The United States Court of Appeals for the D.C. Circuit recently held that a complaint does not need to meet the heightened pleading standards for fraud claims in order to satisfy the first-to-file rule under the False Claims Act (“FCA”). The first-to-file rule provides that, once a private plaintiff brings suit under the FCA, no one other than the government may intervene or bring a related suit “based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). In United States ex rel. Batiste v. SLM Corp., the D.C. Circuit held that an earlier-filed complaint satisfied that rule as long as the complaint alleged the same material elements as the later complaint and provided “sufficient notice for the government to initiate an investigation into the allegedly fraudulent practices, should it choose to do so.”¹ Although the Batiste suit was dismissed, the case illustrates a growing trend of financial fraud cases being brought under the FCA.

Background

In Batiste, the plaintiff alleged that Sallie Mae had improperly granted unwarranted forbearances to borrowers in violation of federal regulations, and had falsely certified regulatory compliance in order to defraud the government. The defendant argued that Batiste’s claims were barred by the FCA’s first-to-file rule, which provides that, “when a person brings an action under this subsection, 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). Because another plaintiff had already brought a qui tam complaint alleging a similar fraud in 2005, the defendant contended that the Batiste suit was barred.

D.C. Circuit Opinion

The D.C. Circuit agreed. The court first held that the first-to-file rule “bars actions alleging the same material elements of fraud as an earlier suit, even if the allegations incorporate somewhat different details.” “[A]lthough the complaints alleg[ed] somewhat different facts, [the 2005] complaint suffices to put the U.S. government on notice of allegedly fraudulent forbearance practices at [Sallie Mae] and its subsidiaries, and Batiste’s complaint alleges the same material elements of the same fraud.”

The court also held that the 2005 complaint satisfied the first-to-file rule even if the complaint failed to meet the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). The D.C. Circuit concluded that “first-filed complaints need not meet the heightened standard of Rule 9(b) to bar later complaints; they must provide only sufficient notice for the government to initiate an investigation into the allegedly fraudulent practices, should it choose to do so.” The court explained that the language of the first-to-file rule in § 3730(b)(5) did not incorporate the particularity requirement of Rule 9(b), and cautioned that imposing the heightened standard could “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 courts disagree on a complaint’s sufficiency.”

The D.C. Circuit therefore affirmed the dismissal of the Batiste complaint.

Financial Fraud and the FCA

Since the economic downturn in 2008, there has been an uptick in FCA cases alleging bank fraud, mortgage fraud, or other financial fraud and abuse. Private whistleblowers are highly incentivized to bring these high dollar cases as the FCA allows whistleblowers to share in up to 30 percent of the recovery. For example, federal prosecutors recently intervened in a suit against Allied Home Mortgage claiming its lending practices led to more than $830 million in losses covered by the Department of Housing and Urban Development. The Department of Justice reported that FCA recoveries in financial fraud cases accounted for 11 percent of 2010’s recoveries or $327.2 million in judgments and settlements. The Batiste case is an important example of this growing area of enforcement in FCA cases.

For more information, please visit the False Claims Act litigation page of the Haynes and Boone, LLP website, or contact one of the attorneys below.