Whistleblowers Earn Unanimous Supreme Court Win On Seal Violation Issue

Whistleblower CaseLast week, the Supreme Court issued an 8-0 decision in State Farm Fire and Casualty Co. v. United States ex rel. Rigsby, finding in favor of the whistleblowers a little more than a month after holding oral arguments. As we wrote in November, this decade-old case originates from a property insurance claim made in the wake of Hurricane Katrina. The whistleblowers alleged that although their home was damaged by the hurricane, State Farm intentionally misclassified the damages as flooding in order to hoist the burden of payment on the United States.

The whistleblowers won a jury trial in 2013, but were unfortunately unable to enjoy the victory. State Farm had learned earlier in the case that the whistleblowers’ original attorney, Dickie Scruggs, had violated the seal provisions of the False Claims Act by providing information about the lawsuit to three media outlets. The information was provided as background to explain the fraud allegations, and the news outlets never disclosed the existence of the False Claims Act whistleblower case while the seal was in place.

Regardless, State Farm asked the court to dismiss the case based on the alleged seal violation. The court denied the motion and after the jury verdict in the whistleblowers’ favor, appealed the seal violation issue all the way to the Supreme Court.

The specific issue put before the Supreme Court was whether dismissal was the appropriate penalty for a violation of the False Claims Acts seal requirement. Justice Kennedy, writing for the unanimous court, held that such a decision was within the “sound discretion” of the district court whose order was broken and that the district court in this case had not abused that discretion.

Following Rigsby, district courts will look to variety of factors to determine what sanction is appropriate for seal violations with the understanding that they may use their inherent power to remedy violations of their orders. The Supreme Court noted that lesser sanctions such as monetary penalties or attorney discipline may well be appropriate in some cases, but that State Farm did not preserve that issue for appeal in this case because it only asked for a dismissal.

The Supreme Court further explained that dismissal in this case was not appropriate “[b]ecause the seal requirement was intended in main to protect the Government’s interests” and that “it would make little sense to adopt a rigid interpretation of the seal provision that prejudices the Government by depriving it of needed assistance from private parties.”

In Rigsby, a rigid interpretation for the seal violation that was found to be largely harmless to the government would have allowed the defendant to avoid the jury verdict on a technicality that was not supported by the law. As Justice Kennedy wrote, “[i]t is proper to infer that, had Congress intended to require dismissal for a violation of the seal requirement, it would have said so.”

This is a very important win for whistleblowers. If defendants could guarantee a dismissal for even a minor breach of a seal, they would be incentivized to engage in intense, scorched-earth discovery of relators and their counsel to try to find any mention of the lawsuit to a third party. Fortunately, the Supreme Court did not accept such a fatalist position and instead set standards for a discretionary test focused on protecting the government’s interest.

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