FCA Alert : Lawyers & Attorneys for Whistleblower, False Claims Act & Qui Tam Defense : Kelley Drye & Warren LLP

The ACLU made three constitutional challenges: 

(1)        The seal provisions violate the First Amendment by denying the public access to judicial proceedings.

(2)        The seal provisions violate the First Amendment by gagging relators from speaking about their qui tam complaints. 

(3)        Congress violated separation of powers by infringing on a court’s “inherent power to determine on an individualized basis whether a qui tam complaint should be sealed.”

Argument #1: First Amendment Right of Access to Judicial Proceedings

The Fourth Circuit acknowledged that the U.S. Supreme Court has held that, though “not absolute”, “the First Amendment guarantees a right of access to criminal trials and certain criminal proceedings.” Additionally, most circuit courts, including the Fourth Circuit, have extended this right to civil trials and civil filings. 

The Fourth Circuit chose not to decide whether this First Amendment right extends to access to qui tam complaints. Instead, the Fourth Circuit assumed that it does for purposes of the appeal. Nonetheless, the Court still found the seal provisions permissible because the United States “has a compelling interest in protecting the integrity of ongoing fraud investigations”, and the seal provisions are “narrowly tailored” to serve that interest. The Court reasoned that the public’s right needed to be balanced against such factors as “the complex nature of modern fraud investigations, the government’s limited resources, and the unique nature of a qui tam action under the FCA.” In an FCA case, a private litigant unconnected to the Executive Branch files a suit with no notice to the Executive on behalf of the United States. By contrast, in a typical suit, the Department of Justice investigates the matter before deciding whether or not to file a suit. The seal provisions help ensure that control of the lawsuit and enforcement of the FCA remain with the Executive, not private litigants. 

Seal provisions give exec control mech. - Thus, the Executive Branch retains “sufficient control” over the relator's conduct to “ensure that the President is able to perform his constitutionally assigned dut[y],” Morrison v. Olson, 487 U.S. 654, 696, 108 S.Ct. 2597, 2622, 101 L.Ed.2d 569 (1988), to “take Care that the Laws be faithfully executed.”

To support its holding that the seal provisions are “narrowly tailored” to protect ongoing fraud investigations, the Court also cited the provision of the FCA that requires the Government to show “good cause” to continue the seal beyond the initial 60-day period. In practice, however, based on numerous FCA cases that remain sealed for years, this purported “good cause” standard appears to be a very easy standard to meet.

Argument #2: First Amendment Right to Speak About Qui Tam Complaints

The Court held that the ACLU lacked standing to make this First Amendment challenge because it is not a relator being prevented from speaking. The ACLU argued that, though it has not been prohibited from speaking, it is a “willing listener”. However, the ACLU’s failure to identify a specific “willing speaker” that would speak to the ACLU but for the gag provision was fatal to this argument.

Argument #3: Separation of Powers

The Court acknowledged that “Congress may not disrupt the balance among the branches of government by preventing another branch from accomplishing its constitutional function.” Without much explanation, the Court held that the seal provisions do not violate separation of powers because they “do not intrude on the zone of judicial self-administration to such a degree as to prevent the judiciary from accomplishing its constitutionally assigned functions.”

The Dissent

Judge Roger L. Gregory, dissenting, found the Government’s purported “compelling interests” insufficient because the seal provisions apply to all qui tam complaints irrespective of whether those so-called interests are implicated. For example, the interest of not tipping-off the target of an investigation may not be implicated because the target may already be aware of it. In practice, a defendant will likely become aware of a sealed complaint when the Government begins to use its investigatory powers to demand that the defendant produce documents and other information.

Due Process Concerns Implicated by Seal Provisions

Though the Fourth Circuit did not address the issue, defendants may have an additional constitutional argument relating to the seal provisions based on the particular facts of a case. In some cases, the Government has requested and received extensions the seal period for many years. During the seal period, the Government has the ability to take one-sided discovery of the defendant through its investigatory powers. Meanwhile, documents that a defendant may one day seek are destroyed and witnesses’ memories fade. The Government’s use of the seal provisions to delay prosecuting an action to gain an unfair tactical advantage or in reckless disregard for the defendant’s ability to defend against the claims may violate a defendant’s right to due process. See United States v. Eight Thousand Eight Hundred and Fifty Dollars in U.S. Currency, 461 U.S. 555, 563 (1984).

The trial court held that Spilton, a clinical social worker, committed 325 separate violations of the Missouri FCA by submitting Medicaid reimbursement claims for clinical services that she did not provide at all or did not provide in accordance with the rules governing the Medicaid program. The Missouri FCA provides for treble damages, so the trial court entered an award of damages in the amount of $136,155, based on single damages of $45,385. The Missouri FCA also provides for a penalty between $5,000 and $10,000 “for each separate act in violation” of the Missouri FCA. The trial court imposed a penalty of $5,000 for each of the 325 violations, for a total penalties award of $1,625,000.

On appeal, the Missouri Supreme Court rejected Spilton’s argument that the penalties award violated due process. The court distinguished statutory penalties from punitive damages awards by juries because the statute defines “in advance the prohibited conduct and the legislative prescribed penalty.” As applied to Spilton, the court found that the penalties provision was not vague or arbitrarily enforced, since the trial court applied the minimum permissible penalty to each of Spilton’s 325 violations. The Missouri Supreme Court further held that the penalties award did not violate the Eighth Amendment’s prohibition on excessive fines because “when the litigant receives the lowest possible penalty proscribed by a statutory range, as Spilton did, the penalty is not excessive.” The court also found that the penalties award did not constitute cruel and unusual punishment because $5,000-per-violation penalty assessed was not so grossly excessive “as to shock the conscience.”

U.S. Supreme Court decisions that limit punitive damage awards on due process grounds may provide a basis to limit excessive penalties awards under the FCA, especially when the amount of the penalties award far exceeds the government’s actual damages and the amount of actual damages is substantial. Although the U.S. Supreme Court has declined to set a bright line test for determining when an award would run afoul of the due process clause, a punitive damages award that exceeds a substantive actual damages award by a ratio of more than 1:1 may run afoul of the due process clause, and it would be unlikely that a punitive damages award that was more than 9 times compensatory damages could ever comport with due process requirements. See Exxon Shipping Corp. v. Baker, 128 S. Ct. 2605, 2624-25 (2008). The Supreme Court’s reasoning regarding punitive damages may be equally applicable to penalties awards under the FCA, a statute that the U.S. Supreme Court has held is punitive in nature. If so, the Missouri Supreme Court’s decision in Spilton may well be contrary to federal due process requirements of the U.S. Constitution, and may be subject to review by the U.S. Supreme Court.