Government’s Authority to Unilaterally Dismiss Qui Tam Fraud Suit Faces Court Test

whistleLast week, the United States filed its long-awaited motion to dismiss a major False Claims Act (FCA) lawsuit filed in the Northern District of California, U.S. ex rel. Campie v. Gilead Sciences, Inc. The Government argued that dismissal was warranted “to avoid the additional expenditure of government resources on a case that it fully investigated and decided not to pursue.” Last December in a U.S. Supreme Court filing, the Government promised that it would seek dismissal of the suit—filed by whistleblowers formerly employed by Gilead, a large brand-name drug manufacturer. The Government likely made that promise to ensure that the Supreme Court would not agree to hear Gilead’s appeal from a Ninth Circuit decision reinstating the case.

The motion could end up becoming a major test of the Granston Memo, a January 2018 Department of Justice memo that directed department lawyers who review FCA qui tam lawsuits to consider seeking dismissal. The FCA grants the Government a virtually unfettered right to dismiss FCA suits filed by private litigants in the name of the United States. Yet the Ninth Circuit and several other federal appeals courts have demonstrated their willingness to closely examine Government efforts to shut down relators’ FCA lawsuits. And the district judge hearing the Gilead case very recently rejected a similar motion to dismiss—ruling that the Government must demonstrate that it has undertaken an absolutely thorough investigation before he will even consider dismissal.

But such decisions defeat a major purpose of the Government’s dismissal authority: to prevent inefficient use of government resources. There will be no net savings of government resources if courts will not permit dismissal until after the government undertakes a scorched-earth investigation of the FCA claims. Moreover, the FCA’s constitutionality is called into serious question if, as FCA relators argue, the statute prevents the Government from exercising ultimate control over suits filed in the name of the United States.

The FCA and the Granston Memo

The FCA imposes civil liability on a person who, among other things, “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the federal government. The FCA contains a unique qui tam provision; it permits a person to appoint himself as a private attorney general (a “relator”) and file an FCA claim in the name of the United States. A relator must submit his lawsuit to the Justice Department for in camera review. If after completing that review the Government decides not to take over the lawsuit (as happens about 75% of the time), the relator may prosecute the claim on his own.

An often overlook FCA provision, 21 U.S.C. § 3730(c)(2)(A), permits the Government to dismiss a qui tam suit “notwithstanding the objections of the [relator] if the [relator] has been notified by the Government of the filing of the motion and the court has provided the [relator] with an opportunity for a hearing on the motion.” The Granston Memo directs DOJ personnel, when reviewing a qui tam action to determine whether the Government should intervene, to also consider whether the Government should seek dismissal under § 3730(c)(2)(A).

The Memo includes a “non-exhaustive list” of seven grounds that the Government can invoke as a basis for dismissal, including a determination that continued litigation would lead to unwarranted expenditure of government resources. It added, “Examples of potential costs may include, among other things the need to monitor or participate in ongoing litigation, including responding to discovery requests.” In response to the Memo, DOJ personnel in the past year have sought to invoke the Government’s dismissal authority in a small number of cases.

The FCA Claims against Gilead

Each year, federal agencies spend many billions of dollars for products manufactured by Gilead, a major producer of drugs designed to treat HIV patients. The whistleblowers suing Gilead under the FCA contend that several of those drugs did not meet FDA manufacturing specifications because a key ingredient was supplied by a subcontractor that had not been properly approved by FDA. They contend that Gilead defrauded the federal government by falsely telling FDA and other agencies that its manufacturing process complied with all applicable regulations, and that Gilead should be required to refund billions of dollars in government payments.

Gilead sought dismissal on the pleadings, arguing that even if the Relators had adequately alleged that some of its statements were false, they could not demonstrate “materiality,” a prerequisite for establishing FCA liability. It noted that the Government closely examined the Relators’ claims for years but continued to spend billions of dollars annually for Gilead’s products and never sought to limit Gilead’s marketing authority.

The Ninth Circuit rejected Gilead’s defense, a decision that conflicts sharply with other appeals courts’ understanding of the FCA materiality requirement. Several other circuits have determined that materiality is lacking when the Government continues business-as-usual with a contractor after fully investigating alleged fraud. Gilead filed a Supreme Court certiorari petition, and the justices directed the Solicitor General to express the views of the United States. The Solicitor General’s brief recommended denial but also assured the Court that if the case were remanded to the district court, the United States would exercise its discretion to move to dismiss. Unsurprisingly in light of that assurance, the Supreme Court denied the petition this past January.

The Ninth Circuit’s Problematic FCA Dismissal Standards

Dismissal of the FCA claims against Gilead would be a foregone conclusion if the claims were pending in the D.C. Circuit. That appeals court interprets § 3730(c)(2)(A) as granting the Government unreviewable discretion to direct dismissal of an FCA qui tam lawsuit. While noting that the statute in some instances affords the relator a right to a hearing on the motion to dismiss, the D.C. Circuit said the only purpose of that hearing is to provide the relator with an opportunity to try to persuade the Government to change its mind about dismissal.

In contrast, the Ninth Circuit and several other circuits have authorized a somewhat more robust review of an FCA dismissal motion. The Ninth Circuit held in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Co. that the United States must demonstrate a “valid government purpose” for dismissal, and that even then the relator can prevail by demonstrating that the Government’s decision is “arbitrary and capricious.” It imposed this standard despite conceding that § 3730(c)(2)(A) “does not specify any conditions under which the relator may block the motion.” The Ninth Circuit nonetheless conceded that the Government may have “valid” bases for dismissal even if the underlying FCA claim is meritorious, and that one such basis is a desire to avoid the burdens that continued litigation would impose on Government personnel.

The Government’s Motion to Dismiss

The Government’s motion to dismiss the Gilead suit takes no position on the merits of the Relators’ claims. Instead, it argues that dismissal is warranted to avoid additional expenditure of government resources on a case that it fully investigated and decided not to pursue. It states that the investigation included interviewing numerous witnesses (including Relators) and collecting more than 600,000 pages of documents. It further states that it conducted numerous inspections of the manufacturing facilities of the subcontractor that is the focus of Relators’ claims. The motion contends that if the litigation continues, discovery and trial testimony about “exactly what the government knew and when” would divert Government employees “from their other duties and agency priorities.”

This high-profile case is an important test of the Granston Memo and DOJ’s efforts to more forcefully exercise its FCA dismissal authority. It may not be an easy task for the Government to satisfy the Ninth Circuit’s review standards in cases, as here, in which the Government is unwilling to directly challenge the merits of a relator’s claims. The task may be even more difficult given that the motion is being heard by Judge Edward Chen of the U.S. District Court for the Northern District of California, who has been skeptical of Government FCA dismissal motions.

In one recent case, United States ex rel. Thrower v. Academy Mortgage Co., Judge Chen rejected the Government’s dismissal effort as “arbitrary and capricious” because he deemed inadequate the Government’s investigation of the relator’s allegations. While noting the Government’s claim that dismissal would conserve government resources, he implicitly rejected the argument that such claims by themselves can justify dismissal. Instead, he suggested that the Government must undertake a cost-benefit analysis to determine whether the costs of continued prosecution are likely to exceed the expected recovery—thereby requiring that the Government’s dismissal decision be based at least in part on its assessment of the lawsuit’s merits. The United States has sought interlocutory Ninth Circuit review of Judge Chen’s decision. If the Ninth Circuit ultimately upholds Judge Chen, the Government is considerably less likely to make use of its dismissal authority in future FCA cases.

Limits on Judicial Review

The scrutiny of Government dismissal decisions required by the Ninth Circuit and Judge Chen is difficult to reconcile with the language of the FCA. Section 3730(c)(2)(A) grants the Government the right to dismiss a qui tam action “notwithstanding the objections of the [relator],” without suggesting that it must justify its decision. Scrutiny is particularly inappropriate in cases, as here, in which the FCA claims are lodged against a highly regulated entity accused of failing to comply with all regulatory requirements. In such cases, federal regulators inevitably will be drawn into the litigation and asked to opine on whether the regulated entity’s alleged noncompliance was material. When the Government tells a reviewing court that those litigation-related burdens are sufficient to warrant dismissal of the lawsuit, no one can seriously argue that those burdens do not exist.

A Government decision to dismiss an FCA lawsuit is akin to a decision by government regulators not to bring an enforcement action. The Supreme Court has repeatedly held that decisions not to bring enforcement actions are almost never subject to judicial review, in part because courts are ill-equipped to second-guess agency decisions that their limited enforcement resources are better spent elsewhere. Courts are similarly ill-equipped to determine whether requiring an agency to devote resources to ongoing FCA litigation would prevent it from using those resources for more pressing matters.

Ironically, if courts condition dismissal on a Government showing that it has investigated the relator’s claims with sufficient thoroughness to satisfy the courts, then the Government’s stated purpose—conservation of Government resources—can never be achieved. The Government can avoid the costs of complying with FCA discovery only by incurring the equally large investigatory costs necessary to justify dismissal. Under those circumstances, the Government will be reluctant to seek dismissal no matter how many resources it likely will be required to devote to ongoing FCA litigation.

Constitutional Concerns

Restricting the Government’s authority to dismiss FCA lawsuits also raises serious constitutional concerns. The Constitution assigns to the executive branch, not the judiciary, the authority to ensure that the laws are faithfully executed. Allowing the courts to second-guess DOJ’s decision not to pursue an enforcement action under the FCA undermines that basic separation-of-powers principle.

Indeed, interpreting the FCA to authorize such restrictions calls into question the constitutionality of the entire FCA qui tam regime. FCA defendants have occasionally challenged the statute’s constitutionality on the ground that Congress may not delegate federal law-enforcement authority to private individuals. The leading decision addressing that issue, the Fifth Circuit’s Riley v. St Luke’s Episcopal Hospital, rejected the challenge on the basis of the “unilateral” power to dismiss an action conferred on the Government by § 3730(c)(2)(A), a power that (according to Riley) ensured ultimate Government control over all FCA lawsuits. But the Government no longer maintains the requisite control if § 3730(c)(2)(A) is interpreted as a limitation on dismissal authority.

The number of FCA qui tam lawsuits filed annually has grown significantly in recent years, to more than 700 in 2017. The Government must review and monitor every one of them. It cannot effectively weed out those FCA lawsuits that are not in the best interests of the United States if courts continue to second-guess its authority to dismiss lawsuits as it sees fit.

Also published by Forbes.com on WLF’s contributor page.

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