Article Summary

The U.S. Supreme Court's unanimous decision in State Farm v. U.S. ex rel. Rigsby was a victory for whistleblowers under the False Claims Act, whose complaints now cannot be automatically dismissed because of harmless violations of a secrecy order. Instead, courts will decide penalties on a case-by-case basis — with a strong bias toward maintaining the "needed assistance" of whistleblowers.

This expert analysis by TELG managing principal R. Scott Oswald was published by Law360 on December 7, 2016.

Originally published in:

High Court: When Punishing FCA Seal Violations, Avoid Taxpayer Harm

By R. Scott Oswald

With Tuesday’s 8-0 decision in State Farm Fire and Casualty Co. v. United States ex rel. Rigsby, the U.S. Supreme Court has placed responsibility for penalizing seal violations under the False Claims Act (FCA) squarely where it belongs: At the “sound discretion” of the district court whose order was broken.

If Congress had wished dismissal to be the mandatory punishment for such violations — as argued by State Farm, defendant in the originating FCA case — “it would have said so,” wrote Justice Anthony Kennedy in a brusque opinion that was issued just five weeks after lopsided oral arguments in the case.

The Court didn’t dictate any rules for lower courts that must decide on penalties for seal violations, but it noted that the so-called Lujan factors — laid out in 1995 by the U.S. Court of Appeals for the Ninth Circuit — “appear to be appropriate,” which should help normalize standards.

In effect, Tuesday’s opinion entrenched a case-by-case approach that already was common in courtrooms outside the Sixth Circuit, an outlier jurisdiction that prescribed automatic dismissal for FCA seal violations.

The decision was a comprehensive defeat for defendant State Farm, which had insisted that the FCA demands dismissal for all seal violations, regardless of circumstances. “The FCA does not enact so harsh a rule,” replied Justice Kennedy, noting that such a strict requirement could endanger the very interests that the FCA was designed to favor — those of the U.S. government and the taxpayers it represents.

In this case, for instance, lower courts had ruled that while a secrecy order was broken, the violation was largely harmless. A mandatory dismissal would have allowed State Farm to worm out of a jury’s later finding that the insurer had defrauded taxpayers.

Justice Kennedy went on to reject State Farm’s fallback argument in just two paragraphs, ruling that the U.S. District Court for the Southern District of Mississippi — the trial court — hadn’t abused its discretion by failing to dismiss the case under a balancing test. He didn’t even consider whether lesser sanctions were merited in the case, saying that State Farm had waived that argument.

FCA: Purpose and Procedure

Originally signed into law by President Abraham Lincoln in 1863, the FCA makes it illegal to deceive the federal government for financial gain. The statute includes a “qui tam” provision that allows whistleblowers, known as relators, to file a legal complaint on behalf of taxpayers and, if they prevail, to receive a share of the proceeds.

FCA complaints are filed under seal and must remain hidden from defendants for at least 60 days so that they don’t jeopardize any criminal investigations that might already be under way.

In his opinion, Justice Kennedy noted that this requirement was explicitly designed to allow more lawsuits by whistleblowers — not to stifle such lawsuits based on minor infractions. Flexible enforcement is “consistent with [this] general purpose,” he said, while mandatory dismissal of cases can be supported only by “a few stray sentences” in the FCA’s legislative history.

“Because the seal requirement was intended in main to protect the Government’s interests,” wrote Justice Kennedy, “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.”

Rigsby: Fraud After Hurricane Katrina

The Rigsby case was filed by two sisters, Cori and Kerri Rigsby, who worked on behalf of State Farm as insurance adjusters in the devastation that followed Hurricane Katrina in 2005. In their FCA complaint, they claimed that State Farm ordered adjusters to say, falsely, that the homes of policyholders had been damaged by flood waters instead of by high winds — a finding that would save State Farm millions of dollars by shifting reimbursement to a taxpayer-funded flood insurance program.

At a trial on a representative “bellwether” claim, a federal jury found that State Farm had violated the FCA. The insurer argued to dismiss the case, however, because the Rigsbys’ original attorney had broken the trial court’s seal by sharing some evidence from the case with reporters — a violation that required automatic dismissal, it said.

Both the trial court and the U.S. Court of Appeals for the Fifth Circuit sided with the Rigsbys, noting that the attorney’s violation had caused no real harm and that, on balance, a dismissal wouldn’t serve justice. Each court relied on the balancing test articulated by the Ninth Circuit in United States ex rel. Lujan v. Hughes Aircraft Co., which weighs three factors: Harm to the government, particularly with respect to a criminal case; seriousness of the seal violation; and evidence of bad faith by the violator.

Three-Factor Analysis Is Valid

On Tuesday the Supreme Court affirmed the Fifth Circuit’s “careful analysis” and said that the trial court had exercised its “inherent power” to fashion remedies for breaches of its own orders. Finding “nothing” in the FCA’s text to override that power, Justice Kennedy said that the lower court “did not abuse its discretion by denying [State Farm’s motion to dismiss], much less commit plain error.”

In particular, Justice Kennedy rejected State Farm’s argument that an unviolated seal is necessary to maintain a cause of action under the FCA. The statute does contain some “express conditions,” he said, but the seal requirement isn’t among them — it is procedural in nature, and “the question of whether dismissal is appropriate should be left to the sound discretion of the district court.”

As for standards to guide the exercise of that discretion, the opinion was deliberately sketchy. “While the factors articulated in [Lujan] appear to be appropriate,” said Justice Kennedy, “it is unnecessary to explore these and other relevant considerations.”

As a result, the Lujan factors now govern in the Fifth and Ninth Circuits, while different case-by-case criteria have been applied elsewhere and aren’t necessarily invalid. Prudent courts will likely start migrating to Lujan, however, given its proven success in Rigsby.

Justice Kennedy concluded by noting that, even when dismissal is not merited, courts still may “punish and deter” seal violations with monetary penalties or attorney discipline. By presenting all-or-nothing arguments for dismissal at the trial level, however, State Farm’s attorneys sacrificed this option.

“Had [State Farm] sought some lesser sanctions, the District Court might have taken a different course,” he chided. “Yet [State Farm] failed to do so.”


R. Scott Oswald represents whistleblowers under the False Claims Act. He is managing principal of The Employment Law Group, P.C., a law firm based in Washington, D.C.

(Note: This version has been slightly edited from the version published by Law360.)