Who controls the settlement of False Claims Act cases – the Government, the whistleblower (or “Relator” as whistleblowers are called under that Act), or the court? To date, no clear consensus has yet developed among the federal courts on this important issue. To be sure, the Relator brings suit on behalf of the Government and, in False Claims Act cases, the injured party is the Government, not the individual Relator. That said, the Relator is an indispensable part of any qui tam action and, in many cases, has the most in-depth, real-world knowledge of the fraud. In light of their important role, should Relators have the right to weigh in on the propriety of a proposed settlement, and force the Government to justify the settlement to the satisfaction of the court? Or, does the Government have an absolute right to settle a qui tam case, even over a Relator’s strong (and potentially valid) objections? Recently, the U.S. Court of Appeals for the D.C. Circuit considered this issue, and held that Relators do have the right to object to a settlement, and that courts may reject settlements that are not fair, adequate and reasonable.
On April 10, 2012, the United States Court of Appeals for the D.C. Circuit handed down its decision in U.S. ex rel. Schweizer v. OCE N.V., reversing the lower court and holding that the Government cannot summarily dismiss a relator’s False Claims Act case when she objects to a pending settlement between the Government and defendant. The D.C. Circuit’s Schweizer decision is an important victory for whistleblowers, as it requires that the court determine whether a challenged proposed settlement is “fair, adequate, and reasonable under all the circumstances” before dismissing a whistleblower’s case.
The facts of Schweizer are fairly straightforward. Whistleblower Stephanie Schweizer sued her former employer, Oce North America, Inc. (“Oce”), in April of 2006, accusing Oce of, amongst other things, violating the False Claims Act by failing to offer its Government customers the same discounts it provided to its private sector clients, and by selling the Government products that were not compliant with the Trade Agreements Act. Although it investigated the case for several years, the Government ultimately declined to intervene. However, the Government remained involved in the case and eventually settled the qui tam claims for $1.2 million, a sum substantially lower than the $165 million in damages alleged by Schweizer. Schweizer objected to the settlement, but the District Court dismissed her claims without analyzing the substance of the agreement. Schweizer appealed.
On appeal, the D.C. Circuit’s analysis centered on two provisions of the False Claims Act: Section 3730(c)(2)(A) and Section 3730(c)(2)(B). Section 3730(c)(2)(A) provides that the “Government may dismiss [a qui tam] action notwithstanding the objections of the person initiatingthe 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.” Yet, Section 3730(c)(2)(B) also states that the “Government may settle [a qui tam] action with the defendant notwithstanding the objections of the person initiating the action if the court determines, after a hearing, that the proposed settlement is fair, adequate and reasonable under all the circumstances.” Oce argued that, according to Section 3730(c)(2)(A), the government has an unlimited right to dismiss an action over a relator’s objection and that that right is equally applicable in the case of a dismissal due to a settlement.
The D.C. Circuit disagreed, employing a textual reading of Section 3730(c)(2)(B). The Schweizer court concluded that, in order for that section to come into play, there are only two pre-existing conditions that must be met. First, the Government and the defendant must have agreed to settle the case and, second, the relator must object to the proposed deal. If both conditions are met, Section 3730(c)(2)(B) requires that the Court hold a hearing and make a determination as to whether the settlement is “fair, adequate, and reasonable[.]” According to the D.C. Circuit, holding otherwise would render Section 3730(c)(2)(B) “a nullity” and contravene established principles of statutory construction.
The Court also rejected Oce’s argument that, as applied, Section 3730(c)(2)(B) is unconstitutional because it invades the Executive Branch’s power to “take Care that the Laws be faithfully executed” under Article II, Section 3, of the Constitution. According to Oce, the decision to settle a FCA action is within the exclusive power of the President and, by requiring a judicial determination as to the fairness of a settlement, Section 3730(c)(2)(B) unconstitutionally infringes that power. Citing many other examples of judicial review of settlements — such as oversight of plea agreements, antitrust consent decrees, and class action settlements — the Court held that Section 3730(c)(2)(B) was constitutionally applied.
In Schweizer, the D.C. Circuit properly chose not to divest whistleblowers of all power in the likely rare, but certainly possible, event that the Government chooses to enter into a bad settlement. Qui tam whistleblowers, who bravely come forward to fight fraud and provide the Government with valuable factual evidence, should be entitled to a judicial determination that a challenged settlement is fair before their case is dismissed without their consent.