This story was updated at 4:45 p.m. EST.
The U.S. Supreme Court on Tuesday handed a big win to whistleblowers, ruling that a violation of the federal False Claims Act's secrecy requirement doesn't automatically mean a complaint should be dismissed.
The unanimous ruling, delivered by Justice Anthony Kennedy, upheld a decision by the U.S. Court of Appeals for the Fifth Circuit. The appeals court in 2015 refused to dismiss a whistleblower complaint that alleged State Farm Fire & Casualty Co. bilked the U.S. government over the way the company processed insurance claims after Hurricane Katrina.
The False Claims Act, or FCA, requires complaints to be filed in court chambers and kept under seal for 60 days. State Farm's lawyers argued that a lawyer for the whistleblowers — former claims adjustors for a State Farm contractor — violated the seal requirement in alerting news outlets to the existence of the then-sealed complaint. Several media outlets published stories about the fraud allegations.
The two adjustors had alleged State Farm mischaracterized wind damages, which it would have had to pay, as flood damages, which the government's insurance program would pay.
"Petitioner's primary contention is that a violation of the seal provision necessarily requires a relator's complaint to be dismissed," Kennedy wrote. "The FCA does not enact so harsh a rule."
The justices heard arguments in November. Kathleen Sullivan of Quinn Emanuel Urquhart & Sullivan argued for State Farm.
The U.S. Department of Justice participated as a friend of the court in the case and urged the justices not to adopt State Farm's proposed rule that a violation of the seal provision requires automatic dismissal. State Farm's "inflexible automatic dismissal rule has no basis in the text or design of the FCA and would undermine the very governmental interests that the seal provision is meant to protect."
The FCA's seal requirement gives the federal government a chance to investigate claims to decide whether to participate in a case in support of whistleblowers. Federal enforcers recovered more than $3.5 billion under the law in 2015, with more than half of that coming from whistleblower suits.
The government did not intervene in the action against State Farm, filed in April 2006 in the U.S. District Court for Mississippi.
Kennedy said State Farm and other business advocates who filed friend-of-the-court briefs "place great emphasis on the reputational harm FCA defendants may suffer when the seal requirement is violated. But even if every seal violation does not mandate dismissal, that sanction remains a possible form of relief."
Federal trial judges, Kennedy wrote, have the authority to issue sanctions short of dismissing a complaint. "Remedial tools like monetary penalties or attorney discipline remain available to punish and deter seal violations even when dismissal is not appropriate," Kennedy wrote.
State Farm 'greatly disappointed'
In response to an email request for comment, State Farm spokesman Justin Tomczak said "We are greatly disappointed in the court's ruling and will of course abide by its holding."
"After Katrina hit," he added, "State Farm employees worked tirelessly and honorably under exceptionally trying circumstances. Despite today's ruling, we know the legacy of their outstanding efforts will not, and should not be diminished.
"We have built a trusted brand by living our values and keeping our promises. Our customers expect us to do the right thing. We depend on each other to do the right thing. We firmly believe that our employees acted responsibly and within the guidelines set forth by the federal government.
"We are reviewing our legal options and will present the remainder of our case in the district dourt."
Mike Scarcella is a reporter for the National Law Journal and can be reached at mscarcella@alm.com. On Twitter: @MikeScarcella.
Rosalie L. Donlon of PropertyCasualty360.com contributed to this article.
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