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Supreme Court Holds Secrecy Violation Does Not Warrant Dismissal of Compliant

A long awaited Supreme Court decision that held major implications for False Claims Act litigants was handed

New-York-City2down this week. On Tuesday, the United States Supreme Court upheld a jury verdict that found State Farm Insurance Company (“State Farm”) defrauded a federal flood insurance program to avoid paying a homeowner’s insurance claim in the wake of Hurricane Katrina.

The False Claims Act (“FCA”) is a law Congress adopted to expose rampant fraud among contractors supplying the Union Army during the American Civil War. Frauds included businesses that sold guns that did not shoot and boots that fell apart after a day’s use. The statute encourages private parties, (“whistleblowers”) or (“relators”), with knowledge of fraud to file suit and collect a share of the government’s recovery.

In State Farm Fire and Casualty Co. v. United States ex rel. Rigsby, two former State Farm employees, both insurance adjusters in Mississippi, filed suit under the FCA alleging they were told by managers to misclassify wind damage, for which State Farm was liable, as flood damage, which would be covered by a federally-backed insurance program.

State Farm argued the case should have been dismissed, as Dickie Scruggs, the whistleblowers’ attorney, emailed information to The Associated Press, ABC News, and The New York Times newspapers and media companies in violation of FCA requirements that the suits be filed under seal, or in secret. State Farm argued that the disclosure of the lawsuit by Mr. Scruggs soured the whistleblowers’ ability to proceed litigating in court.

Counsel and amici briefs for the whistleblowers argued Mr. Scruggs’ violation did not foreclose the suit’s continuance, and that Courts police their own seals, exercising “informed discretion and using well-established analytical guideposts.”

Writing for the unanimous court, Justice Kennedy said that the company had the confidentiality provision wrong. He said Congress enacted it not to safeguard the reputation of alleged fraudsters, but to avoid alerting them to the existence of a federal criminal investigation.

“The seal provision was enacted in the 1980s as part of a set of reforms that were meant to ‘encourage more private enforcement suits,’” Justice Kennedy wrote, citing a 1986 U.S. Senate legislative report. The U.S. Department of Justice, he observed, argued that State Farm’s theory “would undermine the very governmental interests that the seal provision is meant to protect.”

In 2013, a federal jury in Gulfport, Mississippi, found that a unit of State Farm violated the False Claims Act, and awarded the former insurance adjusters, sisters Kerri and Cori Rigsby, $227,000 in damages and $2.9 million in attorneys’ fees for a fraud concerning a single house in Biloxi, Miss.

The Rigsby case gave rise to other claims State Farm defrauded the National Flood Insurance Program. Last year, the state of Mississippi filed its own civil fraud lawsuit against State Farm, saying the state paid as much as $522 million to State Farm policyholders after the company manipulated the reports of adjusters and engineers to limit its responsibility.

The case will now return to the trial court for further litigation that could expose State Farm to additional damages for fraud in processing similar claims in the region after the destruction of Hurricane Katrina.

While the fraud a whistleblower sees may not be as explicit as what insurance adjusters experienced at State Farm, consulting an experienced whistleblower attorney or an attorney who specializes in the False Claims Act will help evaluate and guide a potential whistleblower’s claim. Whistleblowers who bring qui tam False Claims Act cases against companies that commit fraud against the government stand to not only disrupt immoral practices, but often can recover large financial rewards.