Justices Resist Harsh Penalties for Broken Seals

WASHINGTON (CN) — Though critical of those who would violate the mandatory seal requirements of the False Claims Act, the Supreme Court justices seemed reluctant Tuesday to make the penalty for such infractions too steep.

Arguing before the court on behalf of State Farm Fire and Casualty, Kathleen Sullivan said such breaches should cost would-be plaintiffs their chance to sue. The attorney parried when Justice Elena Kagan asked whether the amount of harm the breach caused should be taken into account, regardless of whether it was done in bad faith.

"Your honor, we don't tend to let drug dealers off if the thing they think is marijuana that they are selling turns out to be oregano," Sullivan said. "We do care about state of mind at the time, and we don't just look to the accident or happenstance that it didn't cause harm in fact."

Sullivan's clients faced such a breach 10 years ago when insurance adjusters Cori and Kerri Rigsby brought a whistleblower case against State Farm. The suit accused State Farm of defrauding the government by misclassifying wind damage caused by Hurricane Katrina as flood damage, so that the federal flood insurance program would foot the bill.

To ensure that the government has time to investigate the claims, and decide whether to intervene, the False Claims Act requires complaints like this to be filed in camera and kept under seal for at least 60 days.

When successful, damages in such cases go to the government, as the victim of the fraud. To incentivize whistleblowers, however, a qui tam provision entitles relators to a hefty portion of any recovery.

Though the case against State Farm remained fully sealed until early 2007, several media outlets had already reported on the claims because they received leaked copies of the case from the Rigsbys' attorney.

In arguing for the Supreme Court to make dismissal the penalty for broken seals, State Farm counsel Sullivan purported to defend the government's interests.

Chief Justice John Roberts undercut this, however, by noting that the government took a different position in a friend-of-the-court brief on behalf of the Rigsbys.

"So you're arguing the government's interests, but it rings a little hollow when the government is on the other side," Roberts said.

Sullivan admitted this put her in a "difficult position," but still pressed the court to adopt a test for such violations that turns on whether the seal was breached in bad faith.

John Bash, an assistant to the U.S. solicitor general, suggested that the test to dismiss should weigh the harm that violating the seal caused the government, coupled with the severity of the violation and the intent of the person who committed the breach.

The justices seemed to favor the Justice Department's proposal.

"Given the government is the beneficiary of this provision, why shouldn't we give very significant discretion to the government?" Justice Elena Kagan asked Sullivan.

Insisting that the purpose of the seal is to let the government conduct its investigation in peace, State Farm' attorney said Congress clearly did not intend to give the government too much power over how to punish seal violations.

"We think that Congress could have said the seal should be maintained at the attorney general's discretion," Sullivan said. "It did not say that."

Sullivan warned that letting people skate on breaking the False Claims Act's mandatory seal provision would declare "open season" for bad-faith disclosures to frustrate settlement talks.

Arguing for the Rigsbys, attorney Tejinder Singh said courts should have discretion in deciding when to throw out a case based on a breached seal. The government's position should factor into such decisions significantly, the attorney added..

"We are not arguing, like, blind deference to the government or deference on the issue of statutory interpretation," Singh said. "But we are saying it's very clear that Congress is principally concerned with protecting the government."

The justices did voice concerns about letting bad-faith violations off too easily.

"It's not just the department that has an interest in this," Justice Stephen Breyer said. "It's the United States judicial system that has an interest in this. And that's what poses the problem. And your opponent here is saying when you get to the bottom of it, given the seriousness of what went on, this is too light a sanction.

Singh argued the justices could eliminate such concerns with a "strongly worded" opinion that condemned the seal breached here while still giving courts discretion.

State Farm's appeal to the Supreme Court comes after the Fifth Circuit ruled for the Rigsbys, who ultimately prevailed at trial on a single bellweather false claim under the False Claims Act.

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