Dating back to the Civil War, the False Claims Act (FCA) is a powerful weapon that the U.S. government (government) wields to combat fraud. In particular, the FCA contains “qui tam” provisions wherein a whistleblower, known as a “relator,” may bring claims in the government’s name and retain a portion of any resultant recoveries. While the FCA allows the government to dismiss a qui tam claim notwithstanding the objections of relator, there is a four-way circuit split on the appropriate standard of review for such motions to dismiss. From 2003 through 2020, the split was only between the Ninth Circuit’s Sequoia standard, which requires the government to demonstrate the dismissal is rationally related to a valid governmental objective, and the D.C. Circuit’s Swift standard, which confers nearly unfettered deference to the government. The year 2020 ushered in a new era of judicial debate with the Seventh Circuit creating a third standard based on the Federal Rules of Civil Procedure and the First Circuit promulgating an entirely different standard—one that requires the government to provide reasons for dismissal. The First Circuit standard also requires dismissal to be granted unless there is a constitutional infirmity or evidence of fraud.
This circuit split was thrust into the spotlight in 2018 when Michael Granston, Director of the Department of Justice (DoJ) Commercial Litigation Branch, Fraud Section, promulgated guidance instructing DoJ attorneys to consider dismissing qui tam cases to curb meritless qui tam cases, conserve government resources, and prevent unfavorable precedents. Senator Charles “Chuck” Grassley (R-Iowa), a life-long whistleblower champion, has publicly criticized these dismissals as pretextual and antithetical to the spirit of the FCA. In October 2021, Senator Grassley proposed an FCA amendment that essentially codifies the Sequoia standard. Shortly before this article was sent to the publisher, the Supreme Court granted certiorari to address this question.
This article examines the historical context of the qui tam provisions that ultimately gave rise to the circuit split as well as the DOJ’s recent use of its dismissal authority. It further evaluates Senator Grassley’s proposed FCA amendment and argues that it does not substantively settle key nuanced issues that continue to drive judicial disagreement. In light of the evolution to a four-way circuit split and the recent increase in judicial divergence, this article argues that the government’s dismissal authority is well-suited for Supreme Court intervention. Finally, this article examines why the dismissal authority particularly matters now. With a newly emerging circuit split on whether a denied government motion to dismiss can be appealed and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) introducing significant opportunities to commit fraud against the government, it is imperative that all FCA litigants have clarity on the contours of the government’s dismissal authority.
With an influx of money spent on Civil War efforts, the U.S. government (government) routinely found that it was the victim of fraud and abuse from unscrupulous defense contractors in the early 1860s. “For sugar[, the government] often got sand . . . for serviceable muskets and pistols, the experimental failures of sanguine inventors, or the refuse of shops and foreign armories.” In 1863, Congress enacted the False Claims Act (FCA) to combat such fraud. The FCA imposes civil fines for knowingly presenting a false claim for payment to the government, plus up to treble damages. The FCA also contains whistleblower provisions, known as “qui tam” provisions, wherein a whistleblower, known as a “relator,” may bring claims in the government’s name and retain a portion of any resultant penalties. Once a relator files a qui tam claim, the government may intervene. If the government intervenes, it becomes primarily responsible for prosecuting the case, though the relator remains an interested party. However, a relator can continue with the claim if the government declines to intervene. The fundamental idea is to incentivize the public to report fraud.
The FCA and its qui tam provisions have undergone extensive legislative changes since its inception. In response to parasitic relators unfairly capitalizing on the FCA, Congress severely restricted relators’ power in a 1943 amendment, which predictably led to an increase in fraud. In 1986, Congress again amended the FCA to bolster relators’ power and increase the financial incentives. However, the 1986 amendment simultaneously increased the government’s power in qui tam cases, too.
One aspect of the government’s power is its ability to dismiss a claim over a relator’s objection if the relator is provided notice and a hearing. However, the FCA is silent on the standard of review for such government motions to dismiss, and the ambiguity has given rise to what is now a four-way circuit split. From 2003 through 2020, the circuit split existed between only the Ninth Circuit and the D.C. Circuit. The Ninth Circuit employs a two-step rational basis test, known as the Sequoia standard. For a dismissal to be granted, the government must identify a valid governmental purpose and then demonstrate a rational connection between the dismissal and achievement of that purpose. Conversely, the D.C. Circuit has held that the government has virtually “unfettered” discretion to dismiss qui tam claims under what is known as the Swift standard. Although the two standards confer different levels of deference to the government, the practical difference between the Sequoia and Swift standards was small and rarely outcome-determinative. Throughout nearly two decades of this two-way circuit split, many lower courts and courts of appeals routinely declined to adopt either standard because they found the government was able to meet the more demanding Sequoia standard in any event.
However, 2020 ushered in a new era of debate among appellate courts on the appropriate standard of review. In 2020, the Seventh Circuit created a third standard based on Federal Rule of Civil Procedure (FRCP) 41(a). In 2021, the Third and Eleventh Circuits adopted the FRCP-based approach, though the Eleventh Circuit vacated the decision in March 2022 and will rehear the appeal. Finally, in early 2022, the First Circuit created an entirely new standard that compels the government to provide reasons for dismissal and the court to grant such dismissal, unless the relator is able to convince the government to withdraw the motion or demonstrate a constitutional deficiency. This stunning evolution to a four-way circuit split made the question of the proper standard of review of government motions to dismiss particularly ripe for Supreme Court intervention. This issue is also particularly salient now for several reasons.
First, the circuit split and the question of the government’s authority to dismiss qui tam cases was thrust into the spotlight after an internal memo from the Director of the Department of Justice (DoJ) Commercial Litigation Branch, Fraud Section, Michael Granston, was leaked to the public; the memo is now colloquially known as the “Granston Memo.” The Granston Memo encouraged DoJ attorneys to consider dismissing qui tam cases in which the DoJ declined to intervene. It also offered possible rationales for dismissal, such as conserving government resources, curbing meritless qui tam cases, and protecting national security.
Senator Charles “Chuck” Grassley (R-Iowa), a major proponent of the 1986 amendment and the chairman and co-founder of the twelve-member bipartisan Senate Whistleblower Protection Caucus, has publicly criticized the Granston Memo. Senator Grassley’s concerns stem from a potential chilling effect on whistleblowers and the possibility that the DoJ may flippantly dismiss meritorious claims. Senator Grassley and the DoJ exchanged formal correspondence debating the propriety of the Granston Memo. The Senator asked clarifying questions about the DoJ’s process and asked for certain statistics related to dismissals. The DoJ responded by emphasizing the importance of safeguarding the FCA and further justifying the need for government dismissal authority under certain circumstances. For example, twelve of the forty-five cases the DoJ dismissed between January 2018 and December 2019 were filed by pro se relators, “notwithstanding that every appellate court that has considered the question has concluded that pro se relators may not prosecute qui tam actions once the [government] has declined to intervene.”
In July 2021, Senator Grassley, along with a group of bipartisan senators, introduced an FCA amendment, which was later modified in October 2021 (October 2021 Amendment). The October 2021 Amendment codifies the Sequoia standard. Although the October 2021 Amendment facially resolves the circuit split, it leaves unanswered many of the questions that initially gave rise to this split and still plague many lower and appellate courts. For example, wide disagreement exists over the government’s responsibilities (if any) in conducting a cost-benefit analysis of pursuing the relator’s claim, the contours of a sufficient cost-benefit analysis, and the court’s role (if any) in evaluating the government’s efforts in doing so.
Second, with the advent of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2.2 trillion emergency stimulus package created to provide aid to individuals, businesses, states, and others to combat the economic devastation that the Coronavirus pandemic caused, the FCA will almost assuredly play a major role in detecting and punishing fraudulent behavior. Just as the influx of government spending during the Civil War prompted significant fraud, trillions of dollars rapidly injected into the economy under the CARES Act will create opportunities for unscrupulous actors to defraud the government. In March 2020, then Attorney General William Barr “directed all U.S. Attorneys to prioritize the investigation and prosecution of Coronavirus-related fraud schemes.” Moreover, in a June 2020 speech to the U.S. Chamber of Commerce’s Institute for Legal Reform, Principal Deputy Assistant Attorney General Ethan P. Davis reiterated that the DoJ Civil Division “will energetically use every enforcement tool available to prevent wrongdoers from exploiting the COVID-19 crisis. In that effort, the [FCA] is one of the most effective weapons in [the DoJ’s] arsenal.” As such, it seems likely that the CARES Act will generate increased FCA activity.
Finally, a new circuit split emerged in 2020 regarding the appealability of the rare instances in which a district court denies a government motion to dismiss a qui tam claim. The Ninth Circuit held that a denied government motion to dismiss is not appealable under the “collateral issue doctrine” and dismissed the appeal in United States ex rel. Gwen Thrower v. Academy Mortgage Corp. The Seventh Circuit arrived at the same conclusion with respect to the collateral issue doctrine, but paved a different jurisdictional path to hear the appeal in United States ex rel. Cimznhca, LLC v. UCB, Inc. The Seventh Circuit construed the motion to dismiss as an implicit motion to intervene, thus allowing the appeal to be heard because denied motions to intervene are immediately appealable. Moving to the merits, the Seventh Circuit ultimately reversed the district court and granted the dismissal.
In considering the October 2021 Amendment or any other effort to clarify the contours of the government’s dismissal authority, it is important to recognize the competing interests and the lessons that the FCA legislative history yields in crafting such legislation. As the CARES Act will provide significant opportunities to commit fraud, and therefore likely increase FCA activity, the DoJ must be able to effectively manage its resources and preserve the long-term viability of the FCA without undermining the basic idea that the government depends on relators to provide information pertaining to ongoing fraud. Accordingly, any legislative remedy should follow an analytical review of many factors, including the DoJ’s recent uses of its dismissal authority, the importance of the long-term viability of the FCA, the need to make the best use of DoJ resources, and the need to ensure the ability of bona fide whistleblowers to bring claims.
Dating back to the Civil War, the FCA is a powerful weapon the government wields to combat fraud and impose civil penalties. Although the FCA was conceived “primarily as a means of addressing defense procurement fraud, the [FCA] was never limited to that purpose and has been applied to fraud involving a wide range of government programs.” The DoJ has described the FCA as “the single most important tool that American taxpayers have to recover funds when false claims are made to the federal government.”
Part of the government’s success in enforcing the FCA stems from FCA provisions that allow private citizens (referred to as “relators”) to bring suits on behalf of the government (known as qui tam claims) and retain a portion of the proceeds. In Fiscal Year 2021, the DoJ reported that of the $5.6 billion in FCA settlements and judgments, $1.6 billion arose from qui tam lawsuits, and the respective relators’ share was $237 million. When a relator brings a qui tam claim, he must file his complaint under seal for at least sixty days to provide the government an opportunity to determine whether to intervene. If the government declines to intervene, the relator may still pursue the claim. However, the government retains certain rights, including the right “to intervene at a later date upon a showing of good cause.” If the government elects to intervene, it has “primary responsibility for prosecuting the action, and shall not be bound by an act of the person bringing the action.” However, the relator has “the right to continue as a party to the action,” subject to certain limitations laid out in the statute. The relator is entitled to fifteen percent to twenty-five percent of the proceeds if the government intervenes, and twenty-five percent to thirty percent if the government does not intervene. Additionally, the defendant must pay a successful relator’s reasonable attorney fees.
The statutory regime for qui tam claims has a rich history of legislative changes, particularly in the mid-to-late twentieth century. Under the FCA as initially enacted, a relator was entitled to half the damages, and the government was not allowed to interfere with the suit once initiated. Relators also retained substantial freedom in bringing suits. As such, there was a perception that parasitic relators were unjustly enriched by capitalizing on the FCA. In an 1887 case, the Third Circuit even viewed the relator’s claim as a property right that the government was not allowed to divest by settling the claim.
In United States ex rel. Marcus v. Hess, the relator filed a qui tam action against Marcus Hess and other members of the Electrical Contractors Association of Pittsburgh for bid rigging electric work on a variety of public projects financed by the government. However, the defendants were previously indicted for fraud and paid a $54,000 fine on a nolo contendere plea. The government contended that the relator effectively copied the criminal indictment and contributed none of his own knowledge or effort, thus “thwarting the spirit of the [FCA].” Moreover, the government asserted that providing this extensive latitude to relators unduly infringed on its authority over civil fraud matters and “created a race to the courthouse between the [g]overnment’s civil lawyers and private parties.” The Supreme Court summarily rejected the government’s argument, observing that it was immaterial that the relator did not contribute independent knowledge since the FCA case ultimately resulted in a payment three times the amount of the resultant criminal penalties. Relying on the plain language of the FCA at the time, the Supreme Court even stated that “a district attorney, who would presumably gain all knowledge of a fraud from his official position, might sue as the informer.”
In response, then Attorney General Francis Biddle lobbied Congress to repeal the entirety of the qui tam provisions. While Congress did not go quite that far, it nevertheless weakened those provisions considerably in the 1943 FCA amendment (1943 Amendment). The 1943 Amendment reduced a relator’s fifty percent share of the proceeds to a “fair and reasonable” share not to exceed ten percent if the government intervened and not to exceed twenty-five percent if the government chose not to intervene. Moreover, a relator was guaranteed nothing. Additionally, if the government already possessed the evidence of the alleged fraud, the relator was banned from bringing a qui tam action, even if the government elected not to pursue a claim. Thus, the practical result of the 1943 Amendment was that “[qui tam] actions . . . were rarely viable.”
Predictably, fraud perpetuated against the government grew after the 1943 Amendment and, “[b]y the 1980s, it was evident that the [FCA] was no longer an effective tool against fraud.” The General Accounting Office (GAO) established a Fraud Prevention Task Force and, in 1981, produced a three-volume report concluding that, “although the exact magnitude of fraud against the government was uncertain, fraud was ‘widespread.’” Citing portions of the GAO’s report and other indicia of expansive fraud, Senators Grassley (R-Iowa), Carl Levin (D-MI), and Dennis DeConcini (D-AZ) introduced Senate Bill 1562, which ultimately gave rise the 1986 Amendment to the FCA (1986 Amendment). The 1986 Amendment introduced many features of the current qui tam construct, including the sixty-day seal period and the current level of relators’ guaranteed share of the resultant damages.
The 1986 Amendment swiftly pushed the pendulum back towards giving relators more authority and protection. Although it was not the primary goal, the 1986 Amendment also increased the government’s control in tandem. The 1986 Amendment allowed the government to intervene after its initial declination if good cause existed and specifically granted the government “primary responsibility” for prosecuting actions in which it did intervene. Further, the 1986 Amendment gave the government the authority to settle a case notwithstanding the relator’s objection. Specific to dismissal authority, section 3730(c)(2)(A) allows the government to file a motion to “dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the [g]overnment . . . and the court has provided the person with opportunity for a hearing on the motion.” However, there is no prescribed standard of review for the courts to apply in evaluating such motions to dismiss. Thus, the clash between the government’s entitlement to dismiss cases and the relator’s authority under the FCA gave rise to the original circuit split between the D.C. Circuit and the Ninth Circuit on the standard of review for government motions to dismiss.
The historical and recent use of government motions to dismiss provides important context for understanding the circuit split and the October 2021 Amendment. Historically, the government rarely sought to dismiss qui tam cases; the DoJ identified approximately forty-five cases in which it sought to dismiss a qui tam claim during a thirty-year period after the passage of the 1986 Amendment. In January 2018, the Director of the DoJ Commercial Litigation Branch, Fraud Section, Michael Granston, issued a memorandum (now known colloquially as the “Granston Memo”) to all assistant U.S. attorneys handling FCA cases outlining a new approach to evaluating whether to dismiss a given qui tam case. Citing the significant resources required to monitor cases in which the government did not intervene, plus the potential for cases lacking merit to set bad precedents that may impede the government’s ability to pursue future meritorious claims, the Granston Memo encourages attorneys to carefully consider whether a motion to dismiss is appropriate.
The Granston Memo provides seven criteria for attorneys to consider. The first two, curbing meritless qui tam claims and limiting parasitic relators, are familiar goals in FCA history. Seeking to preserve governmental autonomy, the Granston Memo also cites the prevention of interference with agency policy, controlling litigation involving the government, correcting procedural errors, and safeguarding classified information from the discovery process as other considerations. The final consideration is preserving governmental resources, which is frequently cited in motions to dismiss filed after the Granston Memo. However, the Granston Memo warns that the DoJ has “been circumspect with the use of [the dismissal authority] to avoid precluding relators from pursuing potentially worthwhile matters” and urges the attorneys “to ensure that dismissal is utilized only where truly warranted.” Although the Granston Memo was marked “Privileged and Confidential; For Internal Government Use Only,” it has been widely circulated in the public domain and codified in the DoJ Manual.
Senator Grassley registered his concerns about the Granston Memo in a formal letter to Attorney General William Barr, dated September 4, 2019. Senator Grassley asserted that efforts to dismiss qui tam cases “could undermine the purpose of the [FCA] by discouraging whistleblowers and dismissing potentially serious fraud on the taxpayers.” Senator Grassley asked several questions, partly about particular dismissals the government sought, and about DoJ cost-benefit analyses and various statistics on motions to dismiss. In its December 2019 response, the DoJ reiterated that it shares the Senator’s views on the importance of the FCA and relators. The DoJ did not answer all of Senator Grassley’s questions, but it did provide instructive statistics. Between January 2018 and December 2019, more than 1,170 qui tam cases were filed, and the DoJ sought to dismiss fewer than four percent of them. The DoJ described the nature of some of the dismissed cases as well. For example, two were filed by relators who allegedly “shorted the stock” of the named defendant in their respective qui tam suits. In ten of the other dismissed cases, the relevant agency cited legitimate concerns about patient care being undermined by pursuit of the claims. In essence, the DoJ asserted that these cases run counter to the spirit and intent of the FCA and were rightfully dismissed.
Finally, the DoJ explained that it “investigates the matter and evaluates the facts, law, and claims asserted before deciding how to proceed.” Noting that “[n]either the government, the taxpayers, nor the future whistleblowers benefit when poorly devised cases proceed,” the DoJ emphasized its dedication to making choices that most benefit the taxpayers. In his keynote speech at the 2020 Advanced Forum on False Claims and Qui Tam Enforcement, Deputy Associate Attorney General Stephen Cox characterized the government’s dismissal authority as “an important tool to protect the integrity of the [FCA].” Cox emphasized the importance of recognizing that while there have been more dismissals than in the past, the uptick still represents only a very small number of the qui tam cases filed. Further, the government’s “exercise of this authority will remain judicious.” For example, “[t]en of the cases that [the DoJ] moved to dismiss were funded by a for-profit private investment group that filed meritless copycat complaints across the country against dozens of healthcare-related companies.”
As a long-time champion of whistleblowers, Senator Grassley has questioned the wisdom of seeking to conserve DoJ litigation resources now, when the potential fraud may cost the taxpayers more money in the long run. Moreover, he asserted that DoJ dismissals “will send a clear message that bad actors can get away with fraud as long as they make litigating painful and sufficiently burdensome for the government.” In July 2020, Senator Grassley announced his plan to introduce legislation that “reigns in [DoJ dismissals] that [undermine] the purpose of [his] 1986 amendments to the [FCA], which was to empower whistleblowers” and “clarifies ambiguities created by the courts.”
Just as the propriety of the government’s ability to dismiss qui tam actions has become the recent subject of political debate, the lack of a statutorily mandated standard of review for such dismissals has given rise to a circuit split. The split originates between the Ninth Circuit’s two-part Sequoia standard and the D.C. Circuit’s Swift standard, which is more deferential to the government’s authority.
The Ninth Circuit created the two-part Sequoia standard in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp. There, the relators, Sequoia Orange Company and Lisle Babcock, filed thirty-four qui tam claims against their citrus industry competitors for violating marketing orders under the Agricultural Marketing Agreement Act of 1937 (AMAA). The marketing orders were promulgated by the U.S. Department of Agriculture (USDA) to stabilize the citrus industry and protect prices. The relators claimed the defendants disregarded the limits imposed by the marketing orders and intentionally provided inaccurate reports to the USDA. The government intervened in ten of the qui tam suits prior to the conclusion of the sixty-day seal period.
After discovering how pervasive and extensive the violations were across the industry, the government elected to change course by settling all AMAA litigation, including litigation that it initiated itself. Toward that end, the government intervened in the remaining twenty-four qui tam cases “on the basis of the government’s representations that it would litigate the [qui tam] actions . . . if a settlement could not be reached.” However, the circumstances dramatically changed when the Eastern District of California struck down the orange marketing orders in unrelated litigation and the USDA realized that settling qui tam cases for violations of an invalid regulation was unlikely. Instead of perpetuating the divisiveness, the USDA concluded the best way to advance the government’s and industry’s interests was to start fresh by dismissing all the qui tam actions and any other AMAA litigation. The district court granted the dismissal of the qui tam claims, and an appeal in the Ninth Circuit ensued.
On appeal, the relator’s argument was that, under the FCA, the government may not dismiss a meritorious claim because it negates the intent of the 1986 Amendment, which was “to provide relators with increased involvement in suits brought by the relator but litigated by the [g]overnment.” The court rebutted this assertion by viewing the 1986 Amendment as a whole and considering the increase in control and power conferred to the government thereunder. Citing governmental authority such as the ability to stay a relator’s discovery requests, the Ninth Circuit concluded that “the government’s power to dismiss or settle [a qui tam action] is broad.” Looking to the legislative history from the 1986 Amendment, the court inferred a “congressional intent that the qui tam statute creates only a limited check on prosecutorial discretion to ensure suits are not dropped without legitimate governmental purpose.”
The Ninth Circuit determined that “[t]he district court acted reasonably in adopting” a two-step analysis: first, identifying a valid governmental purpose, and second, identifying a rational relationship between the dismissal and accomplishment of such governmental purpose. If the government satisfies that standard, the burden then shifts to the relator. Then, “if the relator presents a colorable claim that the settlement or dismissal is unreasonable in light of existing evidence, that the [g]overnment has not fully investigated the allegations, or that the [g]overnment’s decision was based on arbitrary or improper considerations,” a hearing is appropriate.
The backdrop of the qui tam suits in Sequoia, which were filed at the same time that the USDA was filing its own claims against many citrus industry participants, including Sequoia Orange itself, was industry-wide upheaval and dissatisfaction with the AMAA. The USDA was “faced with immense divisiveness within the citrus industry caused by oven ten years of acrimonious and expensive litigation and strident disputes among industry participants.” However, the relators argued that eliminating legal battles was “not a legitimate government interest.” The text of the AMAA requires the Secretary of Agriculture to “oversee orderly marketing processes.” Thus, the Ninth Circuit found that “[p]eace among competitors and regulators facilitates orderly marketing” and therefore is a legitimate governmental interest. Another consideration was the enormous cost of litigation the government would inevitably incur. The court noted that, although the FCA contemplates private financing of qui tam litigation, “the government can legitimately consider the burden imposed on the taxpayers by its litigation, and that, even if the relators were to litigate the FCA claims, the government would continue to incur enormous internal staff costs.” Thus, the Ninth Circuit ultimately upheld the dismissal on the grounds that the government identified a legitimate governmental purpose and met the burden of demonstrating the dismissal was rationally related to that purpose.
Five years after Sequoia, the Court of Appeals for the District of Columbia evaluated the government’s dismissal authority in Swift v. United States of America, and ultimately held that the government has an “unfettered right to dismiss an action.” In that case, Susan Swift, a DoJ employee, brought a qui tam action against three fellow DoJ employees for timesheet and leave slip fraud. Prior to the defendants being served and without intervening, the government moved to dismiss because the $6,169 in question did not justify the litigation costs. Swift argued that she ought to be able to engage in discovery prior to the dismissal, but ultimately the district court granted the dismissal on the grounds that the government had demonstrated a rational governmental purpose.
Swift appealed on the grounds that the government did not justify its decision to dismiss and that the dismissal was improper given the lack of investigation on the government’s part. With respect to evaluating the motion to dismiss itself, the D.C. Circuit cited several reasons for its hesitation to adopt the Sequoia standard, and instead held that the government has an “unfettered right” to dismiss qui tam actions. First, the court reviewed the plain language of the FCA and found no authority for the Judiciary to review the Executive Branch on this particular issue. The court likened the motion to dismiss to a decision not to prosecute, which is also unreviewable by the Judiciary. The D.C. Circuit rejected the Ninth Circuit’s reasoning that, because the U.S. Constitution “prohibits arbitrary or irrational prosecutorial decisions,” judicial review of the prosecutorial decision does not inappropriately infringe on executive powers. The D.C. Circuit asserted that “[t]his is not an accurate statement of constitutional law with respect to the government’s judgment not to prosecute.” Relying instead on the Take Care Clause of the Constitution, the court asserted that “[n]othing in § 3730(c)(2)(A) purports to deprive the Executive Branch of its historical prerogative to decide which cases should go forward in the name of the United States.” Although the FCA requires that the relator be afforded notice and a hearing, the D.C. Circuit found that the hearing only offers the relator “a formal opportunity to convince the government not to end the case” with a possible exception of circumstances where there is “fraud on the court.”
The D.C. Circuit went on to explain that the government’s unfettered discretion is also consistent with Rule 41(a)(1)(i) of the Federal Rules of Civil Procedure (FRCP), which allows “a plaintiff to dismiss a civil action” prior to the defendant filing an answer or a motion for summary judgment without an “order of the court.” Thus, the D.C. Circuit reasoned that allowing the government to dismiss a qui tam action prior to the defendant being served without judicial interference is a logical application of the rule. A few years after Swift, the D.C. Circuit summarized its holding as having “flatly rejected the relator’s suggestion that [the court] routinely review[s] the [g]overnment’s decision to dismiss a qui tam action, instead holding the door only barely ajar for review in an exceptional circumstance—in particular, where there is ‘fraud on the court.’”
Although the D.C. Circuit went to great lengths to distinguish “unfettered discretion” from the Sequoia standard, it concluded by asserting that even if the Sequoia standard was appropriate, the government easily satisfied the requirements in this case by demonstrating the costs involved in conducting discovery and monitoring a case far outweigh the four-figure sum at issue. Lastly, Swift provided no evidence that the government behaved arbitrarily, capriciously, illegally, or fraudulently.
Two years later, the Tenth Circuit adopted the Sequoia standard in United States ex rel. Ridenour v. Kaiser-Hill Co. In that case, the relators alleged that various Department of Energy contractors did not properly perform the security services that they were paid to perform under their respective government contracts. While the Tenth Circuit upheld the government’s dismissal, it adopted the Sequoia standard on the grounds that “it recognizes the constitutional prerogative of the [g]overnment under the Take Care Clause, comports with legislative history, and protects the rights of relators to judicial review of a government motion to dismiss.”
Although the Ninth and D.C. Circuits adopted standards that confer different levels of deference to the government, little practical difference emerged between the two. Many district courts and courts of appeals opined on the debate without expressly deciding which standard applies simply because they concluded the government met the higher standard in any event. For example, in United States ex rel. Graves v. Internet Corp. for Assigned Names and Numbers, Inc., the relator alleged the defendant was collecting Internet connection fees in direct contravention of its contract with the government. The government filed a motion to dismiss, and the District Court for the Northern District of Georgia stated that “it is clear that the court must at the very least give substantial deference to the government’s decision to dismiss this action . . . [but] the government’s discretion to dismiss a case is not entirely unfettered as the Swift court decided.” Nonetheless, the court granted the motion to dismiss but declined to adopt a standard because the Sequoia standard was met in any event.
The Second Circuit similarly declined to adopt either standard when it concluded that dismissal was proper in United States ex rel. Borzilleri v. AbbVie, Inc.. In that case, the relator alleged that a variety of pharmaceutical manufacturers defrauded Medicare Part D, a federal prescription program. In granting the government’s motion to dismiss, the district court explained that the possibility the government could recover damages in excess of the currently required expenditures “does not mean that avoiding resource expenditures now is not a valid government purpose.” The district court found that “Borzilleri’s subjective disagreement with the [g]overnment’s investigative strategy and ultimate decision does not provide the court with a basis to second-guess the [g]overnment’s decision to dismiss the case.” The Second Circuit affirmed the district court’s decision and reiterated that it need not determine which standard should apply since “the relator fails even the more stringent Sequoia standard.”
In a different case being litigated around the same time, the DoJ argued that the small practical difference between the standards did not warrant Supreme Court review. In United States ex rel. Laurence Schneider v. JPMorgan Chase Bank, National Ass’n, the petitioner filed a qui tam suit alleging that JPMorgan falsely claimed compliance with a settlement agreement that it entered into for prior misconduct and for falsely certifying compliance with the Home Affordable Modification Program (HAMP), a mortgage incentive program sponsored by the U.S. Department of Treasury. By the time that the petitioner sought leave to file his third amended complaint on the HAMP claim, the government filed a motion to dismiss because the claim lacked merit and the extensive discovery that would necessarily follow would require excessive and unwarranted expenditures of government resources. The district court granted the petitioner’s request for a hearing on the motion, but ultimately dismissed the case under the Swift standard. The D.C. Circuit upheld the dismissal.
In his petition for a writ of certiorari, the petitioner asserted that the government was merely avoiding discovery, that it
fear[ed] an aggressive defendant will cause it to do too much work or cause it to be embarrassed by an investigation into its performance in monitoring Chase’s actions under the HAMP. Certainly, the avoidance of discovery is not a justification envisioned by Congress when it gave the government the ability to dismiss under § 3730(c)(2)(A).
Accordingly, the petitioner implored the Supreme Court to resolve the circuit split by deeming Sequoia the correct standard. Invoking a familiar argument, the relator also asserted that even the single damages in this case could be hundreds of millions of dollars and therefore far outweigh the costs the government would incur. In sum, the petitioner argued the government’s position was arbitrary and capricious.
Although the government argued in favor of the Swift standard, its primary argument in opposition to certiorari was that “the slight difference between [the Swift standard and the Sequoia standard] will rarely, if ever, be outcome-determinative,” and, therefore, Supreme Court intervention is unnecessary. The government argued that in spite of the circuit split on its face, the lack of a substantive difference between the standards is evidenced by the absence of any instance in which a court of appeals denied a government motion to dismiss. Moreover, even if a difference existed, this case would not be suitable for resolving the discrepancy because the government so readily satisfied the Sequoia standard. The government pointed out that its proffered justifications for dismissal were “indisputably valid government purposes” and that the courts have regularly accepted similar grounds in applying the Sequoia standard. The government reiterated that, even if it could recover its costs from petitioner’s ultimate success in the litigation, courts have agreed that that “does not mean that avoiding resource expenditures now is not a valid government purpose.” The Supreme Court denied certiorari on April 6, 2020.
After nearly two decades featuring Swift and Sequoia as the two competing standards for evaluating government motions to dismiss, the courts in 2020 ushered in a new era of judicial debate. The Seventh and First Circuits each promulgated new standards, sister circuits chose sides, and two new relators filed petitions for certiorari.
In 2020, the Seventh Circuit concluded that the choice between Swift and Sequoia “on the merits is a false one, though the correct answer lies much nearer to Swift than Sequoia Orange.” Instead, the Seventh Circuit created a third standard based on Federal Rule of Civil Procedure (FRCP) 41(a) which allows a plaintiff to dismiss any action before the opposing party files either an answer or a motion for summary judgment. In United States ex rel. Cimznhca, LLC v. UCB, the relator alleged that UCB provided illegal kickbacks to physicians in exchange for prescribing a drug that it manufactured, Cimzia, to patients receiving care through federal healthcare programs. The government’s motion to dismiss cited a “lack [of] sufficient merit to justify the cost of investigation and prosecution and otherwise to be contrary to the public interest.” The district court applied the Sequoia standard and held a hearing, reasoning that “Congress would not command the hollow ritual of convening a hearing on a preordained outcome.” The relator was a daughter company of Venari Partners, a for-profit group of investors with the “single purpose” of pursuing qui tam actions. Citing “notes of mere animus towards the relator,” the district court concluded that the dismissal was arbitrary and capricious and thus denied the motion. On appeal, the Seventh Circuit promulgated the FRCP-based standard, reversed the denial, and remanded for dismissal.
The Seventh Circuit explained that while, generally speaking, FRCP 41(a) “obviously does not authorize an intervenor-plaintiff to effect involuntary dismissal of the original plaintiff’s claims,” in the FCA context, it does. The provisions of FRCP 41 are subject to applicable federal statutes, which means that the § 3730(c)(2)(A) dismissal authority within the FCA is the “only authorized statutory deviation of Rule 41.” In this case, the government’s motion to dismiss preceded the defendant’s answer or motion for summary judgment, and the relator received the statutorily mandated notice and hearing. According to the government, “once these steps had been accomplished, that should have been the end of the case.” However, the court clarified that in cases where the defendant has filed an answer or a motion for summary judgment, “then a hearing under § 3730(c)(2)(A) could serve to air what terms of dismissal are proper.” Notably, the court also commented that “[w]herever the limits of government’s power lie, this case is not close to them.” It chided the district court for “fault[ing] the government for having failed to make a particularized dollar-figure estimate of the potential costs and benefits” since nothing in the FCA requires it. Seemingly approving of the government’s cited reasons for dismissal, it “disagree[d] with the suggestion that the government’s decision fell short of the bare rationality standard borrowed by Sequoia Orange from substantive due process.”
The relators in UCB filed a petition for a writ of certiorari. They argued, inter alia,that it was improper for the Seventh Circuit to create a third approach to evaluating government motions to dismiss. Citing the “increasing[] inconsisten[cy]” with which district courts evaluate government motions to dismiss, the relators urged the Supreme Court to grant certiorari to resolve these differences. The Supreme Court denied certiorari in June 2021.
In October 2021, the Third Circuit aligned itself with the Seventh Circuit in holding that FRCP 41(a) should govern dismissals of qui tam claims just as it does in all other civil proceedings. In Polansky v. Executive Health Resources, the defendant, Executive Health Resources (EHR), provided “review and billing certification services” to medical providers that bill Medicare. In his capacity as an EHR consultant, the relator, Dr. Polansky, became concerned that EHR was “systematically enabling its client hospitals to over-admit patients by certifying unnecessary inpatient services” when outpatient services would have sufficed, thereby resulting in improper overbilling to the government. Dr. Polansky filed a qui tam claim in 2012, which remained under seal for two years while the government investigated the claims. The government ultimately declined to intervene. In 2019, the government filed a motion to dismiss, and the District Court for the Eastern District of Pennsylvania granted the motion on the basis that the government “made an adequate showing under any of the prevailing standards.”
On appeal, the Third Circuit held that FRCP 41(a) provides the proper framework for analyzing such motions to dismissals. It reasoned that because Congress clearly intended for the FCA “to establish ‘civil’ proceedings, i.e., lawsuits brought in accordance with the [FRCP],” it follows that Rule 41(a) should govern government motions to dismiss. If the motion to dismiss is made prior to the defendant’s answer or motion for summary judgment, then dismissal should be “self-effectuating,” except that the FRCP are subject to the FCA’s notice and hearing requirements as well as “the bedrock constitutional bar on arbitrary [g]overnment action.” If the government’s motion to dismiss follows the defendant’s answer or motion for summary judgment, then the dismissal must be granted “only by a court order, on terms the court considers proper.” Nonetheless, the court pointed out that “even in a typical case between private parties, dismissal [when the litigation is past the “point of no return”] ‘should be allowed unless [the] defendant will suffer some prejudice other than the mere prospect of a second lawsuit.’”
Unlike in UCB where the government’s motion to dismiss preceded the defendant’s answer or motion for summary judgment, the government’s motion to dismiss in Polansky came several years into the litigation. Accordingly, the Third Circuit evaluated whether the district court abused its discretion in granting the motion. Having found that the district court had “exhaustively examined the interests of the parties,” it found no abuse of discretion. More specifically, the district court noted the government’s concerns about the limited potential for success in part because of Dr. Polansky’s “potentially sanctionable conduct during the course of discovery,” which was “material and play[ed] a role in the final disposition of [the] case.” EHR also supported the dismissal, mitigating the risk of prejudice to the defendant. Thus, in deference to “Rule 41(a)(2)’s ‘broad grant of discretion’ to shape the ‘proper’ terms of dismissal,” the Third Circuit upheld the dismissal.
The Third Circuit also laid out its reasons for rejecting Swift and Sequoia. It deemed “the analogy to prosecutorial discretion . . . too loose a fit because qui tam actions involve not just the [g]overnment but also the relator in the role of ‘prosecuto[r].’” Moreover, the concept of unfettered discretion is “incongruous with other provisions of the FCA.” For example, § 3730(c)(2)(B) requires court approval of settlements to which the relator objects, providing “more judicial oversight” of a settlement than a dismissal, “despite the far more severe consequences for the relator.” In rejecting Sequoia, the court found that “the right against arbitrary government action may provide a constitutional floor, but the [FRCP] are built above it, and the Ninth Circuit’s approach omits that structure entirely.”
In December 2021, the Eleventh Circuit also held that FRCP 41(a) provides the appropriate standard of review for government motions to dismiss in United States ex rel. Farmer v. Republic of Honduras, but it quickly vacated the judgment in March 2022. The relators’ claims in this case stem from the defendants’ alleged misrepresentations in connection with United States Agency for International Development (USAID) funding for reconstruction after Hurricane Mitch struck Honduras. The Eleventh Circuit deferred to the prosecutorial discretion of the Executive Branch to decide whether to pursue a motion to dismiss, explaining that “after all, it is [the] government’s claim and the government’s damages,” but it held that FRCP 41 governs once the motion is before the court. It also echoed the importance of constitutional boundaries, but noted that “these are generous limits that would be breached rarely, if ever.” The appeal was initially heard by District Judge Moody, who was sitting by designation. Less than three months after the opinion was handed down, the Court sua sponte ordered a rehearing on the appeal and vacated the judgment.
Finally, in January 2022, the First Circuit entered the fray and expanded the circuit split a fourth way in Borzilleri v. Bayer Healthcare Pharmaceuticals. There, the relator alleged that several pharmaceutical companies and pharmacy benefits managers colluded to drive up the price of multiple sclerosis therapeutics, thereby defrauding Medicare’s prescription drug program. The court held that the government must always provide its reasons for dismissal because the purpose of the hearing is to provide an opportunity for the relator to convince the government to change its mind. If that relator fails to convince the government, then the motion must be granted unless the relator can “show that the government’s decision to seek dismissal . . . transgresses constitutional limitations or that, in moving to dismiss, the government is perpetrating a fraud on the court.” More specifically, the court rejected the relator’s argument that a separate FCA provision requiring the Attorney General to diligently investigate FCA violations begets a responsibility of the court to assess those efforts in evaluating a motion to dismiss. The court stated that “[i]t would be odd to have courts micromanage government investigations when the statute also provides that the government has discretion whether to pursue any false claims it identifies.”
The First Circuit agreed with the D.C. Circuit insofar as it considered the purpose of the hearing to be an opportunity for the relator to persuade the government to withdraw its motion to dismiss. Accordingly, it required the government to provide its reasons for dismissal because “[t]hat purpose cannot be achieved if the relator is unaware of the government’s reasons for dismissal and, thus, is unable to challenge them.” In rejecting Sequoia, the court simply dismissed the notion that the government should bear the burden of justifying its dismissal decisions and saw “no basis in the statutory language for requiring the government to make a prima facie showing that its motion is rational, reasonable, or otherwise proper.” The court was similarly “unpersuaded by application of Rule 41 to the unique context of a qui tam action. [Section] 3730(c)(2)(A) on its face creates a specific notice and hearing requirement that operates in addition to the requirements of Rule 41 regardless of whether the defendant has responded to the qui tam suit.”
As of early 2020, no court of appeals had concluded that a government motion to dismiss should have been denied. However, two denied motions to dismiss have since been appealed: the District Court for the Northern District of California denied a government motion to dismiss in United States ex rel. Gwen Thrower v. Academy Mortgage Corp.; and the District Court for Southern District of Illinois did the same in United States ex rel. Cimznhca, LLC v. UCB, Inc. Coincidentally, the Seventh Circuit and the Ninth Circuit handed down their respective decisions within two weeks of each other in August 2020, but arrived at opposite conclusions.
In Academy Mortgage, the relator was employed by Academy Mortgage as a mortgage underwriter. Her allegations stemmed from Academy Mortgage’s participation in a Federal Housing Administration (FHA) program that insures lenders against certain losses incurred as a result of lending to certain low-income borrowers who then default on their loans. Using “a variety of methods to approve unqualified loans, such as pressuring underwriters and making exceptions to government-required conditions on file,” the relator alleged that Academy Mortgage falsely certified that some loans met the FHA’s eligibility criteria. The relator further alleged that Academy Mortgage submitted at least seventeen insurance claims under the program, but the relator did not specifically allege that any of those seventeen insurance claims were on loans issued on the basis of a false certification. The district court first ordered the relator to present evidence that the government’s decision to dismiss was unreasonable, not the result of a full investigation, or otherwise based on improper or arbitrary considerations, in order to obtain an evidentiary hearing on the motion to dismiss. The government was also ordered to present rebuttal evidence.
The government’s investigation into the relator’s original complaint consisted of interviewing the relator and reviewing the documents that she provided. The government declined to intervene on the grounds that the case would require significant resources and was unlikely to succeed. The relator later filed an amended complaint that expanded the scope to include multiples branches (instead of just one) and spanned six years (instead of just one and a half). The District Court for the Northern District of California asserted that the government should have investigated everything within its power, seemingly without regard to time or cost constraints. In its brief, the government noted that it produced more than fifteen million pages in discovery in a similar case against Wells Fargo. Imputing a responsibility on the government to use its “considerable resources” to conduct an extensive investigation, the court then stated that, “whatever the precise contours of a ‘full investigation’ may be, the government has not conducted such investigation in this case” and denied the motion to dismiss.
The Ninth Circuit dismissed the government’s appeal for lack of jurisdiction. Looking to the collateral order doctrine—an exception to the general rule that appellate jurisdiction is reserved for final decisions in cases where the prejudgment order is “collateral to the merits of an action and too important to be denied immediate review”—the court held that “[t]he interests implicated by orders denying a government motion to dismiss under § 3730(c)(2)(A) of the FCA are not sufficiently important to justify expanding the collateral order doctrine’s narrow scope, at least in cases where the government has not exercised its right to intervene.” The court acknowledged that, while overly burdensome discovery may justify dismissal of an FCA case, “an erroneous denial of a § 3730(c)(2)(A) motion . . . does not render the denial order immediately appealable.” Emphasizing that “[t]he test set out in Sequoia Orange is not especially demanding,” the court explicitly stated that it was “not swayed by the government’s argument that refusing to allow an immediate appeal will render orders denying a motion to dismiss under § 3730(c)(2)(A) effectively unreviewable.” Instead, the court offered that the government could pursue interlocutory appeals, or “in extraordinary circumstances, such as where the unjustified disclosure of classified information is at risk, the government may seek a writ of mandamus.”
Meanwhile, the Seventh Circuit took an entirely different approach in Cimznhca to conclude that it had jurisdiction to hear an appeal of a denied government motion to dismiss; it ultimately reversed the lower court and dismissed the case. It agreed with the Ninth Circuit in refusing to create a new category of appealable collateral orders for denied government motions to dismiss. However, the Seventh Circuit found jurisdiction by treating the motion to dismiss as an implicit motion to intervene, the denial of which is immediately reviewable. Substantively, the government was seeking to interfere in a dispute between the original parties of the litigation, which is exactly what an intervenor does. Thus, since the district court “concluded that the government’s case for dismissal was not even rational, [it] has necessarily expressed its view on the government’s lack of ‘good cause’ to intervene under the [FCA],” and the court of appeals had jurisdiction to hear the appeal.
While government motions to dismiss are infrequently denied, to the extent that they are, the budding circuit split between the Ninth and Seventh Circuits on the appealability of a denied government motion to dismiss may directly impact the trajectory of a given case, depending on the jurisdiction in which it ensues. The impact may be compounded by the growing circuit split and disagreement more generally on the appropriate standard of review.
Staying true to his promise to modify the government’s dismissal authority under the FCA, Senator Grassley, along with a bipartisan group of senators, introduced an FCA amendment in July 2021 (July 2021 Amendment) and later introduced a Manager’s Amendment in October 2021 (October 2021 Amendment). Specific to the government’s dismissal authority, the July 2021 Amendment added the following italics language to the existing language in Section 3730(c)(2)(A):
The government may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion, at which the government shall have the burden of demonstrating reasons for dismissal and the qui tam plaintiff shall have the opportunity to show that the reasons are fraudulent, arbitrary and capricious, or contrary to law.
In an apparent attempt to clarify the burden being imposed on the government, the October 2021 Amendment modified the proposed additional language as follows: “At which the government shall identify a valid government purpose and a rational relation between dismissal and accomplishment of the purpose, and the person initiating the action shall have the burden of demonstrating that the dismissal is fraudulent, arbitrary and capricious, or illegal.”
Although this language facially resolves the circuit split insomuch as it codifies Sequoia, it leaves many of the same unanswered questions that initially gave rise to the circuit split between D.C. Circuit and the Ninth Circuit and that continue to plague FCA litigants. In particular, the extent to which the government is required to conduct a cost-benefit analysis and the court’s role in evaluating such a cost-benefit analysis (if any) continues to be a source of significant debate. Looking again at cases where government motions to dismiss were granted, it is difficult to see how the October 2021 Amendment would have better enabled courts to consistently answer these questions. For example, the District Court for the Northern District of California concluded that, in determining whether a motion to dismiss is appropriate, “[t]he critical question is whether the [government] engaged in a meaningful consideration of cost and benefit such that its decision to seek dismissal is supported by a rational basis.” Conversely, the U.S. District Court for the Northern District of Mississippi accepted the government’s proffered rationale of conserving resources and rejected the relator’s argument that the lack of a cost-benefit analysis showing the cost of litigation exceeds the potential recovery should be fatal to the government’s motion.
The First Circuit recognized the irony of requiring the government to expend resources to justify its efforts to conserve government resources. Finding no requirement to evaluate the government’s diligence investigating the relators’ claims in the text of the FCA, the court found that mandating such an inquiry “could result in a time-consuming mini-trial––a process that would be especially inappropriate where . . . the government is claiming that the relator’s suit will be a drain on government resources and is unlikely to result in recovery.”
Conversely, the District Court for the Northern District of California grounded its denial of the government’s motion to dismiss in what it deemed to be an inadequate government investigation and cost-benefit analysis in Academy Mortgage. The government’s investigation into the relator’s original complaint consisted of interviewing the relator and reviewing the documents that she provided. The government declined to intervene on the grounds that the case would require significant resources and was unlikely to succeed. As noted, the relator later filed an amended complaint that expanded the scope to include multiples branches (instead of just one) and spanned six years (instead of just one and a half). Although it “did not concede that it performed no investigation of the amended complaint,” the government offered no evidence of such expanded investigations beyond the efforts made in response to the original complaint. The court asserted that “[a] more complete investigation was well within the [g]overnment’s ability.” Imputing a responsibility on the government to use its “considerable resources” to conduct an extensive investigation, the court then stated that “whatever the precise contours of a ‘full investigation’ may be, the government has not conducted such investigation in this case” and denied the motion to dismiss. In view of these divergent approaches to the requirement for and evaluation of any given governmental cost-benefit analysis, a bare legislative mandate for the government to “demonstrate reasons for dismissal” does little to better align the courts.
It may be useful to consider these differences and the proposed October 2021 Amendment through the lens of the FCA’s goal of broadly limiting the ability of parasitic relators to have unbridled access to the system without hamstringing valid relators bringing bona fide claims. The divergence comes from the path to achieve that goal. Senator Grassley’s concerns center on the possible chilling effect a looming dismissal threat may have on potential relators and the possibility that a DoJ dismissal could allow significant fraud to go unpunished. This concern for legitimate relators must be balanced against the problematic nature of parasitic relators and unfounded FCA litigation. The DoJ has a continuing obligation to enforce the FCA. Thus, the DoJ’s concerns are focused on the long-term viability of the FCA and the peril of bad precedents set by ill-conceived qui tam claims, whereas any given relator has no real incentive to consider the long-term precedential value of the case. The DoJ’s view of this long-term protective function serves future relators and taxpayers alike. Accordingly, imposing a requirement on the DoJ to expend significant resources on convincing a court to dismiss a given case may benefit that individual relator but simultaneously undermine future relators’ ability to bring certain qui tam claims.
In many ways, the question of the government’s dismissal authority is a proxy for a question of the best use of government resources. The Granston Memo makes clear that, even in cases where the government does not intervene, it still requires significant effort from the DoJ to keep up with discovery and otherwise monitor the case. Further, courts have consistently accepted the idea that avoiding the expense of litigation is a valid government interest, even in instances where the claims otherwise have merit. Even the Ninth Circuit accepted the premise that conserving governmental resources is a valid purpose in Sequoia. It would be worthwhile to consider the approximately four years of data available since the Granston Memo was issued to determine whether the updated dismissal language in the October 2021 Amendment is appropriate and would facilitate the desired balance. For example, at least twelve of the dismissed cases from that time period were filed by pro se relators, “notwithstanding that every appellate court that has considered the question has concluded that pro se relators may not prosecute qui tam actions once [the government] has declined to intervene.” Moreover, two of the cases were filed by relators who shorted the defendant’s stock prior to filing their claims. If faced with a choice between spending limited government resources to pursue a worthy dismissal or pursue a worthy claim, it seems it would be better for the taxpayers to pursue the latter. The October 2021 Amendment could force the DoJ to unnecessarily reallocate resources to pursue dismissals instead of intervening in other worthier cases that may prove more beneficial to taxpayers.
In addition to balancing these concerns, the legislative resolution should be carefully crafted as a proportionate response to the limited frequency of the DoJ’s use of the dismissal authority. The DoJ has continually reiterated its commitment to using its dismissal authority judiciously, and the small percentage of qui tam cases it has sought to dismiss since the Granston Memo is illustrative of the DoJ living up to that commitment. Over 1,100 qui tam claims were filed between the Granston Memo’s issuance in January 2018 and January 2020, but the DoJ only moved to dismiss approximately forty-five to fifty of those cases. More recently, during Senator Grassley’s keynote speech at the 2021 Qui Tam Conference, he spoke about the “dozens” of cases that were dismissed by the DoJ. Thus, it is critical to create a measured legislative response to resolve the circuit splits without imposing unwarranted or ambiguous requirements that are disproportionate to the size of the issue and could cause unintended consequences.
In the absence of a legislative remedy, Supreme Court intervention will likely provide clarity. Notwithstanding that the Supreme Court refused to grant certiorari in Schneider(Schneider Petition) and UCB(UCB Petition), the recent expansion of the circuit split makes it well-suited for Supreme Court intervention now. Less than a week after the First Circuit handed down its decision in Borzilleri, on January 26, 2022, the relators in Polansky submitted a petition for a writ of certiorari to the United States Supreme Court (Polansky Petition). The question presented is “[w]hether the government has authority to dismiss an FCA suit after initially declining to proceed with the action, and what standard applies if the government has that authority.”
The judicial landscape has drastically changed since early 2020 when the Schneider Petition was denied, and several critical differences make Supreme Court intervention appropriate now. Back in early 2020, the circuit split was only between Swift and Sequoia. The government’s primary argument against granting the Schneider Petition centered on the lack of any real dispute given the lack of practical differences between the two standards. At that point, only two motions to dismiss had been denied, and no court of appeals had handed down an opinion on those denials. These facts are no longer true. Since then, both the Seventh Circuit and the First Circuit have promulgated new standards for evaluating government motions to dismiss, giving rise to a four-way circuit split. Moreover, other circuits have since chosen sides, such as the Tenth Circuit adopting the Sequoia standard and the Third Circuit adopting the FRCP-based approach from the Seventh Circuit.
Polansky is an ideal case for Supreme Court intervention because the Third Circuit did not shield its decision to uphold the dismissal with a proviso that the government’s motion would have met the more demanding Sequoia standard in any event. The Third Circuit based its decision solely on “an abuse-of-discretion analysis under Rule 41(a)’s ‘proper’ test.” In other words, a decision whether to grant a motion to dismiss in which the standard of review could be outcome determinative has finally emerged. While the Seventh Circuit introduced the FRCP-based approach in UCB, it also explained that the government would have met the Sequoia standard in any event, suggesting that Supreme Court intervention may not have changed the outcome at all. Although the relators urged the Supreme Court to resolve the “growing inconsistency among the lower courts” in the UCB Petition, the inconsistency was more of an intellectual debate, rather than outcome determinative, at least as it pertained to UCB. In opposition, the government characterized the circuit split as one of “modest variations” underpinned by universal agreement among courts of appeals that “government motions to dismiss under Section 3730(c)(2)(A) should receive substantial deference.” In contrast to UCB, the Third Circuit’s singular focus on reviewing for abuse of discretion under FRCP 41(a) gives rise to the possibility that Supreme Court intervention may result in at least a fresh review of the appeal under a different standard and, ultimately, the possibility of a different outcome. Accordingly, Polansky is more well-suited for Supreme Court intervention than UCB or Schneider.
In the Polansky Petition, the relator warned that “the profound confusion is interfering with the effective administration of the FCA.” Citing the increased frequency with which this issue arises, the relator asserted that “stakeholders are desperate for a clear answer, which only [the Supreme Court] can provide.” In closing, the relator urged that “the legal question is . . . squarely teed up and ripe for disposition.”
The government’s expansive spending power makes it ripe for falling victim to fraud. There is no doubt that harnessing the general public to help detect and prosecute fraud through the FCA contributes to a healthy governmental system. The unprecedented amount of money distributed under the CARES Act only amplifies the opportunities to defraud the government and the corresponding importance of the FCA. Accordingly, it is critical for parties on both sides of the litigation to have clarity on the boundaries of the government’s dismissal authority.
While Senator Grassley’s October 2021 Amendment facially resolves the circuit split, it leaves unanswered many questions that continue to cost money and contribute to disagreement among the courts. More careful consideration of an appropriate legislative resolution to the circuit split on the standard of review of government motions to dismiss may be appropriate, but Supreme Court intervention will likely provide some clarity in the meantime. Until then, the ambiguities may be compounded by the budding circuit split on the appealability of denied government motions to dismiss. The DoJ will face a significant task in enforcing the FCA against CARES Act fraudsters and others so it must be able to effectively manage litigation without inadvertently discouraging relators from bringing legitimate claims forward.
