Amicus Curiae Brief — State Farm Fire & Cas. Co. v. United States ex rel. Rigsby, 136 S. Ct. 872 (2016) (No. 15-513)

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No. 15-513 OFFICE OF THE CLERK

IN THE

Supreme Court of the United States

STATE FARM FIRE AND CASUALTY COMPANY,

Petitioner,

v.

UNITED STATES OF AMERICA, EX REL.

CoRI RIGSBY & KERRI RIGSBY,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Fifth Circuit

BRIEF OF WASHINGTON LEGAL FOUNDATION AND

ALLIED EDUCATIONAL FOUNDATION

AS AMICI CURIAE IN SUPPORT OF PETITIONER

Cory L. ANDREWS

Counsel of Record

MARK S. CHENOWETH

WASHINGTON LEGAL

FOUNDATION

2009 Massachusetts Ave., NW

Washington, DC 20036

(202) 588-0302

August 5, 2016 candrews@wlf.org

WILSON-EPES PRINTING Co .INC. — (202) 789-0096 — WASHINGTON, D.C. 20002

Lineary of Congree

Lew Lirery

_

QUESTION PRESENTED

What standard governs the decision whether

to dismiss a relator's claim for violation of the False

Claims Act’s (FCA) seal requirement under 31

U.S.C. § 3730(b)(2)?

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TABLE OF CONTENTS

TABLE OF AUTHORITISS .................................... Vv

INTERESTS OF AMICI CURIAE....................00..0. l

STATEMENT OF THE CASE....................00.0000002... 2

SUMMARY OF ARGUMENT..............................025. 5

I. THE HOLDING BELOW IS INCONSISTENT

WITH THE PLAIN LANGUAGE AND

STATUTORY STRUCTURE OF THE FCA ............ 7

IT. EVEN IF DISMISSAL IS DISCRETIONARY,

THE COURT SHOULD REJECT THE TEST

ie 11

A. Proving Actual Harm to the

Government Should Not Be

Required for Dismissal ..................... 11

B. Any Test the Court Adopts

Should Discourage Further

Gamesmanship by Qui Tam

Relators and their Counsel .............. 13

C. The Appropriate Test Should

Consider Reputational Harm to

A 16

Ill. THE PANEL IMPROPERLY IGNORED THE

EXTENT OF RESPONDENTS’ EGREGIOUS,

BAD-FAITH VIOLATIONS OF THE FCA’S

RS 20

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TABLE OF AUTHORITIES

Page(s)

CASES

Allison Engine Co. v. United States ex rel. Sanders,

ST CSE ae 1

Anderecon v. Yungkau,

ll x

Davis v. Mich. Dep't of Treasury,

a. sernicnenneunencenennin 9

Erickson ex rel. United States v. Am. Inst.

of Biological Sciences, 716 F. Supp. 908

TEE RN Ne Resid 17

Exxon Shipping Co. v. United States Dep't of

the Interior, 34 F.3d 774 (9th Cir. 1994) ............ 12

Graham Cnty. Soil & Water Conservation Dist.

vu. United States ex rel. Wilson,

a rennstemneseseteneensensson l

Hallstrom v. Tillamook Cnty.,

er rs)

Harrison v. Westinghouse Savannah River Co.,

176 F.3d 776 (4th Cir. 1999)..........................c000 16

Hughes Aircraft Co. v. United States ex rel.

Schumer, 520 U.S. 939 (1997) .....................0000+ 13

oe

vi

Page(s)

Link v. Wabash R.R. Co.,

ee 24

Mach Mining, LLC v. EEOC,

a ee x

Natl Hockey League v. Metro. Hockey Club, Inc.,

TTA, STE 15

Pioneer Inv. Services Co. v. Brunswick Assocs.

Eg ee 23

Powell v. Davis,

415 F.3d 722 (7th Cir. 20065)............................... 24

Smith v. Clark/Smoot/ Russell,

796 F.3d 424 (4th Cir. 2015)................00....... 14, 17

Taylor v. State Farm Fire & Casualty Co.,

No. 06-cv-9-LTS-RHW (S.D. Miss. 2006) ............. 23

United States ex rel. Betteroads Asphalt, LLC

vu. R & F Asphalt Unlimited, Inc., No. 14-cv-1855,

2016 WL 861244 (D.P.R. Mar. 7, 2016)................ 14

United States ex rel. Bibby v. Wells Fargo Home

Mortg. Inc., 76 F Supp. 3d 1399

RR RR A 14

United States ex rel. Costa v. Baker & Taylor, Inc.,

955 F Supp. 1188 (N.D. Cal. 1997)...................... 13

United States ex rel. LeBlanc v. ITT Indus., Inc.,

No. 07-cv-401 (SHS) (S.D.N.Y. June 20, 2007) .... 18

wa

vii

Page(s)

United States ex rel. Lujan v. Hughes Aircraft

Co., 67 F.3d 242 (9th Cir. 1995)............. 5, 11, 12, 13

United States ex rel. Nathan v. Takeda Pharm.

N. Am., Inc., 707 F.3d 451 (4th Cir. 2013)........... 16

United States ex rel. Pilon v. Martin Marietta

Corp., 60 F.3d 995 (2d Cir. 1995) ......................... 17

United States ex rel. Ruscher v. Omnicare, Inc.,

No. 08-cv-3396, 2015 WL 4389644 (S.D. Tex.

Tlic iciciichiintiidibiigtiniehdddpmpbipetiesaendionnense 14

United States ex rel. Siegel v. Thoman,

eT 8

United States ex rel. Summers v. LHC Grp., Inc.,

623 F.3d 287 (6th Cir. 2010).......................... passim

United States v. Monsanto,

ee »

United States ex rel. Rigsby v. State Farm Ins. Co.,

No. 06-cv-433 (S.D. Miss. 2007)..................0..00.000- 12

United States ex rel. Touhy v. Regan,

a ctudenpmnnotant 11

Universal Health Servs., Inc. v. United States

ex rel. Escobar, 136 S. Ct. 1989 (2016)................... 1

Vt. Agency of Natural Res. v. United States ex rel.

Stevens, 529 U.S. 765 (2000)..................2..cccc0eee00e- 10

PSS), . a. ell ce CL!UChUmheTLh.hUCCUh CTCL

Vili

Page(s)

Watts v. SEC,

482 F.3d 601 (D.C. Cir. 2007) ..................ssecccceeeees 12

STATUTES

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TSE ener ne eh 30 8,9

a piccccinttcsccnirenteninninetsiiesanieuiaiien 2,8

31 UB.C. § STSOG A) ...22000.c0cccececescseese 2, 5, 6, 7, 8, 10

Oe a aivecciareccavonssricdedentoconescuiasns 2, 8

is ccadccansinetntnpepestnlthaiepeitiel 15

OTHER SOURCES

81 Fed. Reg. 42,501 (June 30, 2016)..............000000.... 19

David Freeman Engstrom, Harnessing the Private

Attorney General: Evidence From Qui Tam

Litigation, 112 Colum. L. Rev. 1244 (2012) ........... 19

S. Rep. No. 345, 99th Cong., 2d Sess. (1986) .......... 17

INTERESTS OF AMICI CURIAE'

Washington Legal Foundation (WLF) is a

nonprofit, public-interest law firm and policy center

with supporters in all 50 states. WLF devotes a

substantial portion of its resources to promoting free

enterprise, individual rights, a _ limited and

accountable government, and the rule of law. To that

end, WLF has frequently appeared in this and other

federal courts in cases concerning the appropriate

scope and application of the False Claims Act (FCA),

31 U.S.C. § 3729 et seq. See, e.g., Universal Health

Servs., Inc. v. United States ex rel. Escobar, 136 S.

Ct. 1989 (2016); Graham Cnty. Soil & Water

Conservation Dist. v. United States ex rel. Wilson,

559 U.S. 280 (2010); Allison Engine Co. v. United

States ex rel. Sanders, 553 U.S. 662 (2008).

Allied Educational Foundation (AEF) is a

nonprofit charitable foundation based in Tenafly,

New Jersey. Founded in 1964, AEF is dedicated to

promoting education in diverse areas of study, such

as law and public policy, and has appeared as

amicus curiae in this Court on a number of

occasions.

In recent decades, excessive FCA liability has

spawned abusive litigation against businesses, both

' Pursuant to Supreme Court Rule 37.6, amici state

that no counsel for a party authored this brief in whole or in

part; and that no person or entity, other than amici and their

counsel, made a monetary contribution intended to fund the

preparation and submission of this brief. All parties to this

dispute have consented to the filing of this brief, and global

letters of consent are on file with the Court's docket.

2

large and small, to the detriment of free enterprise,

employees, shareholders, and consumers. Amici fear

that the test applied by the court below, by not

requiring dismissal of FCA claims in the face of

deliberate and repeated bad-faith qui tam seal

violations, further incentivizes such seal abuses by

relators who seek to damage a defendant's public

reputation in an effort to force that defendant to

settle even the most frivolous of FCA claims.

STATEMENT OF THE CASE

The FCA’s qui tam provisions allow private

individuals with knowledge of fraud perpetrated

against the United States Treasury to bring suit “in

the name of the Government.” 31 U.S.C.

§ 3730(b)(1). To incentivize qui tam relators to come

forward and expose such fraud, the Government

pays a bounty of up to 30% on all recoveries. In

authorizing that private right of action, the FCA

requires that a relator’s complaint, including a

written evidentiary disclosure, “shall be filed in

camera, shall remain under seal for at least 60 days,

and shall not be served on the defendant until the

court so orders.” 31 U.S.C. § 3730(b)(2). The

Government may, for good cause, obtain additional

extensions of the 60-day seal period. 31 U.S.C.

§ 3730(b)(3).

Petitioner State Farm Fire and Casualty

Company (State Farm) is a leading provider of

property insurance to homeowners throughout the

United States. Respondents Cori and Kerri Rigsby

are former independent claims adjusters who

provided third-party adjustment services to State

Farm’s policyholders in the wake of Hurricane

3

Katrina in 2005. In April 2006, respondents filed

suit against State Farm under the FCA, alleging

that the company defrauded the federal government

by instructing claims adjusters to mischaracterize

wind damage caused by Hurricane Katrina (and

covered under State Farm’s homeowner policies) as

flood damage (covered by the federal government

under the National Flood Insurance Program). Pet.

App. 113a-114a.

After filing their FCA complaint under seal

with the district court, respondents and their then-

counsel, Dickie Scruggs, repeatedly violated the seal

provision by notifying news organizations and others

about the existence and nature of the qui tam suit.

Long before the seal was lifted, respondents and

Scruggs hired a prominent public relations firm and

disclosed the details of their suit to national media

outlets, including ABC, CBS, the Associated Press,

and the New York Times, resulting in nationwide

print and television coverage. Pet. App. 45a-50a. In

September 2006, respondents met with then-U-S.

Congressman Gene Taylor of Mississippi, who

publicly excoriated State Farm from the well of the

House of Representatives for “violat[ing] the False

Claims Act by manipulating damage assessments to

bill the federal government instead of the

companies.” Jd. at 49a-50a. In February 2007,

Congressman Taylor publicly disclosed to the House

Oversight and Investigations Subcommittee that

“(tlhe Scruggs Law Firm represents the [Rigsby]

sisters in a False Claims Act filing against State

Farm and [E.A. Renfroe & Company, Inc.].” J.A. 548.

After granting several extensions of the seal period

at the Government’s behest, the district court lifted

the seal on August 1, 2007 Id. at 62a.

4

Based on respondents’ willful violations of the

FCA seal requirement, State Farm moved to dismiss

the suit and for judgment as a matte. of law. Pet.

App. 44a-69a; 72a-77a. In denying tl« motions, the

district court concluded that State Farm had not

shown that respondents’ disclosures’ either

“hampered the government's investigation or

otherwise compromised the government's ability to

make its investigation.” Jd. at 67a.

Although the operative complaint alleged a

“wholesale scheme to shift wind claims to water

claims,” respondents proceeded to trial based on a

single flood claim for damage to Thomas and Pamela

McIntosh’s waterfront home in Biloxi, Mississippi.

Pet. App. 7a. Specifically. respondents contended at

trial that the McIntosh claim was false not because

there was no flood damage, but because there was no

covered flood damage, as the house was purportedly

rendered a “total loss” by wind before the

floodwaters arrived. /d.

At trial, however, State Farm introduced

overwhelming video, photographic, and testimonial

evidence showing that the McIntosh house was

overrun with water from Hurricane Katrina, which

produced the largest storm surge ever recorded in

the United States. That evidence revealed extensive

structural damage to the house below the five-foot

flood line; yet, above the flood line, chandeliers hung

undisturbed, windows remained intact, and items

stayed in place in cabinets and on shelves. The jury

ultimately ignored this evidence, finding that the

McIntosh house sustained no flood damage and that

State Farm’s submission of a claim for the $250,000

flood policy limits was fraudulent. Id. at 7a.

5

On appeal, the Fifth Circuit affirmed.

Recognizing that a circuit split existed on whether

dismissal is always the appropriate sanction for

willful qui tam seal violations, the panel purportedly

adopted and applied the balancing test articulated

by the Ninth Circuit in United States ex rel. Lujan v.

Hughes Aircraft Co., 67 F.3d 242 (9th Cir. 1995). Pet.

App. 19a-2la. Conceding that respondents

repeatedly and _ willfully violated the _ seal

requirement, the Fifth Circuit nonetheless concluded

that such violations did not warrant dismissal of

respondents’ FCA suit. Jd. at 22a-23a. Even

presuming bad faith on the part of the respondents,

the panel concluded that the Government was not

harmed and therefore “a fundamental purpose of the

seal requirement” was “not imperiled.” Jd. at 22a.

SUMMARY OF ARGUMENT

Although it is undisputed that respondents in

this case repeatedly and flagrantly violated the

FCA’s seal provision by informing § news

organizations and others about the existence and

nature of their qui tam suit, the Fifth Circuit panel

affirmed the district court’s refusal to dismiss

respondents’ suit for those egregious violations. That

holding is not only inconsistent with the plain

language and structure of the FCA, but it creates

perverse incentives for unscrupulous relators to

routinely flout the FCA’s seal requirement.

As the Sixth Circuit has recognized, 31 U.S.C.

§ 3730(b)(2)’s seal requirement is no mere procedural

formality—it is a mandatory prerequisite to filing

and maintaining a qui tam suit. That understanding

flows from Congress’s repeated and unambiguous

6

use of the word “shall” in § 3730(b)(2)’s seal

provision. It also follows from the fact that Congress

enacted the qui tam seal requirement as part of the

private right of action, thereby making the seal a

“mandatory, not optional condition precedent” to the

private right of action. Accordingly, a _ relator’s

failure to comply with the FCA’s seal requirement is

a fatal deficiency that warrants dismissal with

prejudice of a qui tam suit.

Even if district courts enjoy broad discretion

to fashion the appropriate remedy for qui tam seal

violations in any given case, that discretion is surely

not boundless. Despite presuming bad faith on the

part of the respondents, the Fifth Circuit concluded

that because the Government was not actually

harmed, “a fundamental purpose of the seal

requirement” was “not imperiled” and dismissal was

not warranted. Pet. App. 22a. But such a “balancing

test” is not only unreasonable, it is unfair. At a bare

minimum, the appropriate test should not require a

qui tam defendant to prove that which it does not

have the capacity to prove—actual harm to the

Government. Making proof of Government harm the

dispositive factor in a balancing test not only

deprives the test of “balance,” but undoubtedly has

resulted in under-enforcement of the _ seal

requirement.

Moreover, by placing undue weight on actual

harm to the Government, the Fifth Circuit's

balancing test invites further gamesmanship by qui

tam relators and their counsel. Not only would

dismissal in this case punish the Rigsbys for

violating the seal, but it would remove any incentive

for other relators in other cases to engage in similar

7

behavior. Yet the Fifth Circuit’s approach invites a

misalignment of the relator’s interests with the

Government's, while improperly discounting the very

real reputational harm and settlement pressure that

relators are able to exact on defendants through

calculated violations of the qui tam _ seal

requirement. For that reason, any test the Court

adopts should discourage such bad behavior and

include reputational harm to the defendant as a

relevant consideration.

ARGUMENT

L. THE HOLDING BELOw Is INCONSISTENT WITH

THE PLAIN LANGUAGE AND STATUTORY

STRUCTURE OF THE FCA

By withholding the sanction of dismissal

unless the defendant can prove actual harm to the

Government, the holding below contravenes the

FCA’s plain language and structure. Congress's

unambiguous requirement that a qui tam relator’s

complaint and evidentiary disclosure “shall” remain

under seal underscores the mandatory nature of the

seal as a precondition for filing and maintaining the

suit. And the fact that Congress enacted the qui tam

seal requirement in the very same subsection of the

statute in which it created the private right of action

reinforces the understanding that a relator’s full

compliance with the seal requirement is an absolute

prerequisite for a qui tam suit.

The FCA’s qui tam provision requires that a

relator’s complaint, including a written evidentiary

disclosure, “shall be filed in camera” and “shall

remain under seal for at least 60 days.” 31 U.S.C.

8

§ 3730(b)(2) (emphasis added). Congress’s choice of

words is both unmistakable and dispositive, and

federal courts are not free to rewrite the statutory

language. Through its repeated and unambiguous

use of the word “shall,” Congress enacted

§ 3730(b)(2)'s seal provision as a “mandatory, not

precatory” requirement. Mach Mining, LLC ov.

EEOC, 135 S. Ct. 1645 (2015); see United States v.

Monsanto, 491 U.S. 600, 607 (1989) (“Congress could

not have chosen [a] stronger wor[d] [than ‘shall’] to

express its intent that forfeiture be mandatory.”).

Similarly, a statutory provision is optional or

conditional where the statute states that the parties

“may” take such action. Indeed, the juxtaposition of

“shall” and “may” in § 3730(b) only reinforces the

ordinary meaning of “shall.” See, e.g.,

§ 3730(b)(1) (“A person may bring a civil action for a

violation ...”); § 3730(b)(2) (“The Government may

elect to intervene ...”); § 3730(b)(3) (“The

Government may, for good cause shown, move the

court for extensions of time during which the

complaint remains under seal ...”) (emphases

added). As this Court has recognized, “when the

same [statutory provision] uses both ‘may’ and

‘shall,’ the normal inference is that each is used in

its usual sense—the one being permissive, the other

mandatory.” Anderson v. Yungkau, 329 U.S. 482, 485

(1947); see ‘J/nited States ex rel. Siegel v. Thoman,

156 U.S. 353, 359-60 (1895) (explaining that when

Congress uses the “special contradistinction” of

“shall” and “may,” no “liberty can be taken with the

plain words of the statute,” which indicate

“command in the one and permission in the other”).

9

Further, it is “a fundamental canon of

statutory construction ... that the words of a statute

must be read ... with a view to their place in the

overall statutory scheme.” Davis v. Mich. Dep't of

Treasury, 489 U.S. 803, 809 (1989). Here, the

“overall statutory scheme” reinforces what the plain

text makes clear: a relator’s compliance with the seal

requirement is a mandatory prerequisite to suit.

Indeed, Congress inserted both the grant of a private

right of action and the seal requirement into

§ 3730(b), entitled “Actions by private persons.”

As this Court has held, when Congress enacts

a procedural requirement at the same time it creates

a private right of action, it is a “mandatory, not

optional condition precedent” to the private right of

action. Hallstrom v. Tillamook Cnty., 493 U.S. 20, 26

(1989) (holding that because the Resource

Conservation and Recovery Act’s 60-day notice was

“expressly incorporated by reference” into the

statute’s right of action, “it acts as a specific

limitation on a citizen's right to bring suit”).

In line with these precedents, the Sixth

Circuit has adopted a bright-line rmle requiring

dismissal for any violation of the FCA’s seal

provision. See United States ex rel. Summers v. LHC

Grp., Inc., 623 F.3d 287, 296 (6th Cir. 2010). In doing

so, the Sixth Circuit explained that the Ninth

Circuit's “Lujan-style balancing test”—which the

panel adopted in this case—impermissibly

recalibrates factors that Congress has already

balanced and constitutes “a form of judicial

overreach.” Id. at 296.

—_—— ”

10

And because a qui tam relator, who has

suffered no injury, is deemed to satisfy Article II!

standing under the FCA only as “the assignee of a

claim” on behalf of the Government, strict adherence

to the FCA’s pre-suit requirements is especially

warranted. See Vt. Agency of Nat. Res. v. United

States ex rel. Stevens, 529 U.S. 765, 773 (2000) (“The

FCA can reasonably be regarded as effecting a

partial assignment of the Government's damages

claim.”). Chief among the FCA’s statutory

preconditions for such an assignment is § 3730(b)(2),

which requires that a relator’s complaint and

written evidentiary disclosure “shall remain under

seal for at least 60 days ... [or] until the court so

orders.” 31 U.S.C. § 3730(b)(2).

If the Government itself were bringing an

FCA suit, it would do everything in its power to keep

secret the very existence of the case until the last

possible moment. It therefore follows that if a relator

is truly standing in the shoes of the Government, he

or she must accept both the statutory benefits and

the statutory burdens of acting in the Government's

best interests. That didn’t happen in this case, where

respondents repeatedly violated the FCA’s seal

provision by informing news organizations and

others about the existence and nature of their qui

tam suit.

In sum, because mandatory dismissal for qui

tam seal violations is the remedy most faithful to the

statute's plain language and overall structure, the

Court should reverse the panel’s holding below.

1]

Il. EVEN IF DISMISSAL IS DISCRETIONARY, THE

CourRT SHOULD REJECT THE TEST USED IN

Tuts CASE

A. Proving Actual Harm to _ the

Government Should Not’ Be

Required for Dismissal

The Fifth Circuit held that, without a showing

by the defendant of actual harm to the Government,

dismissal is not an appropriate remedy for even

repeated, bad-faith FCA seal violations. In doing so,

the Fifth Circuit expressly adopted the Ninth

Circuit’s balancing test. See Lujan, 67 F.3d at 245;

Pet. App. 22a. But that short-sighted test not only

imposes a burden on FCA defendants that the

statute does not, it ignores the enormous difficulties

that defendants face in showing actual harm to the

Government—an insurmountable burden that, as

here, necessarily results in an under-enforcement of

the gui tam seal requirement.

As a practical matter, it is nearly impossible

for a qui tam defendant to prove that the

Government has been actually harmed by a seal

violation. Any effort by defense counsel to depose the

Government's investigators would almost certainly

be resisted on grounds of privilege and/or under so-

called Touhy regulations. See United States ex rel.

Touhy v. Regan, 340 U.S. 462 (1951). Under Touhy,

the law affords special treatment to federal agencies

that object to such subpoenas on the ground that

they impose an undue burden on the Government's

operations. See, e.g., Watts v. SEC, 482 F.3d 501, 509

(D.C. Cir. 2007) (recognizing the “government's

interest in not being used as a speakers’ bureau for

12

private litigants”); Exxon Shipping Co. v. United

States Dep't of the Interior, 34 F.3d 774, 779 (9th Cir.

1994) (recognizing that the federal government has a

“serious and legitimate concern that its employee

resources not be commandeered into service by

private litigants to the detriment of the smooth

functioning of government operations’).

In most cases, the Government itself is unable

to offer any more proof of harm than it does when it

moves to extend the seal period. Here, for example,

the Government repeatedly and successfully sought

to keep the proceedings under seal on the good-cause

basis that lifting the seal would “likely prejudice” the

Government's investigation. See United States’

Memorandum of Points & Authorities in Support of

Its Ex Parte Application for a Stay of Civil

Proceedings, United States ex rel. Rigsby v. State

Farm Insurance Co., No. 06-cv-433, ECF Dkt. 13 at

74 (S.D. Miss. May 9, 2007); see also Lujan, 67 F.3d

at 246 (quoting the Government’s statement that it

“could not claim in this case that it was prejudiced

by the public disclosure of the qui tam allegations

prior to the lifting of the seal,” nor could it assert, “as

a factual matter, that it was not prejudiced”). It is

therefore unreasonable to require an FCA defendant

to prove that which even the Government cannot

prove. Indeed, “the rules are in place precisely

because Congress understood” that “the extent to

which the Government might be harmed by

disclosure is impossible to evaluate a _ priori.”

Summers, 623 F.3d at 298.

13

B. Any Test the Court Adopts Should

Discourage Further Gamesmanship

by Qui Tam Relators and their

Counsel

However well-intentioned Congress may have

been when it enacted the FCA, the statute's qui tam

provision has been transformed into a lucrative

vehicle for enterprising plaintiffs’ attorneys.

Congress did not enact the FCA’s seal provision “to

provide an extra bargaining chip in settlement

negotiations,” United States ex rel. Costa v. Baker &

Taylor, Inc., 955 F. Supp. 1188, 1191 (N.D. Cal.

1997). Yet the Fifth Circuit's undue emphasis on

actual harm to the Government altogether ignores

the reality that, “[a]s a class of plaintiffs, qui tam

relators are different in kind than the Government”

because they “are motivated primarily by prospects

of monetary reward rather than the public good.”

Hughes Aircraft Co. v. United States ex rel. Schumer,

520 U.S. 939, 949 (1997). Allowing dismissal as a

sanction only upon a showing of actual harm to the

Government not only misaligns the relator’s and the

Government's interests, but it also results in under-

enforcement of the qui tam seal requirement. Such

under-enforcement further incentivizes future seal

violations by qui tam relators (and their counsel),

who will be perfectly free to publicly demonize FCA

defendants in an effort to gain added settlement

leverage before trial.

As the Sixth Circuit has explained, the Lujan

test allows qui tam relators to comply with the

FCA’s seal requirement “only to the point the costs of

compliance are outweighed by the risk that any

given violation would turn out to be severe enough to

14

require dismissal of an FCA claim.” Summers, 623

F.3d at 298. But if, as here, the threshold for

dismissal is nearly impossible to satisfy, willful seal

violations are virtually guaranteed to increase in

frequency—without consequence. And the more

incentives that qui tam relators have to violate the

seal, the greater the likelihood that actual harm to

the Government ultimately will result. Indeed,

willful violations of the FCA’s seal requirement have

become much more common in recent years. See, e.g.,

Smith v. Clark/Smoot/Russell, 796 F.3d 424 (4th

Cir. 2015); United States ex rel. Betteroads Asphalt,

LLC v. R & F Asphalt Unlimited, Inc., No. 14-cv-

1855, 2016 WL 861244 (D.P.R. Mar. 7, 2016); United

States ex rel. Ruscher v. Omnicare, Inc., No. 08-cv-

3396, 2015 WL 4389644 (S.D. Tex. July 15, 2015);

United States ex rel. Bibby v. Wells Fargo Home

Mortg. Inc., 76 F. Supp. 3d 1399 (N.D. Ga. 2015).

If this Court were to adopt the Fifth Circuit's

test, “it would be the plaintiffs, not the

Government's, interests that [are] paramount.”

Summers, 623 F.3d at 298. Because qui tam relators

and their counsel are in no position to judge the

harm that violating the seal might do to the

Government's investigation, the consequence for

violating the seal must be severe enough to

discourage all willful violations. Otherwise, if

policing the seal requirement is reduced simply to

evaluating whether the Government was actually

harmed, no meaningful deterrent remains for even

reckless disclosures of information that may have

harmed the Government.

Here, as in other areas of the law, “the most

severe in the spectrum of sanctions provided by

15

statute or rule must be available ... not merely to

penalize those whose conduct may be deemed to

warrant such a sanction, but to deter those who

might be tempted to such conduct in the absence of

such detriment.” Natl Hockey League v. Metro.

Hockey Club, Inc., 427 U.S. 639, 643 (1976). Yet,

under the Fifth Circuit's misguided approach, a qui

tam relator’s compliance with the FCA’s seal

requirement would be “subject to the same risk

analysis as any other litigation tactic.” Summers,

623 F.3d at 298. That is precisely what happened in

this case.

Contrary to the contention of the United

States as amicus curiae, dismissal of a qui tam suit

does not automatically guarantee a “windfall” for an

FCA defendant. Rather, the Government always

retains the right to intervene at any time in the case

upon a showing of “good cause.” 31 U.S.C.

§ 3730(c)(3). While the dismissed relator forfeits her

right to participate in the suit and claim any portion

of the recovery, dismissal of the relators’ claims does

not affect the ability of the United States to pursue a

valid claim against the defendant. The Government

thus always retains a key role in the sound

development of the law, and the Government's

decision to intervene in such cases provides a critical

check against not only the defendants’ misconduct, if

any, but against the possible distortion of the FCA’s

purpose by financially motivated relators who would

otherwise seek to violate the seal provision in order

to extract a settlement. Indeed, if anyone is

maneuvering for a windfall in such cases, it is the

relator, whose singular quest for a payoff is so great

that he is willing to publicize the existence of the

case before the Government has even had an

16

opportunity to decide whether it is worth pursuing.

C. The Appropriate Test Should

Consider Reputational Harm to the

Defendant

According to Lujan, when determining

whether an FCA lawsuit should be dismissed

following a seal violation, “protecting the rights of

defendants is not an appropriate consideration.”

Lujan, 67 F.3d at 247. But that misguided approach

ignores the very real stigma that accompanies

allegations of fraud, coupled with the threat of treble

damages and substantial per-claim penalties, which

often lead many FCA defendants to conclude that

settlement is the only viable option—even for

frivolous claims. And because the seal itself operates

to prevent the defendant from knowing the detailed

allegations of the qui tam complaint, FCA

defendants are often caught flat-footed and unable to

respond effectively to hostile media coverage.

By placing undue weight on whether the

Government suffered actual harm, the Fifth Circuit's

balancing test improperly discounts the very real

reputational harm and unfair prejudice that

defendants suffer through calculated violations of

the qui tam seal requirement. Nonetheless, the

legitimate interest in “protect[ing] defendants from

harm to their goodwill and reputation” is “as

applicable in cases brought under the [False Claims]

Act as ... in other cases.” United States ex rel.

Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d

451, 456 (4th Cir. 2013) (quoting Harrison ov.

Westinghouse Savannah River Co., 176 F.3d 776, 784

(4th Cir. 1999)).

17

Although the Fifth and Ninth Circuits fail

even to take into account the interests of defendants,

the FCA’s legislative history makes clear that

Congress believed that “sealing the initial private

civil false claims complaint protects both the

Government and the defendant's interests.” S. Rep.

No. 345, 99th Cong., 2d Sess. 24 (1986) (emphasis

added). Indeed, as the Senate Report further

confirms: “By providing for sealed complaints, the

Committee does not intend to affect defendants’

rights in any way.” Id. at 24 (emphasis added).

Accordingly, Congress’s purposes in enacting

the qui tam seal requirement can most faithfully be

advanced by a test that takes seriously FCA

defendants’ reputational interests. That is why both

the Second and the Fourth Circuits apply a test that

explicitly accounts for those interests. See, e.g.,

Smith, 796 F.3d at 430 (recognizing that one of the

“purposes” of the “seal provision” is “to protect the

reputation of a defendant in that the defendant is

named in a fraud action brought in the name of the

United States, but the United States has not yet

decided whether to intervene”); United States ex rel.

Pilon v. Martin Marietta Corp., 60 F.3d 995, (2d Cir.

1995) (recognizing that “a defendant’s reputation is

protected to some degree” by the statutory “sealing

period”); see also Erickson ex rel. United States v.

Am. Inst. of Biological Sciences, 716 F. Supp. 908,

912 (E.D. Va. 1989) (noting that Congress enacted

the FCA’s seal provision, in part, “to protect the

defendant's reputation from unfounded public

accusations’).

The Government itself has recognized that the

FCA's seal requirement protects an FCA defendant's

18

interests as well as the Government’s:

Beyond serving these governmental!

interests, the sealing requirement

protects a defendant's interests as well.

Specifically. it “prevent[s] defendants

from having to answer the complaints

without knowing whether the

government or relators would pursue

the litigation”; and it insulates a

defendants reputation from meritless

suits in which the Government

ultimately declines to _ intervene,

“because the public will know that the

government had an opportunity to

review the claims but elected not to

pursue them.”

Statement of the United States of America in

Support of the Defendants’ Motion to Dismiss,

United States ex rel. LeBlanc v. ITT Indus., Inc., No.

07-cv-401 (SHS), ECF Dkt. 28 at 5 (S.D.N.Y. June

20, 2007) (quoting Pilon, 60 F.3d at 999).

The substantial risk of harm to a defendant's

reputation is vividly illustrated by this case, where

the respondents’ calculated media campaign to vilify

State Farm resulted in an avalanche of unfavorable

publicity that was undeniably damaging to State

Farm’s reputation. Any publicly traded company.

facing downward pressure on shareholder stock price

resulting from negative media coverage, would likely

have been forced into a settlement. Unlike State

Farm, most qui tam defendants do not have the

luxury or the resources to litigate their case all the

way up to the U.S. Supreme Court.

19

Since the Court granted certiorari in this case,

the financial incentive for relators to violate the

mandatory seal to add settlement leverage has

increased dramatically, as the Department of Justice

has recently implemented higher FCA penalties. See

81 Fed. Reg. 42,501 (June 30, 2016). As of August 1,

2016, minimum per-claim FCA penalties rose to

$10,781 (from $5,500) and maximum per-claim FCA

penalties rose to $21,563 (from $11,000). Ibid.

Because per-claim penalties constitute such a large

percentage of overall FCA recoveries, this sharp

spike in penalties portends an exponential rise in

settlement value for even the most baseless FCA

claims.

Even in cases where FCA defendants believe

they have legally compelling defenses on the merits,

the risk of astronomical liability, no matter how

remote, provides a strong motivation to settle FCA

claims. At the same time, “indifference to social cost

may lead profit-motivated private enforcers to

initiate so-called in terrorem lawsuits, using the

threat of massive discovery costs or bad publicity to

extract settlements.” David Freeman Engstrom,

Harnessing the Private Attorney General: Evidence

From Qui Tam Litigation, 112 Colum. L. Rev. 1244,

1254 (2012). Allowing qui tam relators to violate the

FCA’s mandatory seal with impunity only invites

further abuses.

The Court should therefore reject the lopsided

approach to FCA seal violations adopted by the Fifth

and Ninth Circuits. Under such a rule, as Judge

Boggs has observed, plaintiffs are “encouraged to

make disclosures in circumstances when doing so

might particularly strengthen their own position,

20

such as those in which exposing a defendant to

immediate and hostile media coverage might provide

a plaintiff with the leverage to demand that a

defendant come to terms quickly.” Summers, 623

F.3d at 298.

*“**

In sum, because the Fifth Circuit's

requirement of actual harm to the Government

results in under-enforcement of the seal provision

and invites a misalignment of the relator’s and the

Government's interests, the Court should reverse the

panel's holding below.

Ill. THE PANEL IMPROPERLY IGNORED THE

EXTENT OF RESPONDENTS’ EGREGIOUS, BAD-

FAITH VIOLATIONS OF THE FCA’S SEAL

PROVISION

In affirming the district court’s decision not to

dismiss respondents as qui tam relators for violating

the FCA seal provision, the panel below concluded

that “there is no indication that the Rigsbys

themselves communicated the existence of the suit

in the relevant interviews” and that any resulting

leaks were “in the context of allegations about State

Farm misleading policyholders, not the federal

government.” Pet. App. 23a. The appeals court is

wrong on both counts.

After their counsel, Dickie Scruggs, e-mailed a

copy of the FCA complaint’s sealed evidentiary

disclosure to ABC News for use as background,

respondents agreed to be interviewed on camera for

“Blowing in the Wind,” a 20/20 investigative report

that aired on August 25, 2006—nearly a full year

21

before the seal was lifted in this case.? Along with

Scruggs, respondents “spoke publicly for the very

first time” by levelling on-air allegations against

State Farm virtually identical to those contained in

the sealed FCA complaint and_ evidentiary

disclosure. Among other things, viewers learned that

“Dickie Scruggs, the lawyer who took on the big

tobacco companies, is now taking on State Farm.

And the Rigsby sisters’ allegations are a big part of

his lawsuit.” J.A. 377.

Scruggs also e-mailed a copy of the sealed

evidentiary disclosure to the Associated Press (AP).

The Rigsbys later invited an AP correspondent into

their home to conduct an on-the-record interview. On

August 26, 2006, the AP published an article entitled

“Sisters Blew Whistle on Katrina Claims,” which

contained quotations from both Cori and Kerri

Rigsby (but none from Scruggs) alleging misconduct

on the part of State Farm identical to that alleged in

the sealed evidentiary disclosure. The article stated

that “the first of Scruggs’ cases against State Farm

is scheduled to be tried early next year” and that

“the Rigsbys’ cooperation has been invaluable in

building [that] case.” J.A. 246.

? The sealed evidentiary disclosure expressly stated

that it was made pursuant to 31 U.S.C. § 3730 and alleged that

State Farm was “engaging in wholesale fraud both on policy

holders and on the federal government” in “[t]his False Claims

Act case” (emphasis added). J.A. 336. The disclosure also

included a signature block that read “Attorneys for Relators”

and contained a certificate of service for the United States

Attorney and Attorney General. J.A. 368-69.

22

On September 16, 2006, respondents met with

then-U.S. Congressman Gene Taylor of Mississippi.

Only five days later, in remarks published in the

Congressional Record, Congressman Taylor recalled

his meeting with respondents and announced—on

the floor of the House of Representatives—that State

Farm had not only misled policyholders, but had

“stole[n] from the taxpayers” because “[fllood

insurance is paid through you, the taxpayers.” J.A.

539. Accusing State Farm of “commit{ing] fraud

against the United States Government,”

Congressman Taylor explained that State Farm’s

conduct in attributing wind damage to flood waters

“broke the law, because under the False Claims Act,

when you ask your Nation to pay a bill that it should

not pay, you are liable for triple damages and a

$10,000-per-incident fine.” Jbid. Contrary to the

Fifth Circuit’s opinion below, respondents’ seal

violations were patently not limited to “the context of

allegations about State Farm _ misleading

policyholders, not the federal government.” Pet. App.

23a. As Congressman Taylors comments

demonstrate, respondents revealed that they were

alleging fraud “against the United States

Government.”

On September 18, 2006, respondents’ counsel

e-mailed the sealed evidentiary disclosure to the

New York Times. On March 16, 2007, the New York

Times published an article entitled “A Lawyer Like a

Hurricane,” which repeated details concerning State

Farm's handling of Hurricane Katrina claims

identical to those contained in the sealed evidentiary

disclosure. J.A. 484.

23

In February 2007, Congressman Taylor

publicly disclosed to the House Oversight and

Investigations Subcommittee that “[t]he Scruggs

Law Firm represents the [Rigsby] sisters in a False

Claims Act filing against State Farm and [E.A.

Renfroe & Company, Inc.].” J.A. 548. Yet the

relators’ First Amended Complaint (FAC), which

named Renfroe as a defendant in the suit for the

first time, was not filed until May 2007. Thus,

Congressman Taylor apparently learned the details

of the FAC from the relators or their counsel months

before the district court did.* Each of the foregoing

seal violations occurred before the district court

lifted the seal on August 1, 2007.

These uncontroverted facts underscore the

egregious nature of the seal violations committed in

this case. Even if respondents had no personal

involvement in violating the seal—and they clearly

did—the actions of respondents’ attorney are

imputed to them. See, e.g., Pioneer Inv. Services Co.

v. Brunswick Associates Lid., 507 U.S. 380, 397

(1993) (“Petitioner voluntarily chose this attorney as

his representative in the action and he cannot now

avoid the consequences of the acts ... of this freely

selected agent.”) (citing Link v. Wabash R.R. Co., 370

U.S. 626, 633-34 (1962)); Powell v. Davis, 415 F.3d

722, 727 (7th Cir. 2005) (“[A]ttorney misconduct,

3 At the time of his public statements in 2006 and 2007,

Congressman Taylor was represented by Dickie Scruggs, in the

same district court, in a lawsuit against State Farm; the suit

arose from claims under Taylor's homeowner's policy for alleged

damage by Hurricane Katrina. See Taylor v. State Farm Fire &

Casualty Co., No. 06-cv-9-LTS-RHW (S.D. Miss., compl. filed

Jan. 6, 2006).

24

whether labeled negligent, grossly negligent, or

willful, is attributable to the client.”). As this Court

has consistently recognized, “any other notion would

be wholly inconsistent with our system of

representative litigation, in which each party is

deemed bound by the acts of his lawyer agent.”

Pioneer Inv. Services, 507 U.S. at 397 (citing Link,

370 U.S. at 633-34).

The relators’ seal violations in this case are

especially troubling because the Rigsbys and their

counsel actively participated in a larger pattern of

unethical misconduct. For example, as the district

court found in this case, the Rigsbys improperly

accepted hundreds of thousands of dollars in

“consulting fees” from Scruggs. See J.A. 16 (finding

that “Scruggs paid each of the Rigsby sisters an

annual salary of $150,000 to act as ‘consultants’ for

his law firm in connection with hurricane damage

claims”). After a thorough review of the evidence, the

district court concluded that because the Rigsbys

were neither “required to perform any regular

duties” nor “to keep any regularly scheduled hours,”

their ““consulting’ arrangement was a sham.” Ibid.

While the district court correctly found that this

misconduct disqualified the Rigsbys from testifying

in other cases, it nonetheless allowed them (over

State Farm's objections) to serve as relators in this

case. J.A. 32-33.

In sum, the seal violations at issue here are

direct affronts to the federal courts and the integrity

of the judicial process. Amici are aware of no

reported decision under the FCA that involves seal

violations as widespread and calculated as those in

this case. If these willful, bad-faith violations do not

i ll tt ee , lg —

oe, ptt Ml am ili a i i el | i

25

merit the sanction of dismissal, then the FCA's seal

provision will have been rendered a nullity.

CONCLUSION

For the foregoing reasons, amici curiae

Washington Legal Foundation and _ Allied

Educational Foundation respectfully request that

the Court reverse the decision below.

Respectfully submitted,

Cory L. ANDREWS

Counsel of Record

MARK S. CHENOWETH

WASHINGTON LEGAL

FOUNDATION

2009 Massachusetts Ave., NW

Washington, DC 20036

(202) 588-0302

candrews@wlf.org

August 5, 2016