High Court Questions Automatic Dismissal Sanction in State Farm Case

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By Daniel Seiden

Nov. 1 — Violating the False Claims Act’s seal requirement shouldn’t automatically result in dismissal of a fraud case against State Farm as punishment, Supreme Court justices suggested Nov. 1 during oral arguments ( State Farm & Fire Cas. Co. v. United States ex rel. Rigsby, U.S., No. 15-513, oral arguments 11/1/16 ).

The court indicated support for penalizing violations on a case-by-case basis. Their questioning focused on how automatic dismissals could hinder the government’s ability to combat fraud.

While the justices showed intense interest in petitioner State Farm’s justification for an automatic dismissal rule, they gave respondents’ counsel a little more breathing room to argue for adoption of a discretionary standard instead of dismissing the case over a relatively minor detail.

Some violations may not be serious enough to justify dismissal, said Justice Stephen Breyer, who favored allowing district courts’ discretion over sanctions.

He said courts should ensure a fair penalty by considering factors such as those established by a U.S. Court of Appeals for the Ninth Circuit decision: harm to the government, the relative severity of the disclosure and whether the disclosure was in bad faith.

Hurricane Katrina Claims

A jury agreed with FCA plaintiffs that State Farm submitted false claims to the government for payment on flood policies arising out of damage caused by Hurricane Katrina.

The U.S. Court of Appeals for the Fifth Circuit ruled that the plaintiffs’ media disclosures weren’t severe enough to harm the government, and that dismissal for the seal violation wasn’t necessary.

State Farm petitioned the Supreme Court to resolve a circuit split on this issue.

Government’s Interest

Much of the session focused on the government’s role in this dispute, and the extent to which the court should consider the government’s view that an automatic dismissal rule would deprive it of opportunities to combat fraud.

An automatic dismissal rule would protect operation of the FCA, State Farm argued.

However, that argument “rings hollow” if the government doesn’t benefit from the seal requirement, Chief Justice John Roberts said.

The government’s burden in pursuing an FCA case would increase if the plaintiffs were removed from cases, Justice Ruth Bader Ginsburg added.

When Justices Anthony Kennedy and Elena Kagan asked why the government shouldn’t have a say in what happens to a case following a seal violation, State Farm pushed back, saying the government often doesn’t know if a seal caused it harm.

‘Sensitive’ to Reality

State Farm also asked the court to find that the case should be dismissed over the respondents’ bad faith media leak even if the court doesn’t adopt an automatic dismissal rule.

Justice Samuel Alito voiced concern that the court would encourage media leaks if it rejects automatic dismissal; Justice Breyer concurred that seals are important in a variety of cases, aside from the FCA, and that violations are serious.

Although they agreed, respondents asked the court to “be sensitive to the reality” that only the respondents’ prior attorney, Dickie Scruggs, participated in and should be held responsible for the leak.

Scruggs, who e-mailed evidentiary disclosures and engineering reports to several news outlets while the case was under seal, went to prison for bribery in an unrelated matter following a 2008 guilty plea.

Kathleen M. Sullivan of Quinn Emanuel Urquhart & Sullivan LLP represented petitioner State Farm. Tejinder Singh of Goldstein & Russell P.C. represented the respondents. John F. Bash, assistant to the U.S. Solicitor General, represented the government.

To contact the reporter on this story: Daniel Seiden in Washington at dseiden@bna.com

To contact the editor responsible for this story: Jerome Ashton at jashton@bna.com

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