Eastern District of Pennsylvania Refuses to Keep FCA Qui Tam Complaint Under Seal to Facilitate Government's Settlement Negotiations
November 7, 2018
On October 16, 2018, the District Court for the Eastern District of Pennsylvania denied the government’s requested eleventh extension of the seal in a five-year-old False Claims Act (“FCA”) qui tam case. United States ex rel. Brasher v. Pentec Health, Inc., No. 13-05745, 2018 U.S. Dist. LEXIS 177118 (E.D. Pa. Oct. 16, 2018). The court ruled that the government’s desire to continue settlement negotiations with the defendant, who had been given a copy of the complaint with the court’s permission, did not constitute “good cause” to extend the seal, as required by the FCA. The court made clear that extensions beyond the initial 60-day sealing period will not be granted as a matter of course and expressed growing frustration with and skepticism of the government’s practice of keeping a case under seal for years prior to making an intervention decision.
Government’s First Ten Extensions of the Seal
The complaint was filed under seal on October 1, 2013, and alleges that the defendant company defrauded federal government health care programs. The court granted the government nine sealing extensions before ordering a hearing in March 2018 on its request for a tenth. At that hearing, the government explained that its investigation into the qui tam’s allegations was active and the requested extension was necessary to evaluate whether to intervene while allowing the defendant to respond to the government’s inquiries without “being prejudiced by potentially untruthful allegations being made public.” The court granted the extension, but cautioned that repeated extensions of the seal did not satisfy the “need for transparency and accountability” into the government’s actions and resulted in a concerning “lack of meaningful deadlines.”
Interestingly, the government’s civil investigation apparently was only a few months old at the time of the hearing, as the court had – at the government’s request – placed the case in suspense from June 2016 through October 2017 to permit the government to conduct a criminal investigation (which ultimately resulted in no charges being brought). Pausing civil enforcement during the pendency of a criminal probe is relatively common in tax investigations, as the IRS has recognized that “attempts to concurrently pursue both the criminal and civil aspects of a case may jeopardize the successful completion of the criminal case,” given the centrality of the tax loss amount. See IRM 126.96.36.199.1 et seq. (balancing criminal and civil enforcement). However, it should be uncommon in health care fraud and other False Claims Act cases, for which the government touts its “parallel proceedings” policy, Justice Manual at Title 1, § 1-12.000, Title 9, § 27, and frequently employs HIPAA (DOJ administrative) subpoenas, 18 U.S.C. § 3486, 45 C.F.R. § 164.512; DOJ Civil Investigative Demands (“CIDs”), 31 U.S.C. § 3773; or IG subpoenas, 5 U.S.C. app. 3 § 6(a)(4), rather than grand jury subpoenas, to facilitate sharing information between criminal and civil investigative teams.
Eleventh Requested Extension
In July 2018, the government sought an eleventh extension until October 2018, arguing more time was needed for “meetings and follow-up meetings with [company] attorneys and to make an intervention decision and to pursue settlement options.” The court denied the request, ruling that the extension, sought five years after the litigation began, was not justified and noting with frustration that the court had “no assurance that the ‘just one more’ extension requested by the Government would not be followed by ever more requests.”
The government sought reconsideration of the court’s decision – and an extension until December 31, 2018. The relator and defendant supported the government’s request, but the court denied the extension, unsealed the entire case, and ordered the government to notify the court of its intervention decision within 30 days.
In its reconsideration opinion, the court explained that the seal is intended to permit the government to evaluate the qui tam case and decide whether to intervene. It stressed, citing the FCA’s legislative history, that the initial 60-day seal period reflected congressional judgment that “with the vast majority of cases, 60 days is an adequate amount of time to allow Government coordination, review and decision.” Extensions of the seal period are available under the FCA only upon a showing of good cause. 31 U.S.C. § 3730(c)(3). Thus, according to the court, the FCA “does not condone the granting of extension requests routinely.”
The court considered, and rejected, each of the parties’ proffered good cause arguments. First, the court held that the existence of a completed criminal investigation into the defendant that did not result in charges did not constitute good cause to extend the seal. It ruled that the government could not articulate a “specific, concrete harm” that the defendant would suffer if the seal were not extended and rejected the defendant’s claim that disclosure of the criminal probe would harm its ability to obtain financing, noting that the existence of the investigation likely would be material, and therefore subject to disclosure, with any lender. Second, the court held that the relator’s general allegation that she would suffer unspecified harm if the seal were lifted did not constitute good cause as relator no longer was employed by the defendant and the relator’s identity ultimately is revealed in any qui tam action.
Third, and most importantly, the court held that the parties’ ongoing settlement negotiations did not constitute good cause to maintain the seal, despite the government’s assertions that unsealing would harm the negotiations. The court ruled that “the sealing provision is not intended to allow the Government to negotiate a settlement under the cloak of secrecy but rather to investigate the allegations and then to determine whether it is electing to intervene. That a settlement may result is incidental to the central purpose of the statute.”
- Brasher held that the False Claims Act seal period is designed to permit the government to evaluate whether to intervene and take over the litigation, not to conduct an entire investigation and reach a settlement with the defendant. Whether Brasher will change the government’s practice of, in some cases, investigating the merits and conducting settlement negotiations before making a formal intervention decision remains to be seen.
- As Brasher demonstrates, a qui tam case may not be kept under seal by agreement or stipulation of the parties, even if doing so is to both parties’ advantage and facilitates efficient resolution of the matter by settlement. The government must satisfy the “good cause” standard for each and every extension after the initial 60-day sealing period.
- Cases may be unsealed more quickly, as courts grow increasingly reluctant to keep cases under seal for years (at least in the Eastern District of Pennsylvania). This in turn may affect settlement prospects and may suggest earlier defense advocacy with the government during the seal period.
- Be prepared to counsel clients on dealing with the collateral effects of being “outed” as the subject of a government qui tam investigation, as reputational damage to the defendant does not constitute “good cause” to keep documents under seal.
Disclaimer: This post does not offer specific legal advice, nor does it create an attorney-client relationship. You should not reach any legal conclusions based on the information contained in this post without first seeking the advice of counsel.
About the Author:
Carolyn H. Kendall conducts internal investigations and defends corporations, officers and other individuals facing criminal and civil investigation. Her practice includes matters relating to potential criminal tax and money laundering violations, as well as allegations involving securities violations, mortgage, and financial institution fraud, the Federal Anti-Kickback Statute and Stark Law, and other fraud and regulatory statutes. She also assists clients in offshore account disclosure and compliance via IRS disclosure programs (OVDP and Streamlined Procedures). Learn More.