# 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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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2016

## Text

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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
I isiinciscscsesiascctshtiniidelienrntepialagslecimmmesapdianl 21
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0627%3A24. Public record. Not legal advice.