Publication

August 26, 2020Client Alert

Seventh Circuit Creates Third Standard to Assess DOJ Dismissal Authority of FCA Claims

Wading into the U.S. Department of Justice’s campaign to dismiss disfavored False Claims Act (FCA) whistleblower actions, the Seventh Circuit recently articulated a third standard for assessing the federal government’s dismissal authority under the FCA. The case, United States ex rel. CIMZNHCA, LLC v. UCB, Inc., exacerbates an already complicated circuit split by rejecting the two prevailing dismissal standards and creating new jurisdictional and statutory interpretation law and a new standard of review along the way.

The UCB decision interjects fresh constitutional and statutory questions into a growing bevy of cases involving DOJ-led attempts to dismiss FCA whistleblower cases that do not match government priorities, increasing the likelihood the U.S. Supreme Court will weigh into this circuit split.

What is this all about?

The FCA is the federal government’s primary litigation tool in combating fraud against the federal government. Under the FCA, private parties called “relators” may file lawsuits (known as qui tam suits) on behalf of the federal government. The law requires the relators to first present their claims to the DOJ so it can investigate the allegations and, if it chooses, to intervene and take over the prosecution of the relator’s suit. If the DOJ declines to intervene, the FCA permits the relator to proceed without any government involvement. The FCA, however, authorizes the DOJ to file motions to dismiss qui tam claims it finds lack merit. In such cases, the FCA requires the district court to hold a hearing before deciding the motion.

For all its detailed statutory procedures, the FCA provides no guidance on what standard a district court should apply when considering whether to grant these dismissal motions. The result is a long-standing circuit split with two prevailing standards. First, there is the D.C. Circuit's Swift standard, which gives the DOJ an "unfettered right" of dismissal. The second is the Ninth Circuit's Sequoia Orange burden-shifting standard, which requires the government to first identify a valid government purpose and then show a rational relation between dismissal and accomplishment of the purpose. If the government does so, the burden shifts to the relator to show that dismissal is fraudulent, arbitrary and capricious, or illegal.

This circuit split assumed greater importance in 2018 following the release of the “Granston Memo,” so named after the DOJ’s Director of Commercial Fraud Unit who instructed U.S. attorneys to seek dismissal of any meritless qui tam claims or simply claims that did not align with government priorities. Since the memo’s release, the Department has sought to dismiss approximately 50 qui tam actions—more than it targeted for dismissal in the previous 30 years combined.

All these cases, until the Seventh Circuit’s UCB decision, were decided under either the Swift or Sequioa Orange standards for dismissal. With the Seventh Circuit’s introduction of a new third standard, coupled with the circuitous constitutional and statutory analysis it used to arrive at this new standard, businesses with government contracts and FCA practitioners are left with a number of unanswered questions.

The Seventh Circuit’s Decision

The UCB case arose from one of a dozen FCA suits filed in federal court in December 2017 by a professional whistleblower company, the National Healthcare Analysis Group, alleging unlawful kickbacks under the Anti-Kickback Statute. The alleged kickbacks included free nursing services and reimbursement assistance. The DOJ declined to intervene because it did not find the purported kickbacks objectionable, so the relator proceeded with the suit in the Southern District of Illinois.

Approximately one year later, following the release of the Granston Memo, the DOJ moved to dismiss the case. Applying the Sequoia Orange standard, the district court denied the motion, finding the DOJ failed to perform a “minimally adequate investigation to support the claimed governmental purpose.” The DOJ appealed the decision. The Seventh Circuit reversed, holding that the district court should have granted the government’s motion to dismiss under the FCA’s authorizing statute. The Seventh Circuit remanded with instructions to dismiss the case.

The UCB decision is a lengthy exercise in constitutional analysis and statutory interpretation. At bottom, the Seventh Circuit stated the choice between applying the Swift or Sequoia Orange standards is “a false one.” The UCB court instead decocted a third standard based principally on its interpretation of the statute authorizing DOJ dismissal authority as requiring the DOJ to intervene in the suit, despite the fact: (1) the authorizing statute contains no such language; and (2) the DOJ never moved to intervene. The Seventh Circuit laid the groundwork for its new standard on a separate, fundamental jurisdictional question: appeals from motions to dismiss are not generally appealable whereas appeals from denials of motions to intervene are immediately appealable. Treating the DOJ’s motion to dismiss as a de facto motion to intervene helped resolve the jurisdictional issue and allowed the court to reach the merits of the case.

Finding that the government must first intervene, and that it had successfully done so, the UCB court rejected both Swift and Sequoia Orange. Instead, the Seventh Circuit looked to Federal Rule of Civil Procedure 41(a)(1), which gives a plaintiff an absolute right of voluntary dismissal before the opposing party serves either an answer or a motion for summary judgment. Because neither event had occurred in the case, and the district court held the required hearing with the relator, the UCB court determined the government had an absolute right to dismiss the case.

In other words, the standard for evaluating a DOJ dismissal motion of an FCA whistleblower claim in the Seventh Circuit is simply based on the text of Rule 41. In practice, this makes the Seventh Circuit standard closer to the Swift standard than the Sequoia Orange standard. If the conditions of Rule 41(a)(1) are not satisfied, then the FCA’s mandatory hearing is where the district court will decide the proper terms on which to dismiss (or not) the case.

Notably, this new standard recognizes the district court is not merely a “convening authority,” as one may argue under the Swift standard. Rather, it must ensure against potential due process concerns in terms of the relator’s interest in the suit and other potential concerns about constitutional overreach by the government. With respect to Sequoia Orange, the Seventh Circuit simply stated the FCA does not require the government to make that contemplated showing.

Takeaways from the UCB Decision

It is difficult to imagine a situation where a court located within the Seventh Circuit could now deny a DOJ dismissal motion absent extraordinary constitutional circumstances. In this way, the new third standard is very similar to the Swift standard at least with respect to early dismissals under Rule 41(a)(1).

It also now seems clear that the government must move to intervene before or in moving to dismiss an FCA qui tam in the Seventh Circuit. Other circuits have rejected this particular reading of the FCA because, simply, the statutory language does not require this step.

Notably, the UBC decision explicitly raised the possibility for Congress to act to clarify what the Seventh Circuit recognizes as a morass of legal questions about DOJ dismissals, stating: “if Congress wishes to require some extra-constitutional minimum of fairness, reasonableness or adequacy of the government’s decision [to dismiss], it will need to say so.” As it happens, there is a bipartisan effort in Congress to achieve exactly that goal. It remains to be seen whether any such changes will occur.

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