News & Developments

Fifth Circuit Adopts New Test Interpreting False Claim Act's First-to-File Rule

The Fifth Circuit overturned a decision by Judge Peter Beer dismissing several insurance companies and adjusting firms from an action accusing them of overbilling the federal government for flood-damage claims resulting from Hurricane Katrina. The qui tamaction, entitled U.S. ex rel. Branch Consultants v. Allstate Insurance Company, accused eight insurers and six adjusting firms of inflating flood-damage estimates so that the federal government would cover a greater share of the payout on claims based on damage to Gulf Coast homes.

In reinstating the action against several of the insurance defendants, the Court of Appeals joined other circuits in interpreting the federal False Claims Act’s “first-to-file” rule to require dismissal where a later-filed action alleges the same material or essential elements of fraud as a previously filed action. The court also held, as a matter of first impression for any circuit court, that allegations in a first-filed action cannot bar related actions against wholly unrelated defendants brought in a subsequent action.

The allegations of fraud underlying the Eastern District of Louisiana action, which had been filed in August 2006, paralleled similar claims that were simultaneously pending in a separate action in the Southern District of Mississippi, United States ex rel. Rigsby v. State Farm Ins. Co., No 1:06-CV-433 (S.D. Miss. filed Apr. 26, 2006). The Mississippi action, which involved some, but not all of the same insurer defendants, was filed in April 2006 by sisters Cori and Kerri Rigsby, former State Farm adjusters who claimed that State Farm pressured engineers to change damage reports.

Judge Beer dismissed the claims in the Louisiana action against all of the insurers and adjusting firms named as defendants after concluding that the False Claim Act’s “first-to-file” provision deprived him of jurisdiction over the Louisiana matter because it was based on the same “general conduct and theory of fraud” as the Mississippi case, despite the fact that the Mississippi action focused on different details, geographic locations, and other insurer defendants. Under the Civil Actions for False Claims Statute’s first-to-file bar, U.S.C. § 3730(b)(5), when a person brings an action under the FCA, no person other than the government may bring a second action based on the same facts as the first action.

On appeal, a three-judge panel for the Fifth Circuit found that Judge Beer’s decision was correct as to two of the insurance companies—Allstate Insurance Co. and State Farm Fire and Casualty Co.—because they were already named as defendants in the Mississippi action. For the rest of the insurance and adjusting firms, however, including Liberty Mutual Insurance Co., Fidelity National Insurance Co., American National Property & Casualty Co., American Reliable Insurance Co., and Standard Fire Insurance Co., the Appeals Court reversed because those companies had not yet been named as defendants in the first-filed action.

In so doing, the Fifth Circuit for the first time adopted a test for determining whether the False Claim Act’s first-to-file provision applies, choosing to follow the lead established by the Sixth, Tenth, and D.C. Circuits in adopting the Third Circuit’s LaCorte rule, which rejects the argument that the first-to-file provision blocks only those subsequent claims that arise from facts identical to those in the first-filed action. The court found that the rule effectively balanced the dual legislative purposes of the False Claims Act, which are both to encourage whistleblowers “with genuinely valuable information” to bring suits “for the common good,” and “to discourage opportunistic plaintiffs from filing parasitic lawsuits that merely feed off previous disclosures of fraud.”    

In applying the rule, the court agreed that merely adding factual details or different geographic locations to a fraud claim was not enough to avoid the first-to-file rule, and so upheld the district court’s dismissal of claims against insurance companies also named in the Mississippi action. The court, however, disagreed with the district court regarding the other insurance defendants and found that the generic naming of two other insurers was insufficient to trigger the first-to-file bar as to insurance defendants that the Mississippi action did not name. Writing for the court, Judge Haynes concluded that on the basis of the FCA, “we cannot hold that ‘suit as to one is suit as to all,’” finding that “nothing in the [Mississippi] complaint provided the government with facts from which it could discern a widespread fraud involving all [insurers] or the identities of other specific fraudfeasors.”

Submitted by:
Theresa M. House
Hogan & Harston LLP
New York, NY