judicial gag orders impinge upon freedom of speech and the press under the First Amendment, and must pass muster under well-established constitutional case law. On the other hand, sealed judicial orders conflict with the common law tradition of public access to judicial proceedings, and are typically evaluated under more flexible common law rules.” In re Sealing and Non-Disclosure of Pen/Trap/2703(d) Orders, 562 F. Supp. 2d 876, 880 (S.D. Tex. 2008).

This distinction between a sealing provision and a non-disclosure provision is perhaps best illustrated by Rule 6(e) of the Federal Rules of Criminal Procedure, which governs the secrecy of federal grand jury proceedings. By its plain terms, Rule 6(e) includes both sealing provisions and non-disclosure provisions. But these provisions are not co-extensive. While Rule 6(e)'s sealing provisions require that records relating to grand jury proceedings “must be kept under seal,” its non-disclosure provisions prohibit “disclosure” of matters “occurring before the grand jury” only by certain categories of people, including grand jurors, prosecutors, and court reporters. See Rule 6(e)(2)(B).

Categories of persons who are not specifically enumerated in the non-disclosure provisions — such as witnesses — are not precluded from discussing the grand jury proceedings, even though those proceedings take place under seal. See also U.S. v. Sells Engineering, Inc., 463 U.S. 418, 425 (1983) (“Witnesses are not under the [6(e)(2)(B)] prohibition unless they also happen to fit into one of the enumerated classes.”). Finally, Rule 6 also addresses remedy, explicitly providing that knowing violations “may be punished as a contempt of court.”

In contrast to Rule 6(e), the False Claims Act addresses sealing, but says nothing at all about non-disclosure; it does not itself purport to “gag” any party. The Act requires the relator to file the action “under seal,” but does not, by its terms, otherwise limit what the relator — or anyone else — may say. Nor, as the Supreme Court recently observed, does the FCA provide a remedy for violating the sealing requirement, leaving it to the discretion of the district judge. State Farm Fire & Casualty Co. v. United States, 137 S. Ct. 436, 442 (2016) (“The statute says nothing, however, about the remedy for a violation of that rule.”).

Next month we will discuss the DOJ's position on this issue and the risks of being accused of contempt for breaking the seal.

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Andrew W. Schilling heads Buckley Sandler LLP's New York office, and is a leader of the firm's False Claims Act & FIRREA practice. He was formerly Assistant U.S. Attorney (AUSA) and Chief of the Civil Division at the U.S. Attorney's Office for the Southern District of New York (SDNY). Megan E. Whitehill is an associate in the the firm's New York office.