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Article: March 2018: U.S. Justice Department Issues Guidance on Dismissing Qui Tam False Claims Act Cases Over Relators’ Objections

Business Litigation Reports

Background. In recent years, there have been record numbers of qui tam filings under the False Claims Act (“FCA”). The continued increase in qui tam filings over the last several years has not been met with a rise of DOJ interventions in such cases. On January 10, 2018, the head of the DOJ Civil Frauds Section weighed in on this trend, issuing an internal memorandum instructing all DOJ attorneys that admonish FCA cases to first consider whether the Government should dismiss meritless cases over relator’s objections. Although the impact of this guidance remains to be seen, it appears to represent an unprecedented act by the DOJ to expressly set standardized guidelines for the Government’s seldom applied authority to dismiss qui tam actions. And, it may well provide defendants with an increased ability to call on the aid of the Government when facing such claims.

Qui Tam FCA Actions. In common law, a writ of qui tam allows a private individual to sue on behalf of a government for a public claim. Plaintiffs are incentivized to file these actions because they receive a portion of any recovery. Under the FCA, individuals with knowledge of fraud committed against the U.S. Government—“relators” or whistleblowers—may bring a qui tam claim on its behalf. The rise of qui tam actions filed in recent years is in part due to the passage of the Affordable Care Act in 2010 and the large recovery given to successful plaintiffs who bring qui tam actions in the healthcare sector. Since passage of that Act, the Government has seen an explosion in qui tam activity in the healthcare and pharmaceutical sectors, where recovery can reach hundreds of billions of dollars, with the FCA granting relators between 15% and 25% of any award or settlement. On top of this, the FCA awards relators their attorneys’ fees, making qui tam filings especially popular for the plaintiff’s bar.

Once a whistleblower files suit on the Government’s behalf, the DOJ has three options: 1) intervene as a plaintiff in one or more counts of the claim; 2) decline to intervene, leaving the relator to prosecute the action on the Government’s behalf (although the Government often still expends valuable resources monitoring these claims); or 3) dismiss the action over the relator’s objections, which the FCA expressly empowers the Government to do as long as it gives the relator notice and the court holds a hearing. Historically, however, the DOJ has rarely exercised its dismissal power. One reason is that courts disagree over the standard of review. For example, in Swift v. United States, 318 F.3d 250, 252 (D.C. Cir. 2003), the District of Columbia Circuit held that the DOJ has an “unfettered right” to dismiss a qui tam action. Conversely, under Ninth Circuit law, the DOJ must identify a “valid government purpose” before it unilaterally dismisses an action. United States ex rel. Sequoia Orange Co. v. Baird–Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998).

The Guidance. The guidance set forth in the DOJ’s January 10 memorandum is multi–faceted. It outlines seven non–exclusive circumstances that DOJ attorneys should consider in evaluating whether to dismiss a claim:

  1. Where “a qui tam complaint is facially lacking in merit—either because relator’s legal theory is inherently defective, or because the relator’s factual allegations are frivolous.”
  2. Where “a qui tam action duplicates a pre–existing government investigation and adds no useful information to the investigation.”
  3. Where “an agency has determined that a qui tam action threatens to interfere with the agency’s policies or the administration of its programs and has recommended dismissal to avoid these effects.”
  4. Where “necessary to protect the Department’s litigation prerogatives” and authority to control its docket.
  5. Where necessary “to safeguard classified information” regarding agencies with sensitive national security information.
  6. Where “the government’s expected costs are likely to exceed any expected gain.”
  7. Where there are “problems with the relator’s action that frustrate the government’s efforts to conduct a proper investigation,” such as failing to provide all material information to the government.

The goal of this non–exhaustive list is twofold: (i) provide a general framework for evaluating when the DOJ should dismiss a qui tam case, and (ii) ensure consistency throughout the process. Given the above factors all represent circumstances where the DOJ has dismissed cases in the past, only time will tell whether the guidelines set forth in the Memorandum characterize a new policy or merely memorialize current practices.

In addition to outlining those seven factors, the Memorandum also sets forth the DOJ’s view on the standard of review, addressing the disagreement among courts. Unsurprisingly, the DOJ sided with the D.C. Circuit, taking the position that the appropriate standard should be the “‘unfettered’ discretion standard,” which is meant to be “highly differential.” By doing so, the DOJ reaffirmed the Government’s important “gatekeeper role,” stressing that its dismissal authority remains “an important tool to advance the government’s interests, preserve limited resources, and avoid adverse precedent.”

The Memorandum is potentially significant for several reasons. First, it may signal an increased aggressiveness by the DOJ in dismissing qui tam claims where it has chosen not to intervene. Second, while not explicitly saying so, the Memorandum arguably signals support for FCA qui tam defendants, and defendants should avail themselves of the policies outlined in the Memorandum to argue not only in favor of non–intervention, but outright dismissal. Third, the Memorandum highlights the hurdles plaintiffs must overcome to avoid dismissal. For example, plaintiffs are now not only on notice that facially meritless claims could be dismissed, but that “even if the relator’s allegations are not facially deficient, the government may conclude…that the case lacks merit” and dismiss it. This may discourage plaintiffs from bringing claims in the first place. Finally, the mere articulation of these guidelines may lead to an increase in relators voluntarily dismissing their cases after the Government declines to intervene. Specifically, the Memorandum instructs DOJ attorneys to “advis[e] relators of perceived deficiencies in their cases as well as the prospect of dismissal.”

Conclusion. Whether the DOJ’s new guidelines for dismissing qui tam cases reflects a new policy of assertiveness in terminating cases or merely reflects a memorialization of past practices remains to be seen. Practitioners in this space would be well advised to closely watch the DOJ’s actions in this space over the next 12 to 18 months.