Federal Courts Split on Government Dismissals of Qui Tam Claims

In 2018, the Justice Department (DOJ) ordered US Attorneys to aggressively seek dismissal of False Claims Act (FCA) whistleblower qui tam lawsuits that lack merit or don’t serve the government’s interests. However, actual attempts to implement the controversial policy have proven tougher than expected with the courts split over how much discretion the government has to toss qui tam cases it doesn’t like.

 The Granston Memo

Under the FCA, lawsuits by whistleblowers (aka, “relators”) must be filed under seal to give the DOJ time to decide whether to intervene in the case. Although the case doesn’t end if the DOJ declines, the decision reduces the relator’s leverage significantly. The FCA also includes what had been a rarely used provision, Section 3170(c)(2)(A), allowing the government to actively seek to have cases that it doesn’t believe serve its interests dismissed.

In January 2018, then DOJ Civil Fraud Section Director Michael Granston issued an internal memorandum instructing US Attorneys to exercise their Section 3170(c)(2)(A) powers more aggressively. The Granston memo calls on federal prosecutors to act as “gatekeepers” to preserve enforcement resources, protect government interests and prevent weak cases from resulting in adverse judgments that weaken government enforcement powers.

The DOJ’s 7 Grounds for Seeking Dismissal of Qui Tam Claims

The Granston memo instructing US attorneys to use their Section Section 3170(c)(2)(A) dismissal powers more aggressively lists seven kinds of problematic qui tam claims that they should target for dismissal:

1. Meritless Claims, i.e., where a qui tam complaint appears to be lacking in merit because the relator’s legal theory is “inherently defective,” or because his/her “factual allegations are frivolous.”

2. Parasitic or Opportunistic Claims, i.e., qui tam actions that duplicate pre-existing government investigations and add no useful information to the investigation and bestow the relator with an unwarranted windfall in taxpayer dollars for providing merely duplicative information.

3. Threats to Policies or Programs, i.e., qui tam actions that threaten to interfere with a government agency’s policies or programs.

4. Actions Interfering with Other FCA Cases, e.g., a separate qui tam case in which the government has already chosen to intervene.

5. Cases Threatening Harm to National Security, e.g., qui tam actions that may compromise classified information, involve intelligence agency operations or military contracts.

6. Cases Where Costs Will Exceed Gain, the calculation of which should include the “opportunity cost” of utilizing resources on other matters of higher priority with a surer probability of recovery.

7. Claims that May Frustrate an Investigation, i.e., whether there are issues, such as procedural errors, with the relator’s action that frustrate the government’s effort to conduct a proper investigation.

The Courts Split

Even so, government attempts to implement its Section 3170(c)(2)(A) powers have encountered firm resistance from not only relators but also the courts. All agree that, as the “real party in interest,” the US government can seek dismissal. However, even before Granston, the federal courts have split on what the government must do to get a case dismissed under Section 3170(c)(2)(A).

Unfettered Discretion: In a case decided in 2003, the DC Circuit, found that the government has unfettered discretion to get a qui tam case dismissed (Swift v. United States, 318 F.3d 250, 252 (D.C. Cir. 2003).

Rational-Relation Test: By contrast, two Circuits, the Ninth (United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998) and Tenth (Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 936 (10th Cir. 2005) have required the government to hold an evidentiary hearing and meet a two-part test:

1. First, the government must identify “a valid government purpose” for dismissal; and
2. Then, it must show that dismissing the case accomplishes that valid purpose.

When and if the government meets that purpose, the burden shifts to the relator to prove that “dismissal is fraudulent, arbitrary and capricious, or illegal.”

Note: The Seventh Circuit subscribes to neither of these views and has held that a Section 3170(c)(2)(A) qui tam dismissal is no different from dismissal of any other lawsuit subject to the Federal Rules of Civil Procedure (United States ex rel. CIMZNHCA v. UCB, Inc., 970 F.3d 835, 839 (7th Cir. 2020)).

The Health Choice Case

In July, the Fifth Circuit became the fifth court to weigh in on this question. The case began when Health Choice and another entity created by a legal and consulting firm to file qui tam lawsuits against pharmaceutical companies and health care providers sued Eli Lily and Bayer for paying physicians kickbacks in the form of patient-education services for prescriptions that were subsequently billed to Medicare. Having done its own two-year investigation into the matter, the government concluded that the case had no merit. A year after declining to intervene, it sought dismissal of the case under Section 3170(c)(2)(A).

The lower court agreed and tossed the cases. Health Choice appealed but to no avail. After acknowledging the courts split, the Fifth Circuit sided with the Ninth and Tenth in deciding that the rational-relation test applied. But it also found that the government met the test in this case:

• Valid purpose: The government demonstrated two valid reasons for dismissal: i. the claims lacked the merit sufficient to justify the cost of investigation and prosecution; and ii. litigation over free patient education services would “undermine practices that benefit federal healthcare programs by providing patients with greater access to product education and support”;
• Rational relation: The government also showed that because the case lacked merit, the expected recovery wouldn’t be enough to recoup its litigation expenses if the case were to proceed; and
• Arbitrary: Once the government met both parts of the test, the burden shifted to Health Choice to show that the motion to dismiss was “fraudulent, arbitrary and capricious, or illegal.” But the court rejected its argument that the DOJ had a personal animus against the organization and deliberately waited a year into discovery to seek dismissal as “conclusory.”

United States ex rel. Health Choice All., L.L.C. v. Eli Lilly & Co., 2021 U.S. App. LEXIS 20175, __ F.5th __, 2021 WL 2821116

What It Means

 Granston is gone but his memo remains. Thus, much the way the DOJ’s Yates memo policy of targeting individual corporate officers, directors and leaders for the fraud committed by their organizations before it, the Granston memo policy of making greater use of Section 3170(c)(2)(A) to seek dismissal of cases the DOJ deems weak or counter to government interests is likely to survive the loss of its author and transition in administrations. At the same time, it appears that at least some federal courts will hold the government’s feet to the fire and make a solid case for dismissal rather than grant it unfettered discretion to dismiss any case it doesn’t like.