District Courts Hold that DOJ Lacks “Unfettered” Discretion to Preemptively Dismiss Qui Tam Actions

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In two recent decisions, federal district courts in the Eastern District of Pennsylvania and the Southern District of Illinois, respectively, considered the Government’s motions to dismiss False Claims Act (FCA) lawsuits against pharmaceutical companies and marketing consultants alleging violations of the Anti-Kickback Statute (AKS) related to patient assistance programs.  As discussed in our previous post, the two lawsuits were among 11 similar qui tam actions filed by corporate relators described by the Department of Justice (DOJ) as “shell companies,” and which DOJ sought to preemptively dismiss based on its view that the claims lacked merit and that litigation of the actions would waste “scarce government resources.”

In the Pennsylvania case, U.S. ex rel. Harris v. EMD Serono, Inc., the court granted DOJ’s motion to dismiss over the relators’ objection.  In the Illinois case, U.S. ex rel. CIMZNHCA, LLC v. UCB, Inc., the court denied DOJ’s motion, declining to dismiss the case.  Although reaching different dispositions, both courts parted ways with a prior decision of the U.S. Court of Appeals for the D.C. Circuit by holding that the Government does not possess “unfettered” discretion to dismiss FCA actions.  Instead, the courts joined two other circuits in requiring the Government to demonstrate that its decision to dismiss an FCA action has “a rational relationship to a government interest.”

The circuit split highlighted by the decisions in EMD Serono and UCB is one of increasing importance in light of indications that the Government may be more aggressive in seeking preemptive dismissals of qui tam actions following the January 2018 Granston Memo.

Differing Approaches to Considering DOJ Requests to Dismiss Qui Tam Cases

31 U.S.C. § 3730(c)(2)(A) provides that “[t]he Government may dismiss [a qui tam action] notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.”   Notably, however, the statute does not articulate any standard governing the court’s decision to grant such a dismissal.

In light of that silence, in Swift v. United States, the U.S. Court of Appeals for the D.C. Circuit held that DOJ possesses an “unfettered right” to dismiss FCA actions—a right with which courts may not interfere.  In the D.C. Circuit’s view, permitting courts to second-guess DOJ’s decision to dismiss, even under a deferential standard, would run afoul of the Executive Branch’s “historical prerogative to decide which cases should go forward in the name of the United States.”  Although the court in Swift acknowledged the FCA’s requirement that a hearing be held on the Government’s motion to dismiss, it concluded that the only function of such a hearing is “to give the relator a formal opportunity to convince the government not to end the case.”

By contrast, in an earlier decision, U.S. ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., the U.S. Court of Appeals for the Ninth Circuit concluded that, although “the government’s power to dismiss or settle an [FCA] action is broad,” it is not unfettered.  Instead, the court explained that DOJ’s justification for dismissal is subject to testing under a two-part analysis: “(1) identification of a valid government purpose; and (2) a rational relation between dismissal and accomplishment of the purpose.”  If both parts of that test are satisfied, “the burden switches to the relator to demonstrate that dismissal is fraudulent, arbitrary and capricious, or illegal.”

In the Ninth Circuit’s view, such an approach was supported by the FCA’s legislative history and did not run afoul of separation-of-powers principles.  The Ninth Circuit’s approach has since been adopted by the Tenth Circuit, as well as several district courts, including in a noteworthy decision last year in which a district judge in the Northern District of California denied DOJ’s motion to dismiss an FCA action based on its view that the Government had not conducted an adequate investigation.  DOJ has appealed that decision to the Ninth Circuit.

District Courts Endorse the “Rational Relation” Test

In both EMD Serono and UCB, the district courts surveyed the various cases addressing the issue, but ultimately sided with the Ninth and Tenth Circuits by holding that DOJ’s decision to dismiss an FCA action must be rationally related to a valid government purpose.  In these courts’ view, that test “accords with statutory interpretation and fosters transparency,” while also being “consistent with the constitutional scheme of checks and balances.”

In rejecting the D.C. Circuit’s “unfettered”-discretion approach, both courts highlighted the FCA’s requirement that a hearing be held before a court dismisses an FCA action over a relator’s objection.  The courts explained that if the Government’s right to dismiss were absolute, “a hearing would be superfluous, rendering the requirement of a hearing a nullity.”  The courts were unpersuaded by the D.C. Circuit’s suggestion that the hearing would provide an opportunity for the relator to convince the Government to change its mind, because such a hearing would require the participation of a federal district judge acting as something other than an adjudicator.  As the court explained in UCB, Congress “surely” would not have intended for courts “to be relegated to simpl[y] providing a venue, hosting the parties, and sitting idly by while the relator pleads its case to the Government.”

Applying the “Rational Relation” Test Results in Opposite Conclusions for District Courts

Turning to the merits of DOJ’s motion, in EMD Serono, the court determined that the Government’s stated interest in avoiding litigation costs and protecting the Government’s healthcare programs in a case that lacked merit was a legitimate government purpose to which dismissal of the FCA action was rationally related.  Further, finding that DOJ had invested significant time and resources investigating the relators’ claims, the court concluded that its request to dismiss the action was not arbitrary and capricious.  In granting DOJ’s motion to dismiss, the court noted that the government “is entitled to do a cost/benefit analysis to decide whether to pursue a case.”

In UCB, on the other hand, the court emphasized that although the Government has a valid interest in avoiding litigation costs—particularly when it views the allegations as lacking merit—the Government must at least conduct a “minimally adequate investigation.”  In this case, the court found DOJ had failed to meet that standard because it had only “collectively” investigated the 11 related patient-assistance cases, failed to review certain evidentiary materials, and had not conducted any specific cost-benefit analysis.  Moreover, because the complaint alleged a “classic violation” of the AKS, the court questioned DOJ’s assertion that permitting the case to move forward would conflict with important Government policy prerogatives.  Finally, noting that the Government had devoted a significant portion of its briefing to expressing disapproval of “professional relators,” such as the corporate entities responsible for filing the 11 related cases, the court opined that DOJ’s proffered justifications for dismissal may well have been pretext for animus towards such relators.  Based on all of those considerations, the court denied the Government’s motion to dismiss.

Standard Governing DOJ’s Request to Dismiss a Qui Tam Action Has Additional Significance Post-Granston Memo

Although the circuit split with respect to the standard governing DOJ’s requests to dismiss an FCA action has persisted for a number of years, that issue has assumed added significance following the 2018 Granston Memo, particularly given recent signals that DOJ may act more aggressively in seeking to dismiss qui tam actions it views as meritless or as potentially imposing unreasonable discovery obligations on the Government.  To the extent DOJ seeks to dismiss additional cases, more courts will be forced to grapple with the limits (or lack thereof) on its prerogative to do so.

While many cases, like EMD Serono, may be subject to dismissal even under Sequoia Orange’s “rational relation” analysis, it is possible that at least some requests for dismissal will not withstand that scrutiny, as the Southern District of Illinois’ decision in UCB confirms.  FCA defendants therefore should expect relators to be increasingly aggressive in seeking to test any DOJ request for dismissal, and they should not assume that such a request necessarily signals the end of any potential exposure.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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