Circuits Split on First-to-File Rule for Whistleblower Suits

Two whistleblowers discover that their employer is defrauding the Government and race to the courthouse, each trying to be the first to file a qui tam suit on behalf of the Government. The first whistleblower’s hopes are dashed when the district court determines his complaint fails to “state with particularity the circumstances constituting fraud or mistake” as required by Federal Rule of Civil Procedure 9(b). May the second whistleblower, whose complaint satisfies Rule 9(b), proceed as though his complaint were first in line, or is he barred by the first-to-file rule?

In an opinion by Chief Judge David B. Sentelle, the D.C. Circuit’s answer to this question of first impression created a circuit split. The Court held on Friday that the second whistleblower is out of luck, at least where the first, deficient complaint was sufficient to put the Government on notice of the facts underlying the second suit. The Court based its decision on the plain meaning of the first-to-file rule, which provides that “[w]hen a person brings [a qui tam] action . . . , no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). Thus, the Court held, “as long as a first-filed complaint remains pending, no related complaint may be filed.” United States ex rel. Batiste v. SLM Corp., No. 10-7140 (D.C. Cir. Nov. 4, 2011).

The Court noted that its decision contradicts the Sixth Circuit’s holding that “[o]nly a complaint that complies with Rule 9(b) can have preemptive effect under § 3730(b)(5).” Walburn v. Lockheed Martin Corp., 431 F.3d 966, 971 (6th Cir. 2005). The Sixth Circuit reasoned that a strict interpretation of the first-to-file rule would encourage deficient lawsuits designed to preempt sufficiently particular claims. The D.C. Circuit wrote that the Sixth Circuit’s reasoning “does not make sense.” A whistleblower’s fear of dismissal under Rule 9(b) should encourage him to state his fraud claims with sufficient particularity.

The D.C. Circuit’s decision does not say whether the second whistleblower could have proceeded as the first-to-file if the original, deficient complaint were dismissed before the second whistleblower filed suit. In that event, there would be no related, pending action. As long as the second whistleblower is an original source of the information underlying his suit (or the first, deficient complaint and any related information remains under seal), see 31 U.S.C. § 3730(e)(4), (b)(2), it would seem that the second whistleblower may proceed as though the first, inadequate complaint had never existed. A savvy relator may therefore delay filing if he has reason to believe a prior, related complaint will be dismissed on pleading grounds. Or he may move to voluntarily dismiss his own claim without prejudice and refile it after the first complaint has been dismissed. Indeed, the untimely relator in Friday’s case argued that his complaint should have been dismissed without prejudice, but the D.C. Circuit held he waived this argument by failing to raise it in the district court.

The relator, a former senior loan associate at a Sallie Mae subsidiary, alleged that Sallie Mae unlawfully granted forbearances on federally subsidized student loans and then fraudulently certified its compliance with federal law when it submitted claims to the Government. A similar suit was filed earlier, and dismissed for failure to satisfied the heightened pleading standard for fraud, in United States ex rel. Zahara v. SLM Corp., No. 2:05-cv-8020 (C.D. Cal. Nov. 9, 2005).

From the Opinion:

[A] complaint may provide the government sufficient information to launch an investigation of a fraudulent scheme even if the complaint does not meet the particularity standards of Rule 9(b).

Nothing in the language of Section 3730(b)(5) incorporates the particularity requirement of Rule 9(b), which militates against reading such a requirement into the statute.

Imposing the heightened pleading standard [in the first-to-file rule], moreover, would create a strange judicial dynamic, potentially requiring one district court to determine the sufficiency of a complaint filed in another district court, and possibly creating a situation in which the two district courts disagree on a complaint’s sufficiency.

[I]mposing such a requirement would not minimize duplicative claims, would encourage opportunistic behavior, and would have a negligible impact on desirable whistle-blowing. We therefore reject Batiste’s argument that first-filed qui tam complaints must meet a heightened pleading standard under Rule 9(b) in order to bar later-filed complaints. (quotation marks omitted).

Opinions:

See also:

Update:

Ben Vernia at False Claims Counsel sees the same loophole I pointed out above:

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).

But as I read Campbell, the Ninth Circuit is closer to the Sixth Circuit’s Walburn decision than it is to the D.C. Circuit’s Batiste decision. Where there has been a public disclosure, Campbell holds that a relator who is an original source of the information underlying his complaint is not barred by the first-to-file rule when his complaint is preceded by a relator who is not an original source and whose complaint is therefore jurisdictionally defective. Campbell does not require the original source to re-file after dismissal of the prior, jurisdictionally defective complaint.

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