The United States Department of Justice (DOJ) is seeking with increasing frequency to dismiss meritless qui tam actions under the False Claims Act (FCA) it views as conflicting with government prerogatives.
The FCA is the federal government’s primary litigation tool in combating fraud against the federal government. The FCA allows private persons to file suit for violations of the FCA on behalf of the government. A suit filed by an individual on behalf of the government is known as a “qui tam” action, and the person bringing the action is referred to as a “relator.” Once a relator files a qui tam action, the government is required to investigate the allegations in the complaint. The government may either notify the court it is proceeding with the action (known as “intervening”) or declining to take over the action, in which case the relator may proceed with the action.
The DOJ’s more assertive attitude in rooting out meritless qui tam claims follows from the issuance of the 2018 “Granston memo”. This guidance addresses the DOJ’s authority to dismiss FCA qui tam cases and outlines multiple factors DOJ attorneys should consider in determining whether to seek dismissal.
All in all, this is good news for businesses. Defending meritless qui tam actions is distracting and expensive. Yet, as the DOJ increasingly focuses on its gatekeeper function, district court rulings from across the nation forecast a growing battle over defining the limits of the DOJ’s dismissal authority under the FCA. All businesses with government dealings should be aware of these developments.
DOJ Dismissal Authority under the FCA
Though an available tool to the DOJ since 1986, the DOJ seldom exercised its power until the Granston memo. This memo strongly encourages DOJ prosecutors to consider moving to dismiss meritless whistleblower FCA cases when it is in the government’s best interests. The Granston memo’s factors weighing in favor of dismissal include (1) whether the factual allegations are frivolous; (2) whether the DOJ’s costs exceed its gains; (3) whether the case runs counter to an agency’s programs, policies, and goals; and (4) whether dismissal would preclude an “unwarranted windfall” for the relator.
A Tale of Two Standards: Swift and Sequoia Orange
Courts are now wrestling with the extent of the DOJ’s power to derail FCA claims. A string of cases within the last year show courts organizing in two factions of judicial review: the Swift and Sequoia Orange standards.
The Swift standard comes from the U.S. Court of Appeals for the District of Columbia. In Swift v. U.S., the court recognized that the government has “unfettered discretion” to dismiss qui tam claims due to the government’s inherent status as the real party of interest in each FCA case. Swift reasoned this is true even when the government declines to intervene. Unsurprisingly, the DOJ favors the Swift approach because, among other reasons, it comports better with the deference due to prosecutorial discretion.
The Ninth Circuit’s decision in Sequoia Orange v. Baird-Neece Packing Corp. stands in contrast to Swift. Sequoia Orange requires that courts conduct a limited judicial review to ensure the government’s decision to dismiss is not fraudulent, arbitrary or an abuse of power. This standard requires the DOJ to show a valid governmental interest and that dismissal is rationally related to accomplishing that interest. The burden then shifts to the relator to show evidence of fraud, arbitrariness, or abuse of power. The Tenth Circuit has also adopted this “rational relationship approach.”
The DOJ Wave of Dismissal Actions—Far from a Fait Accompli
Aside from the Ninth, Tenth, and D.C. Circuits, no other federal court of appeals has to date weighed in on the debate between the two standards. Nevertheless, that seems poised to change with a slew of district courts across the country coalescing around either the Swift unfettered right standard or the Sequoia Orange rational relationship approach.
What is particularly notable about at least 10 of these district court cases is that they are brought by the National Healthcare Analysis Group and are based on materially identical allegations regarding purported violations of the Anti-Kickback Statute. Far from resulting in a spree of dismissals in the Granston-era, however, these district courts are reaching different outcomes in these NHAC cases based on how they apply the Swift and Sequoia Orange standards.
Three cases each from the Third, Fifth, and Seventh circuits illustrate just how unsettled this issue of the DOJ’s dismissal authority under the FCA is around the country. In US v. EMD Serono, Inc., a federal judge sitting in the Third Circuit applied the rational relationship approach and granted the DOJ’s request to dismiss an NHAC case. EMD Serono specifically noted this statute mandates a hearing before a court can dismiss an FCA action over a relator’s objection. The court ruled that the unfettered right approach would effectively render this right to a hearing meaningless. In so ruling, EMD Serono acknowledged dismissing the case to conserve costs was rationally related to a valid governmental interest in preserving costs.
Yet, in the Southern District of Illinois, the court weighed essentially the same facts as in EMD Serono, applied the same rational relationship standard, and denied the DOJ’s motion to dismiss. In CIMZNHCA v. UCB, Inc., the court adopted the Sequoia Orange standard for many of the same reasons as EMD Serono. The court, however, was far more skeptical of the DOJ’s reasons for dismissal than the Eastern District of Pennsylvania, particularly doubting the scope of the DOJ’s investigation into the complaint and its cost-benefit analysis. After weighing the evidence, the court found no rational relationship between the government’s cost and policy justifications and dismissal of the action. This decision has been appealed to the Seventh Circuit.
Most recently in late September 2019, a Texas federal judge granted the DOJ’s motions to dismiss in a pair of consolidated NHAC cases. This time, however, the court found the government satisfied its burden under both the Swift and Sequoia Orange standards. The court specifically highlighted the government’s interest in conserving resources as a good enough reason to dismiss the case. It is currently unknown whether NHAC will appeal this decision to the Fifth Circuit.
Defendant companies should welcome the rise in the number of DOJ motions to dismiss. Litigating a meritless qui tam action is, of course, expensive and distracting to business. It is nevertheless important to remember that we are still very much in unsettled territory with respect to the limitation on DOJ dismissal authority. Further, the most important task for businesses remains showing the DOJ why a case should be dismissed in the first place.
We can expect ongoing litigation surrounding the precise standard, Swift or Sequoia Orange, courts will apply in dismissal cases. For the time being, businesses should strongly consider working with the DOJ in cases where the government is seeking dismissal. The more information and data supporting a DOJ cost-benefit analysis at an evidence hearing, the higher the likelihood the DOJ will succeed on the higher rational relationship standard.