Amid Repeated Calls from Leadership, DOJ Exercises Its “Virtually Unfettered Discretion” to Dismiss “Weak” Qui Tam Action

Historically, qui tam actions have effectively been decided at the intervention stage:  if the Department of Justice (DOJ) did not intervene, the action generally went away.  In recent years, relators have increasingly proceeded (and recovered) even without DOJ intervention.  That trend may be shifting once again.  In 2018, the DOJ has repeatedly announced the need to closely scrutinize and dismiss “weak” qui tam actions.  Given that increased willingness and the DOJ’s nearly unreviewable discretion to dismiss, persuading the DOJ to do so will likely become even more critical in False Claims Act (FCA) litigation—as reflected in last week’s dismissal in United States ex rel. Maldonado v. Ball Homes, et al., No. 5:17-CV-379-DCR (E.D. Ky. June 29, 2018).

On June 29, 2018, a federal district court in Kentucky granted a motion by the Department of Justice (DOJ) to dismiss with prejudice a non-intervened qui tamsuit.  In doing so, the court joined the D.C. Circuit (and declined to follow the Ninth and Tenth Circuits) by concluding that the DOJ has “virtually unfettered discretion to dismiss a False Claims Act case.”  The court also held that, while a relator is entitled to a hearing on the DOJ’s motion to dismiss, the relator is not entitled to an evidentiary hearing absent “exceptional circumstances”—such as “a showing of fraud on the Court.” 

That dismissal comes on the heels of repeated calls from DOJ leadership to dismiss qui tamactions more frequently.  On January 10, 2018, the Director of DOJ’s Civil Fraud Section, Michael Granston, issued a memorandum to that effect.  Deputy Associate Attorney General Stephen Cox followed-up a month later at the Federal Bar Association Qui Tam Conference.  Mr. Cox warned that, when the DOJ fails to “exercise the dismissal authority in non-meritorious qui tam cases,” both defendants and the government bear the “obvious” and “substantial” costs.  And last month, at the American Bar Association’s 12th National Institute on the Civil False Claims Act and Qui Tam Enforcement, Acting Associate Attorney General Jesse Panuccio emphasized that the more “consistent[]” use of DOJ’s “rarely” used dismissal authority under the FCA was an “important development” in reforming the DOJ’s FCA enforcement.  In calling for such reform, Mr. Panuccio pointed to, among other things, the “substantial costs” that meritless FCA actions impose on “the Department—and [its] client agencies”—as well as “defendants and the judiciary.”

Some observers have questioned how seriously the DOJ would implement those pronouncements.  Last Friday’s dismissal shows that the message has resonated from the DOJ front office to the line attorneys at Main Justice and at least one United States Attorney’s Office. 

In Maldonado, the relator alleged that the defendants had violated the FCA by submitting falsified documents to obtain loans insured by the Federal Housing Administration.  After conducting its own investigation, the DOJ not only declined to intervene, it also moved to dismiss over the relator’s objections.  The DOJ concluded that the relator had failed to (1) show that the alleged false statements were material and (2) identify “any examples of false claims resulting in monetary damages to the United States.” 

In its motion to dismiss, the DOJ echoed many of the same concerns that Messrs. Panuccio, Cox, and Granston had raised.  Among other things, the DOJ argued that, even without intervention, the relator’s “continued pursuit of a weak case would burden the United States” and divert resources “from other matters involving [the agency] and the Department of Justice.” 

The DOJ also argued that it has “absolute discretion” to dismiss.  The D.C. Circuit has held that the DOJ has an “unfettered right” to dismiss.  Swift v. United States, 318 F.3d 250, 252-53 (D.C. Cir. 2003).  But, in the Ninth and Tenth Circuits, the DOJ must (1) identify a valid purpose for dismissal and (2) show a “rational relation” between the dismissal and accomplishing that purpose.  United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998); United States ex rel. Ridenour v. Kaiser-Hill Co., 397 F.3d 925 (10th Cir. 2005).  Although the rational-relation standard imposes a greater burden, that burden is still a low hurdle as the Ninth and Tenth Circuits have both recognized that the FCA confers “broad” dismissal discretion.

The Sixth Circuit, where an appeal of the Maldonado decision would be heard, has yet to address the issue.

The court in Maldonado adopted the D.C. Circuit’s position and granted the motion given the DOJ’s “virtually unfettered discretion” to dismiss non-intervened qui tamsuits.  Alternatively, the court concluded that the DOJ would also prevail under the rational-relation standard.  The court explained that the DOJ has a valid interest in “reining in weak qui tam actions” given the expense of monitoring and participating in discovery, mediation, or settlement negotiations.

The court also denied the relator’s request for an evidentiary hearing on the DOJ’s motion to dismiss.  First, the court held that the FCA affords only a hearing and not an evidentiary hearing.  Second, the court observed that the relator cannot use such hearings “to develop evidence for the government to consider” when “he has not identified ‘existing evidence’ that the United States has unreasonably failed to consider in electing to dismiss.”  (Emphasis in original).

We will continue to monitor how DOJ exercises its dismissal authority in other cases.

This month, Crowell & Moring Counsel Mana Elihu Lombardo and Jason Crawford will discuss DOJ FCA-enforcement reforms, including the DOJ’s dismissal authority, with Crowell & Moring partners Laura M. Kidd Cordova and William S.W. Chang on the Let’s Talk FCA podcast.  Laura served as an Assistant Chief of the Criminal Division, Fraud Section, where she created and led the Corporate Healthcare Fraud Strike Force.  Will was a Trial Attorney in the Fraud Section and a founding member of that Strike Force.  Laura and Will have led several criminal investigations with parallel FCA actions.  They will discuss effective ways to persuade the DOJ to dismiss qui tam actions, how the announced FCA enforcement reforms may impact exposure for companies and individuals, and how companies can use those reforms to navigate current FCA enforcement actions.  So stay tuned.