Seventh Circuit hews new path regarding False Claims Act dismissals; DOJ registers its disagreement

Since the Department of Justice (DOJ) issued the so-called Granston Memo and began moving to dismiss more False Claims Act (FCA) lawsuits over the objections of private whistleblowers, courts have had more opportunities to consider the scope of DOJ’s discretion in doing so.  Recently, the US Court of Appeals for the Seventh Circuit weighed in on a growing circuit split and reached a surprising result.  Previously, two competing standards had emerged between courts that had weighed in on FCA dismissal motions brought by the government.  Yet in U.S. ex rel. CIMZNHCA, LLC v. UCB, Inc., et al., the Seventh Circuit said the choice between those two standards “is a false one” and instead articulated a new middle-of-the-road approach for these cases.  The government has recently gone on the record to disagree with the Seventh Circuit’s reasoning in CIMZNHCA.  The Supreme Court may need to step in to resolve this expanding rift among the circuits. 

Background

Last year, we wrote about the broadening of this circuit split in the wake of increased FCA dismissals following DOJ’s Granston Memo.  Section 3730(c)(2)(A) of the FCA empowers DOJ to dismiss qui tam suits over a relator’s objection, provided the relator receives “an opportunity for a hearing on the motion.”  The 2018 Granston Memo encouraged government attorneys to scrutinize non-intervened FCA lawsuits and to consider dismissing those cases when doing so would advance important government interests (eg, preservation of government resources, rejection of meritless complaints, or interference with agency policies).  A flurry of new dismissal motions ensued. 

As DOJ sought more dismissals, courts grappled with the appropriate standard to apply.  Courts in different circuits generally aligned with one of two standards: the highly deferential “unfettered discretion” standard announced by the DC Circuit in the Swift case (and later endorsed by the Second and Fifth Circuits) or the less deferential “rational relation” test announced by the Ninth Circuit in the Sequoia Orange case (and later endorsed by the Tenth Circuit).  Many district courts have deepened this split by aligning with Swift or Sequoia Orange, while other district courts have declined to choose between the competing approaches, instead holding that dismissal passes muster regardless as to which standard applies.  The recent Seventh Circuit decision has introduced yet another approach.

Seventh Circuit decision

In CIMZNHCA, a corporate relator alleged the defendants violated the FCA by engaging in schemes to provide illegal kickbacks in the form of free nursing and reimbursement-support services.  The government had declined to intervene and, in December 2018, it moved to dismiss the suit under FCA’s Section 3730(c)(2)(A), citing factors set forth in the Granston Memo.  Last April, the district court applied the less-deferential Sequoia Orange standard and denied DOJ’s request.  In explaining its choice, the district court criticized the more deferential option, noting that Swift “renders the hearing specifically provided for in the statute superfluous and belies the role of the judiciary in ensuring constitutional checks and balances.” DOJ appealed.^[1]

As to the appropriate dismissal standard, the Seventh Circuit concluded “. . . the choice presented to us on the merits [whether Swift or Sequoia Orange applies] is a false one, though the correct answer lies much nearer to Swift than Sequoia Orange.”  It then set forth a novel approach “relying on Federal Rule of Civil Procedure 41,” which empowers plaintiffs to dismiss unilaterally any lawsuit prior to service of an answer or summary judgment motion.  According to the Seventh Circuit, “once a valid Rule 41(a) notice has been served, ‘the case is gone; no action remain[s] for the district judge to take,’ and further orders are void.”^[2]  The court continued, noting Rule 41 is “subject to . . . any applicable federal statute”^[3] and determined that the portion of Section 3730(c)(2)(A) of the FCA referring to notice and a hearing “is the only authorized statutory deviation from Rule 41.”^[4]

The Seventh Circuit then commented on Swift and Sequoia Orange.  On the one hand, it “[found] unpersuasive Swift’s suggestion that ‘the function of a hearing when the relator requests one is simply to give the relator a formal opportunity to convince the government not to end the case.’”^[5] On the other hand, the court noted that “Sequoia Orange may be read to hold no more than the government’s § 3730(c)(2)(A) dismissal may not violate the substantive component of the Due Process Clause.”^[6]  Ultimately, the court concluded that “the danger that the § 3730(c)(2)(A) hearing may often serve little purpose does not justify imposing on the government in each case the burden of satisfying Sequoia Orange” and “[i]f Congress wishes to require some extra-constitutional minimum of fairness, reasonableness, or adequacy of the government’s decision under § 3730(c)(2)(A), it will need to say so.”^[7]

In applying its approach to the facts, the court concluded, “[t]he government proposed to terminate this suit in part because, across nine cited agency guidances, advisory opinions, and final rulemakings, it has consistently held that the conduct complained of is probably lawful.  Not only lawful, but beneficial to patients and the public. . . This is not government irrationality. It oppresses no one and shocks no one’s conscience.  Accordingly, where the government’s conduct does not bump up against the Rules, the statute, or the Constitution, the notice and hearing under § 3730(c)(2)(A) serve no great purpose.  But that will not be true in every case.  Our reading of § 3730(c)(2)(A) does not render its process futile as a general matter.  Rather, this particular relator simply had no substantive case to make at the hearing to which the statute entitled it.”

DOJ rejects CIMZNHCA

On September 15, the US Attorney’s Office for the Southern District of New York (USAO) filed with the Second Circuit a notice of supplemental authority concerning CIMZNHCA.^[8]  The Second Circuit is currently considering an appeal filed by another FCA relator whose qui tam lawsuit was dismissed by DOJ in the immediate aftermath of the Granston Memo.  According to the USAO’s recent filing, CIMZNHCA “confirmed the government’s broad authority to end a case brought on its behalf,” but “[n]onetheless, Swift is most closely aligned with the [FCA’s] statutory text and constitutional considerations,” meaning the separation of powers concerns that potentially arise when the Judiciary overrules the Executive’s exercise of prosecutorial discretion.  The USAO also prefers Swift because, unlike CIMZNHCA, “it avoids a standard that changes depending on whether an answer has been served.”     

Takeaways

The Seventh Circuit has announced an alternative approach to Swift and Sequoia Orange in Section 3730(c)(2)(A) cases, although the Seventh Circuit’s standard more closely resembles the former than the latter.  Since issuing the Granston Memo, DOJ has sought increasingly to exercise its statutory authority to dismiss qui tam actions.  While courts are generally willing to grant those dismissals, the existence of now three competing standards creates significant uncertainties.  The extent to which DOJ must expend resources in evaluating any particular whistleblower lawsuit, or otherwise show its hand prior to dismissal, has important implications for all litigants.  Given the growing circuit split, the Supreme Court may be invited—whether by DOJ or private parties—to settle the matter sooner rather than later.   

Learn more about this growing circuit split by contacting any of the authors or your DLA Piper attorney.