Under the 1986 amendments to the False Claims Act, whistleblowing has become big business. The Act’s qui tam provision empowers private parties, called relators, to bring suit on behalf of the government for frauds committed against it—and to receive substantial portions of that recovery. Relying on the award-sharing provision to draw out relators with inside knowledge of complex and well-hidden frauds, the government uses these qui tam suits as a critical part of its regulatory policy. The recent history of the Act shows that it has done this to great effect: the government recovers billions of dollars annually from fraudulent contractors through relators’ suits.
However, the Act has become something of a victim of its own success. The promise of big rewards for relators has led to a dramatic increase in the number of suits overall and, especially, in the number of dubious claims costing valuable prosecutorial resources. In response to the increase in meritless suits, the government has resolved to more aggressively seek dismissal to sort the wheat from the chaff.
The circuit courts of appeals have split over the proper dismissal standard. The first approach, created in United States ex rel Sequoia Orange Co v Baird-Neece Packing Corp, requires the executive branch to explain why dismissal is justified by cost-benefit analysis. The second approach, created in Swift v United States, offers near plenary dismissal power to the government. Sequoia, in permitting relators to probe the government’s reasoning, encourages meritless and strategic suits, while stunting the government’s ability to respond to this increase. Swift, in denying relators a meaningful opportunity to object, discourages meritorious relators from bringing suit. Beyond their suboptimal incentive structures, neither approach fully comports with the text and legislative history of the 1986 amendments, and both raise serious constitutional concerns. As such, this Comment offers a new standard of dismissal that resolves the incentive, interpretive, and constitutional issues.
To address these issues, this Comment turns to an area in which courts and legislatures have long worked to create a standard that draws out only the meritorious claims: shareholder derivative lawsuits. Analogizing the executive to a Special Litigation Committee, this Comment adapts the business judgment rule to the qui tam context. Because government attorneys lack the independence and bias concerns traditionally associated with actual board members, this Comment argues that New York’s deferential application of the business judgment rule to SLC decisions can be transposed with great success to the qui tam context. Such an “Executive Judgment Rule” would guarantee that the government’s review of the relator’s claim meets its statutory duty of “diligent investigation,” but would deny more probing judicial review without good cause. This approach not only remedies the interpretive and constitutional shortcomings of both current approaches, but also strikes the optimal incentives balance by assuring serious relators that their claims will be fully investigated without encouraging frivolous suits.