U.S. Supreme Court Rules on False Claims Act Dismissals

The U.S. Supreme Court, in a near-unanimous (8-1) decision, resolved a divide among circuit courts on the federal government's authority to dismiss a False Claims Act (FCA) suit where the government initially declined to intervene. In U.S. ex rel. Polansky, the Supreme Court held that the government has the authority to dismiss an FCA action at any point in the litigation, so long as it first intervenes in the action. The Court rejected the argument (adopted by Justice Clarence Thomas in dissent) that the government cannot unilaterally dismiss a case if it declined to intervene during the seal period. The Court further held that the standard for dismissal is that found in Federal Rule of Civil Procedure Rule 41(a) (FRCP 41(a)). Both the standard for intervention and the standard for voluntary dismissal will be very easy for the government to meet in nearly all cases.

Background

Under the FCA, whistleblowers, known as relators, file cases under seal, and the government is required to investigate the allegations of fraud while the case remains under seal for 60 days. At the end of the seal period, which is regularly extended, the government is required to inform the court whether it intends to enter the litigation, known as intervention. This positions the government as the primary litigant in the case. If the government declines to intervene, the relator may proceed with the action, and the government waits in the wings for any recovery.

In Polansky, the government investigated the relator’s allegation for two years but declined to intervene, thus allowing the petitioner to proceed qui tam – in the name of the government. The case then continued for nearly a decade before the government decided to intervene, after the relator had accrued $20 million in litigation costs. The government ultimately filed a motion to dismiss, citing the potential cost of continued discovery and the unlikelihood of a recovery by the government. The district court granted the motion and dismissed the action. The U.S. Court of Appeals for the Third Circuit subsequently affirmed the lower court’s decision.

Although circuit courts have generally agreed that some form of federal government intervention post-declination was permissible, there was no consensus among courts on what standard should apply when the government wanted to intervene to dismiss. Before this decision, there were five conflicting judicial interpretations from the U.S. Courts of Appeals for the First, Sixth, Seventh, Tenth and District of Columbia Circuits. Approaches to government intervention ranged from the Sixth Circuit rejecting the government's unilateral dismissal of a relator's FCA suit to the D.C. Circuit granting the government "unfettered discretion" to dismiss an FCA action despite prior declination. These are only two of the five wide-ranging judicial interpretations of the government's ability to intervene and dismiss under the FCA. Other circuit courts have offered different tests the government should apply when intervening post-declination, such as using a rationality standard, considering the burden on the relator or demanding an explanation.

Supreme Court Decision

In the Polansky opinion, authored by Justice Elena Kagan, the Supreme Court held that the government may seek dismissal of an FCA suit over a relator's objection so long as the government intervened at some point in the litigation, whether during the seal period or later. The government can intervene after the seal period upon a showing of "good cause" under 31 U.S.C. §3730(c)(3). While “good cause” is a lax standard, some district courts have recently denied government motions to intervene in FCA cases after the government had previously declined to intervene or elected not to intervene.

The Court also addressed the standard a district court should use in assessing the government's motion to dismiss where a relator objects to dismissal. The Court held that FRCP 41(a) applies. That Rule provides that if a defendant has filed an answer or a summary judgment motion, dismissal requires a "court order on terms that the court considers proper." The Court noted that in most cases the Rule 41 standard will be "readily satisfied" and that the government's views on dismissal are entitled to substantial deference. In the case at hand, the Court held that the requirements of the Rule were satisfied because the government believed that continued litigation would entail significant discovery costs with little chance of success on the merits.

Justice Thomas, writing alone, dissented. He concluded that the FCA did not give the government power to unilaterally dismiss a pending qui tam action after the government declined to take over the action from the relator during the seal period. Significantly, Justice Thomas wrote that there are substantial arguments that the qui tam device itself violates Article II of the U.S. Constitution because Article II vests all executive power – such as civil litigation – in the president and those acting under him. Justices Brett Kavanaugh and Amy Coney Barrett, though joining Justice Kagan's majority opinion on the statutory question, noted that they agreed with Justice Thomas that there are substantial constitutional arguments regarding the FCA's qui tam provisions. Though three Justices are not enough to have a case heard by the Supreme Court – let alone to decide the outcome of the case – this does suggest some possibility that in the future the Court will decide to address the constitutionality of the qui tam device.  

Conclusion

The Polansky decision will likely empower the federal government to act more efficiently to dismiss meritless FCA claims. Defendants thus should continue to press the government to intervene and move to dismiss even in cases where the government initially declined to intervene during the seal period. For example, a defendant can use evidence developed during discovery to attempt to persuade the government that the suit lacks merit. On the other hand, there is some risk that the government's ability to dismiss at any time will make the government less likely to intervene and dismiss during the seal period, as the government now has the flexibility to sit on the sidelines and decide to dismiss at any stage of the litigation. Finally, the suggestion by three Justices that the qui tam provisions are potentially unconstitutional could encourage parties to attempt to raise the constitutional arguments to the Court in some future case. A ruling that the qui tam provisions are unconstitutional would be a dramatic change in the FCA, and one that would be very welcome by companies that are most at risk of False Claims Act litigation.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.