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Justices Grapple With Whistleblower Rules in Hurricane Katrina Case

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By Casey C. Sullivan, Esq. on November 02, 2016 12:57 PM

The False Claims Act allows whistleblowers, or 'relators,' to sue contractors who are suspected of fraud in federal contracts. The government can then pick up the suit, or the relator can pursue it herself. In either case, she gets a sizable chunk of any award. But there is a catch. The False Claims Act requires that complaints are filed in camera and kept under seal, with no notice to the allegedly offending contractor. But the act doesn't say what should be done when that seal requirement is broken.

During yesterday's oral arguments, the justices struggled to establish the proper rule. The arguments stem from allegations that State Farm Insurance defrauded the government by misclassifying damage from Hurricane Katrina, forcing the government to cover costs the insurance company should have borne. The company was eventually found liable, but while the suit was still under seal, the whistleblowers' lawyer leaked information about the fraud to the media. That, State Farm argues, should have led to an immediate dismissal of all False Claim Act complaints.

A Leaked Lawsuit Over Flood Damage

Two sisters, Cori and Kerri Rigsby, worked as claims adjusters for State Farm after Hurricane Katrina struck 11 years ago. The sisters alleged that State Farm was fraudulently classifying wind damage, which the company's policies would be liable for, as flood damage, which the National Flood Insurance program would have to cover. They filed a False Claims Act suit against State Farm and pursued it when the government declined to take over, earning a sizable percentage of the damage award against the company.

But, the Rigsbys' lawyer had leaked information about the case while it was still under seal, violating False Claims Act requirements. Both the district court and Fifth Circuit let the verdict stand despite this, finding that the disclosure had not harmed the case.

"Life Is More Complicated"

At oral arguments, State Farm pushed for a bright line rule. Kathleen Sullivan, arguing for State Farm, began by urging the Court to hold "that such bad-faith, willful, and sever violations" of the act's seal requirement "warrant dismissal under any appropriate test." The justices didn't seem too inclined to take the same position.

There could be a "vast range of violations," Justice Breyer noted, echoing concerns raised by Justice Alito. "Some don't hurt really at all. Some are sort of accidental. Some are certainly not bad faith and they didn't cause much trouble. Really, why dismiss the case?" Why not allow the district court to determine what is appropriate, perhaps under something like the Ninth Circuit's Lujan factors, he wondered. A bright line rule might not be appropriate. After all, "Life is more complicated," he said.

If No Bright Line, Then What?

For the rest of the argument, the justices grappled with what standards should be applied to a qui tam seal requirement violation. Many of the justices indicated that the government should be able to weigh in on the effect of a seal violation, which is in place largely to allow the government time to investigate and decide whether to take over a case. "It it's a condition for the government's benefit, the government can waive it," Justice Ginsburg suggested.

"Congress could have said that the seal should be maintained at the Attorney General's discretion," Sullivan responded. "It did not say that."

John Bash, argued for the government, in support of the Rigsbys. He suggested that a test to dismiss a claim for a seal violation should balance the harm the violation caused the government, coupled with the severity of the violation and the intent of the violator. The suggestion seemed to resonate with several justices. "Given the government is the beneficiary of this provision, why shouldn't we give very significant discretion to the government?" Justice Kagan asked, somewhat rhetorically.

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