Break the Seal and Lose Your Case?

It is hard to keep quiet when you have a secret big enough that ABC’s 20/20 is interested in interviewing you. But if you talk too soon will the lawsuit your secret culminates in be dismissed?

The False Claims Act (FCA) allows third parties to sue on behalf of the United States for fraud committed against the United States. Per the Act a FCA complaint is kept secret “under seal” until the United States can review it and decide whether it wants to participate in the case.

In Rigsby v. State Farm the Supreme Court will decide what standard applies when deciding whether to dismiss a case because of a seal violation. Some federal circuits dismiss all cases.

While the Supreme Court has yet to rule whether states and local governments can bring FCA claims, local governments, but not state governments, can be sued for making false claims against the federal government.  

State Farm insurance adjusters alleged that after Hurricane Katrina, State Farm instructed them to falsely determine houses and property were damaged by flooding, instead of by wind. State Farm had to pay for wind claims and the federal government had to pay for flooding claims.

The adjusters admitted in oral argument that they violated the seal. Before the seal was lifted their former counsel disclosed the existence of the FCA lawsuit to several news outlets, the adjusters were interviewed by news outlets including ABC’s 20/20, and they notified a Mississippi Congressman about the FCA action.

The Fifth Circuit applied a three-part test to determine whether the seal violation in this case should result in dismissal of the FCA case and concluded it should not.

First, the federal government was not likely harmed because “none of the disclosures appear to have resulted in the publication of the existence of this suit before the seal was partially lifted”; so State Farm didn’t know about the case before the seal was lifted. Second, the seal wasn’t completely violated because the adjusters’ disclosures related to State Farm misleading policy holders, not the federal government. Third, the adjusters didn’t act in bad faith as no evidence indicates they (as opposed to their former lawyers) disclosed the existence of the FCA action in news interviews.

 The Court’s ruling in this case will affect state and local governments. As in all FCA cases which outcome would be best for them is hard to say. To the extent FCA claims can be brought against local governments a test mandating or favoring dismissal for seal violation is preferable. But to the extent state and local governments may bring FCA claims or otherwise benefit from them a test disfavoring dismissal for seal violation is a better outcome.