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Contract — No Dismissal for Leak of Sealed FCA Claim

Smith v. Clark/Smoot/Russell, a Joint Venture (Lawyers Weekly No. 15-01-0798, 22 pp.) (Wynn, J.) No. 14-1406, Aug. 10, 2015; USDC at Greenbelt, Md. (Titus, J.) 4th Cir.

Holding: Although a relator’s lawyer disclosed the relator’s False Claims Act suit to his employer before expiration of the 60-day waiting period for the FCA complaint to be unsealed, the district court erred in dismissing the FCA action with prejudice; the 4th Circuit says dismissal was inappropriate because the seal violation did not incurably frustrate the seal’s statutory purpose.

In 2012, relator Brian K. Smith worked on several federal construction projects for the Smithsonian Institution. The projects were subject to the Davis-Bacon Act, 40 U.S.C. §§ 3141-3144, 3146, 3147. That Act requires contractors and subcontractors performing covered contracts to stipulate to agreeing to pay their workers no less than the locally prevailing wages.

Defendants are construction companies that performed construction work on one or more of the projects. Metro Earthworks (Shirley/Metro) employed Smith.

Smith believed defendants failed to pay him the required Davis-Bacon Act wages for work he performed on several contracts. He filed an FCA complaint alleging that defendants’ certification of Davis-Bacon Act compliance on payrolls they submitted for payment constituted false claims because he was not paid appropriate wages on several projects, and that defendants’ reassignment of Smith and reduction in his hours were retaliatory.

As required by § 3730(b)(2) of the FCA, Smith’s attorney filed the complaint under seal in camera. The next day, however, he called defendant’s in-house counsel to inform him that he recently filed an FCA case in which defendant was named and asked employer to cease retaliating against Smith. Ultimately, the government elected not to intervene in the case, and the district court dismissed Smith’s complaint.

Sealing under FCA

No FCA provision explicitly authorizes dismissal as a sanction for disclosures in violation of the seal requirement. The FCA, on its face, neither mandates nor expressly supports dismissal with prejudice. But we recognize that every other circuit to consider this issue has read such authority into the FCA. We join the 2nd Circuit, U.S. ex rel. Pilon v. Martin Marietta Corp., 60 F.3d 995 (2d Cir. 1995), and hold that a violation that results in an incurable and egregious frustration of the statutory objectives underlying the filing and service requirements merits dismissal with prejudice under the FCA.

Here, the seal violation did not incurably frustrate FCA purposes. The government was still able to investigate the alleged fraud and determine whether it was already investigating the same issue. The government even suggested that the fact that defendants knew about the FCA claim would allow for early responses to the government’s questions, allowing it to better evaluate the relators’ claims and quickly determine whether to intervene. Because the seal violation involved disclosure between the parties rather than the public, defendants’ reputations suffered no harm. The FCA does not support the district court’s dismissal of Smith’s claims with prejudice.

We also reject the two additional rationales for dismissal offered by the district court: the doctrine of primary jurisdiction and Fed. R. Civ. P. 9(b) pleadings deficiencies.

Although it may be proper for a district court to invoke the doctrine of primary jurisdiction in the face of this mixed picture and thereby stay or dismiss the matter without prejudice pending an agency determination, the district court dismissed Smith’s entire complaint with prejudice. Relying on this doctrine to dismiss the suit with prejudice would constitute an abuse of discretion and thus also does not support the district court’s dismissal order.

Further, our review of Smith’s complaint leads us to conclude he did indeed allege the “who, what, when, where and how” of the alleged fraud, and dismissal under Rule 9(b) also was error.

Finally, we hold that Smith has successfully pled retaliation under § 3730(h). Smith alleged that after lodging a complaint with the Department of Labor that resulted in an investigation, he was transferred to a lower-paying job that substantially increased his commute time and transportation costs. This action might well dissuade a reasonable worker from whistleblowing.

We affirm the district court’s denial of Smith’s oral motion to amend, reverse the order dismissing with prejudice counts I, II and IV, vacate the costs order and remand for further proceedings.

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