4th Circuit: Violation of False Claims Act’s Seal Provision Does Not Require Dismissal

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In an issue of first impression for the Fourth Circuit Court of Appeals, the court was confronted with the question of the appropriate remedy for a relator’s violations of the automatic seal provision of the False Claims Act. In Smith v. Clark/Smoot/Russell, 796 F.3d 424, 429 (4th Cir. 2015), the relator’s counsel, after filing the FCA complaint under seal and in camera as required by the FCA, promptly called the defendant’s counsel to inform him of the existence of the complaint. Of course, such action was “undoubtedly [a] violat[ion of] the False Claims Act’s seal requirement.” Id. at 430.

After analyzing the tests that other circuit courts have adopted for whether such violations require the dismissal of the suit, see,e.g U.S. ex rel. Summers v. LHC Grp., Inc., 623 F.3d 287 (6th Cir.2010); Lujan, 67 F.3d 242 (9th Cir.1995); United States ex rel. Pilon v. Martin Marietta Corp., 60 F.3d 995, 998 (2d Cir.1995), the Fourth Circuit decided that “that a violation that results in an incurable and egregious frustration of the ‘statutory objectives underlying the filing and service requirements’ merits dismissal with prejudice under the False Claims Act.” Id. (internal citation omitted).

The court identified the statutory objectives of the seal provision as “(1) to permit the United States to determine whether it already was investigating the fraud allegations (either criminally or civilly); (2) to permit the United States to investigate the allegations to decide whether to intervene; (3) to prevent an alleged fraudster from being tipped off about an investigation; and, (4) to protect the reputation of a defendant in that the defendant is named in a fraud action brought in the name of the United States, but the United States has not yet decided whether to intervene.” Id. (internal marks omitted). 

In Smith, the court determined that the objectives of the seal provision had not been compromised because (1) the disclosure had not been made to the public, so there was no harm to the defendant’s reputation, and (2) the disclosure had actually facilitated the government’s investigation by allowing the defendant to better answer the government’s questions.

In sum, Smith stands for the rule that although a relator’s counsel should never violate the seal provision, where there is no actual harm from a violation, court’s will impose no penalties.