06 July 2018

Granston Memo Calls for DOJ to Dismiss More Declined Qui Tams; Courts Diverge on The Extent of DOJ’s Right to Do So

In the recently released Granston Memo, DOJ outlined its policy in favor of dismissing non-intervened qui tam suits when dismissal will advance other important government interests. [Reported on here].  While the FCA bar has been debating how much – if at all – the world of FCA enforcement will change in light of the Granston Memo, DOJ has been litigating over its right to act on the policy and dismiss declined qui tam suits.  In that regard, the statute appears straightforward:  “The Government may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.”  31 USC § 3730(c)(2)(a).  However, in the last week DOJ lost and won this issue in sharply contrasting decisions regarding the government’s right not to pursue claims. 

The Loss:  Academy Mortgage

In a remarkable opinion filed on June 29, Judge Chen in the Northern District of California rejected the government’s effort to dismiss a qui tam suit, adopting a novel and expansive reading of the statute precluding dismissal of a case without a meaningful investigation.  See U.S. ex rel. Thrower v. Academy Mortgage Corp., Case No. 16-cv-02120-EMC, 2018 U.S. Dist. LEXIS 109489 (Jun. 29, 2018) available here.  In Academy Mortgage the government declined to intervene on the relator’s initial complaint, which alleged that the defendant mortgage company fraudulently certified loans that were insured by the government, but limited the allegations to one of defendant’s branches and the period of her employment.  The court described the government’s investigation of the original complaint as “limited,” consisting of interviewing the relator and reviewing documents she supplied.  The relator subsequently filed an amended complaint, which described nationwide misconduct over a longer period, informed in part by relator’s review of publicly available data.  The court chastised the government for moving to dismiss that amended complaint, concluding that the government “appears not to have investigated the amended complaint at all.”  Although the government denied that its investigation was lacking, it did not submit any evidence in response to a court order as to the scope of its investigation.

The court then turned to the two-part test for evaluating dismissals under the FCA articulated by the Ninth Circuit in U.S. ex rel. Sequoia Orange Co v. Baird-Neece Packaging Corp., 151 F.3d 1139 (9th Cir. 1998).  Under that test, the government first bears the burden of identifying a valid purpose that will be achieved by a dismissal.  If the government succeeds, the burden then shifts to the relator to establish that the dismissal is “fraudulent, arbitrary and capricious, or illegal.”  In an effort to carry its burden the government cited one of the interests outlined in the Granston Memo as a basis for the dismissal:  the conservation of government resources to litigate more meritorious claims.  The court brushed this aside, and in doing so imposed an additional burden on the government to satisfy step one of the Sequoia Orange test, by endorsing relator’s suggestion that the government must have sufficient information about the “potential proceeds from the suit” to perform a “sufficient cost-benefit analysis” of its dismissal versus the resources being conserved.  The court held that by failing to conduct any meaningful investigation the government was unable to satisfy this new prerequisite to dismissal.

And still the court went on, holding that even if the government had satisfied its burden as to step one, the relator would have prevailed under step two of the test.  Citing legislative history of the FCA’s provision allowing relators to object to dismissals and obtain a hearing where there is evidence that a dismissal is unreasonable because “the Government has not fully investigated the allegations,” the court concluded that dismissal would itself be inappropriate where a complaint “has not been fully investigated.”  Finally, the court justified its decision by looking to the “good cause” requirement for government intervention subsequent to a declination.  Deeming dismissal “the most intrusive form of intervention,” the court reasoned that if the government had to demonstrate good cause for a secondary intervention it should also have to demonstrate good cause to dismiss a suit.  Consistent with the rest of the court’s opinion, the court held that the government will be unable to establish good cause to dismiss a qui tam suit where it has not conducted a “full investigation.”

But what is a “full investigation?”  The Academy Mortgage court plainly does not consider a review of the evidence offered by a relator to satisfy that ex-statutory requirement, but does not offer guidance on what will satisfy the burden.

The Win:  Ball Homes

Meanwhile, on the same day, Judge Reeves in the Eastern District of Kentucky granted the government’s motion to dismiss a non-intervened qui tam suit and denied the relator’s request even for an evidentiary hearing, finding the government has expansive rights to dismiss FCA suits.  See U.S. ex rel. Maldonado v. Ball Homes, No. 5:17-379, 2018 U.S. Dist. LEXIS 109127 (Jun. 29, 2018) available here.  Like Academy Mortgage, the relator in Ball Homes alleged fraud in certifications for federally insured loans.  And like in Academy Mortgage, the Department of Justice, on reviewing the complaint and information submitted by the relator, determined that its resources were best spent elsewhere and moved to dismiss.

The Ball Homes court cited the Sequoia Orange two-part test for evaluating government motions to dismiss FCA suits, but noted the tension with other cases that have endorsed the government’s “unfettered right” to dismiss qui tam suits, including Swift v. U.S., 318 F.3d 250 (D.C. Cir. 2003).  Finding neither the Sixth Circuit nor Supreme Court has taken a position on the issue, Judge Reeves relied on precedent in the District that adopted the Swift standard.  In reaching its decision, the Court underscored the government’s interests, as articulated in the Granston Memo, in dismissing declined qui tam suits, including the resources required to participate in discovery, and monitor pleadings, and participate in settlements and mediations.  The Court deemed it “clearly unreasonable to suggest that the government should sit by idly while Maldonado prosecutes an action in the United States’ interest.”  And in denying relator’s demand for an evidentiary hearing on the government’s motion to dismiss, the Court put it plainly: “the government has virtually unfettered discretion to dismiss a False Claims Act case, save exceptional circumstances, such as a showing of fraud on the Court.”

The Court also rejected the notion that relator’s right to a hearing was itself the source of test to be imposed on the government when seeking to dismiss a case.  Indeed, the court held that the hearing is merely designed as a last-ditch opportunity for relator to try to convince the government that his case has merit, and does not require the government “to make any sort of showing in support of its motion to dismiss” at all.  In particular, and in its own answer to the questions raised by the Academy Mortgage decision about the adequacy of a government investigation, the court noted that the government met with the relator several times and relator was afforded the opportunity to argue against the dismissal, deeming that sufficient to satisfy the statutory requirement.

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If, as we believe, the Granston Memo indeed signals an evolution in DOJ’s approach to declined qui tam actions we will see increasing litigation that may sharpen the split signaled by the Academy Mortgage and Ball Homes decisions.  We will continue to monitor for and report on any DOJ reaction to the decisions and further developments from the courts.

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