Criminal defense bar sides with business lobby in False Claims Act case at SCOTUS

August 17, 2016

(Reuters) – It’s easy to understand why groups such as the U.S. Chamber of Commerce, the American Tort Reform Association and the Coalition for Government Procurement are siding with State Farm in one of the most colorful business cases the U.S. Supreme Court will hear in its upcoming term. But the organized criminal defense bar?

The case, State Farm v. United States, stems from a 2006 False Claims Act suit two onetime insurance adjustors filed against State Farm, which they accused of fraudulently shifting Hurricane Katrina property damage claims to a government-backed flood insurance program. The adjusters – sisters named Cori and Kerri Rigsby – were represented by plaintiffs’ lawyer Dickie Scruggs, who was at that time one of the most powerful plaintiffs’ lawyers in the country. Scruggs also represented thousands of homeowners who alleged insurance companies were improperly denying their claims by attributing damage to floods rather than wind and storm surge.

Under the False Claims Act, whistleblower complaints are filed under seal and are supposed to remain under seal for at least 60 days to give the Justice Department a chance to investigate the fraud allegations – which, after all, are being asserted on behalf of the federal government. The defendant named in FCA suits isn’t even served with the complaint until the case is unsealed, usually at the time the government informs the court whether it intends to intervene and pursue the case or will step aside, leaving the whistleblower (or, in FCA parlance, relator) to go at the litigation alone. The very existence of a whistleblower complaint is supposed to be a secret until a federal judge orders the case unsealed.

Scruggs, however, was eager to whip up publicity for the homeowners he represented. While the Rigsbys’ FCA complaint was still under seal, Scruggs sent documents from the case to journalists from ABC, the Associated Press and The New York Times. The former adjusters met personally with a Mississippi congressman, who recounted the meeting for the Congressional Record, including the claim that State Farm had violated the Fair Claims Act.

Scruggs ended up in prison for conspiring to bribe a judge over a fee dispute from the Hurricane Katrina suit. The Rigsby sisters got a happier, albeit temporary, ending. Though the Justice Department opted not to intervene in their FCA case, the whistleblowers won a bellwether verdict in federal court in Gulfport, Mississippi, on behalf of the U.S. government. Jurors found that State Farm submitted a false $250,000 flood claim to the U.S. The trial judge trebled the damages and added a civil penalty to bring the total award against State Farm to $758,250, with the Rigsby sisters receiving the maximum possible share for FCA whistleblowers, $227,475. The court also granted the Rigsbys nearly $3 million in legal fees and expenses.

State Farm argued at the 5th U.S. Circuit Court of Appeals that the entire whistleblower case should have been dismissed because the whistleblowers and their lawyers violated the seal order in the case. The 5th Circuit denied the appeal, refusing to adopt a standard that seal violations automatically result in dismissal of the case. The appeals court said such a rule would defy the Congressional mandate to encourage private whistleblowers to police government contractors’ conduct through the FCA.

Instead, the 5th Circuit adopted a balancing test from the 9th Circuit’s 1995 case U.S. v. Lujan. Under the Lujan test, the court said, the Rigsbys’ suit should not have been dismissed. The trial court did not find the whistleblowers themselves violated the FCA seal order in bad faith, but even if their original lawyers’ mistakes were imputed to them, the 5th Circuit said, the Lujan factors weighed against tossing the case.

State Farm, represented by Quinn Emanuel Urquhart & Sullivan and Sullivan & Cromwell, asked the Supreme Court to use the case to resolve a split among the circuits on whether seal violations require the dismissal of FCA suits. Despite opposition from the Rigsby sisters, represented by Weisbrod Matteis & Copley, and from the Justice Department, the justices granted the petition for certiorari last May.

State Farm filed its merits brief at the Supreme Court on July 29. It argues that FCA complaints are not supposed to serve as litigation bargaining chips, and unless the Supreme Court exacts severe punishment for private whistleblowers who publicize their allegations, that’s what the cases will become. “An affirmance here would invite qui tam relators in the future to intentionally disclose sealed FCA filings in order to gain a litigation advantage and to inflict reputational damage on defendants,” the brief said. “Nothing in the FCA’s goals of deterring and compensating fraud on the government contemplates such unscrupulous disregard for statutory rules, court orders, and fundamental principles of fair play.”

The business lobby, as I mentioned above, chimed in this month with amicus briefs backing State Farm. Like the insurance company, the groups argued that violations of FCA seal orders give plaintiffs an advantage the law expressly wanted to restrict when it imposed the gag on disclosing whistleblower complaints. Publicizing the allegations puts pressure on the Justice Department to intervene in FCA cases, which, in turn, frightens defendants into settling. Congress drafted the law to give the Justice Department a chance to weigh whistleblower allegations without outside influences, the amici said. Letting plaintiffs get away with breaking seal orders violates the spirit of the FCA.

The Justice Department recovered nearly $6 billion last year from civil fraud cases brought under the FCA so you can see why businesses that might be targeted in those cases want a say. But the FCA is a civil statute. Why does the National Association of Criminal Defense Lawyers believe strongly enough in FCA seal orders to file an amicus brief in the State Farm case?

Because according to the group’s brief, all whistleblower FCA complaints are reviewed by the Justice Department’s criminal division, as well as government lawyers on the civil side. If potential criminal defendants respond to leaks from whistleblowers flouting FCA seal orders, the NACDL said, they put their Fifth Amendment rights at risk. Meanwhile, abuse of FCA seals can compromise defendants’ Sixth Amendment right to a fair trial, according to the amicus filing.

“Without strict enforcement of the seal, relators have strong incentives to violate it,” wrote NACDL’s lawyers from Sidley Austin. “They can cherry-pick the facts, threaten use of an adverse inference in the event defendants invoke the Fifth Amendment privilege, and use under-informed public opinion to color the view of the merits and of potential prosecution. And relators can use the disclosure to rush the government’s decision and pressure it to intervene – increasing a relator’s chances of success and recovery.”

I hadn’t thought of the criminal implications of the disclosure of whistleblower allegations until I read the NACDL brief. It’s always fascinating to see the potential ripples of Supreme Court cases that seem to present circumscribed questions.

I left a message for NACDL amicus counsel Jeffrey Green of Sidley but didn’t hear back. William Copley of Weisbrod Matteis, who represents the Rigsby sisters, told me he couldn’t comment beyond the brief opposing cert. His side’s merits brief is due next month.

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