False Claims Counsel

On November 4, the Court of Appeals for the District of Columbia Circuit, in U.S. ex rel. Batiste v. SLM Corp., upheld the dismissal of a whistleblower’s suit on the basis of the False Claims Act’s first-to-file rule (31 USC 3730(b)(5)). The whistleblower in the suit sued SLM Corp. (“Sallie Mae”), alleging that the company committed fraud in the federal student loan program – by putting students into forebearance in violation of federal law.

Two years earlier, another whistleblower had filed a case against Sallie Mae in California (which was later transferred to Indiana), alleging that his former employer falsified loan records relating to forebearance, and engaged in other fraudulent practices. When the earlier whistleblower was unable to obtain counsel by a court’s deadline, it dismissed his suit without prejudice.

The later relator, appealing the district court’s dismissal of his suit, argued that his suit alleged a different scheme from the first one, that the district court disregarded the particularity requirements of Fed. R. Civ. P. 9(b), and that it erred in dismissing his case with prejudice.

The Court of Appeals disagreed with all three arguments:

• Similarity- After first concluding that the phrase “based on the facts underlying the pending action” clarifies the term “related action” under the statute, the Court compared the two complaints side-by-side using a “material facts” test and found that they alleged “essentially the same corporation-wide scheme.” The Court concluded that the relator’s suit was properly dismissed.
• Particularity- The Court then rejected the relator’s argument that the earlier suit failed to satisfy Rule 9(b), and could not, therefore, be a bar to his action. Supported by an amicus brief by the United States, the relator argued that imposing the rule in this context would strike an appropriate balance between the first-to-file rule’s twin purposes: to encourage whistleblowers to come forward with fraud allegations while preventing copycat cases.

  The Court first noted that nothing in the False Claims Act incorporates Rule 9(b) – which instead sets up a simple test of whether a related complaint is already pending. It then reasoned that 9(b)’s purpose was to protect defendants from frivolous accusations, but that the government could launch investigations based on allegations that did not necessarily meet that standard. The Court also noted that if it were to impose a particularity requirement, it would create a “strange judicial dynamic” risking contradictory decisions by different districts over the sufficiency of a first-filed qui tam complaint.

  The Court also rejected the relator’s and government’s assertion that failing to adopt 9(b) in this context would induce relators to rush to file complaints – however inadequate – out of fear of losing the race to the courthouse. The prospect of losing a relator’s share due to an inadequate pleaded complaint, the Court reasoned, was sufficient incentive.

• Prejudice- Lastly, the Court rejected the relator’s argument that his complaint should have been dismissed without prejudice, because the first case had been dismissed (and so no longer was pending) eighteen months before his case was dismissed. The Court concluded that he had waived this argument. He had not asked for leave to amend his complaint during that period of time, and so had waived his opportunity to file a suit based on the same facts.

Comment: It is somewhat ironic to have both a qui tam relator and the government argue for application of Rule 9(b). The Court of Appeals’ final point, however, raises a possible solution for later relators caught in this situation (at least where the first case has been dismissed): move to amend their complaint after the dismissal of the first one, then argue that the first case was not pending at the time of the amended filing. See, for example, U.S. ex rel. Campbell v. Redding Medical Center, 421 F.3d 817 (9th Cir. 2005).