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SCOTUS Finds that Violating FCA’s Seal Requirement Does Not Mandate Dismissal

Prior to Hurricane Katrina, State Farm issued homeowner-insurance policies that included both flood and wind damage.  The flood insurance was government-backed while damage related to wind was covered under State Farm’s own general homeowner’s policies.  This meant that policyholders affected by Hurricane Katrina would receive compensation from the government for flood damage, but State Farm would be responsible for wind damage.  According to the relators, who were claims adjusters for State Farm, State Farm instructed its adjusters to misclassify wind damage as flood damage in order to shift insurance liability to the government. 

The relators filed a qui tam action under seal, alleging the improper shift of insurance liability to the government.  However, prior to the seal being lifted, relators’ counsel leaked news of the complaint’s existence to media outlets who published stories about the alleged fraud.  Counsel for State Farm then moved to dismiss the complaint, arguing that the relators’ violation of the FCA seal requirement should result in dismissal of the complaint. 

The district court applied a balancing test for dismissal and denied State Farm’s motion.  The court looked at three factors:  (1) actual harm to the government, (2) severity of the violations, and (3) evidence of bad faith, and found that dismissal was not warranted.  The Fifth Circuit affirmed, and found that a seal violation does not mandate dismissal. 

The Supreme Court granted certiorari and affirmed.  The Supreme Court held that a violation of the FCA’s seal provision does not necessarily require dismissal of a complaint because the FCA does not enact so harsh a rule.  In fact, the statute is silent on the remedy for a seal violation.  As a result, the Supreme Court held, remedy decisions for seal violations are left to the sound discretion of the district courts.  Thus, courts are free to remedy seal violations by either dismissal of the compliant, or utilization of remedial tools such as sanctions and attorney discipline. 

While the Supreme Court did not conduct the balancing test utilized by the district court, it did articulate that such a test appears to be appropriate.  The Court also noted that State Farm sought only dismissal, so the question of whether lesser sanctions were warranted in this case was not preserved for review.

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