Second Circuit Finds that Violations of the FCA’s First-to-File Bar Cannot Be Cured Through Amended Pleadings, Deepening Circuit Split
In August 2018, the U.S. Court of Appeals for the Second Circuit held that a violation of the False Claims Act (FCA) first-to-file bar cannot be cured by filing an amended complaint after the first-filed related action is no longer pending. The Court’s decision in United States ex rel. Wood v Allergan, Inc., which reversed a decision of the United States District Court for the Southern District of New York, deepens an already existing circuit split on this issue. Although the U.S. Supreme Court declined to resolve the circuit split earlier this year, as we previously reported, the Wood decision may well lead to a future grant of certiorari to clarify the scope of the FCA’s first-to-file bar. Below we discuss Wood’s holdings and its potential impact on first-to-file bar jurisprudence.
The FCA’s first-to-file bar states that “[w]hen a person brings an action under [the FCA], 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). This rule promotes efficiency and expediency – only one relator may share in a recovery under the FCA, so potential relators are incentivized to file promptly so as not be left in the dust.
In July 2010, relator Wood filed a sealed complaint on behalf of the United States and numerous states alleging that Allergan, a pharmaceutical company that develops and sells healthcare products, had since 2003 provided free cataract surgery “recovery kits” to physicians to induce increased use of Allergan products. Little did Wood know, however, that he had not won the race to make this claim – two other individuals had filed sealed complaints in 2008 and early 2010, respectively, and both of these suits were pending at the time Wood brought suit. Both of the earlier suits were subsequently unsealed and dismissed in 2012. In 2016, Wood’s action was unsealed, after which he filed his Third Amended Complaint. Allergan moved to dismiss, arguing that Wood’s action violated the FCA’s first-to-file bar.
The district court denied Allergan’s motion to dismiss, finding, among other things, that while the FCA’s first-to-file bar applied (due to the pendency of related actions at the time Wood filed his action), it did not require dismissal of Wood’s suit because there were no pending related actions when Wood amended his complaint. Because the latter issue was one of first impression in the Second Circuit, Allergan’s interlocutory appeal was accepted for review.
The Second Circuit’s Ruling
The Second Circuit considered two key questions over which other circuit courts have split – (1) whether the first-to-file bar applies when the first-filed action is legally deficient, and (2) whether a violation of the bar can be cured through an amended pleading if the first-filed action is no longer pending when the amended pleading is filed. On the first question, the Second Circuit agreed with the district court and held that the first-to-file bar applied to Wood’s claim even though the first-filed claim was deficient as a matter of law. On the second question, however, the Second Circuit reversed the district court’s decision, holding that a first-to-file violation cannot be cured by amending or supplementing a complaint, and remanded the case with instructions to dismiss Wood’s Third Amended Complaint.
As to the applicability of the first-to-file bar, the Second Circuit followed the D.C. Circuit and the First Circuit in concluding that an action is “related” to another action under the FCA when both actions rely on the same essential facts. The Second Circuit held that the legal sufficiency of a first-filed action has no bearing on this inquiry. The Second Circuit found that while Wood’s allegations were more detailed than the prior actions involving Allergan’s alleged conduct, they did not add material information that the government was unaware of or could not otherwise discover. Notably, the Second Circuit disagreed with the Sixth Circuit’s holding in Walburn v. Lockheed Martin Corporation, which held that a legally deficient first-filed action does not bar a later-filed legally sufficient action. The Second Circuit analyzed the implications of the Sixth Circuit’s interpretation of the first-to-file bar – including the fact that it could require courts to make findings regarding the sufficiency of complaints pending before other courts – and determined that this would give rise to an untenable and “precarious dynamic.” Wood, slip op. at 14.
As to whether a violation of the first-to-file bar can be cured by a subsequent pleading, the Second Circuit agreed with the D.C. Circuit that a complaint asserting the same essential facts as an earlier-filed related FCA action is “incurably flawed” from the moment it is filed. The Second Circuit opined that the FCA’s first-to-file bar plainly provided that no private individual “may . . . bring a related action” while an FCA action is “pending” and relied on U.S. Supreme Court precedent to find that a statutorily barred action must be dismissed. Thus, the Second Circuit concluded, “dismissal is the obvious response to an improperly filed action.” Wood, slip op. at 19. Notably, in reaching this conclusion, the Second Circuit disagreed with the First Circuit, which has held that a violation of the first-to-file bar can be cured pursuant to Federal Rule of Civil Procedure 15. The Second Circuit also rejected Wood’s argument that the FCA’s first-to-file bar did not prevent a court from staying a later-filed action until the first-filed action is dismissed. The Second Circuit strongly disagreed, holding that the plain language of the statute bars a person from bringing – not continuing to prosecute – an action while a related action is pending. According to the Second Circuit, Wood had merely altered an action that was already pending, and his FCA claim was doomed at its inception.
What Lies Ahead
Wood reveals that the federal courts of appeals diverge on at least two key issues regarding the first-to-file bar, which may be enough to spur the U.S. Supreme Court to weigh in on these issues the next time it has an appropriate opportunity. Whether the U.S. Supreme Court would agree with the Second Circuit’s interpretation of the FCA’s first-to-file bar is debatable. On the one hand, Wood offers several strong policy reasons to support its reading of the statute, among them the administrative problems and inefficiencies that may arise if courts selectively apply the first-to-file bar based on the legal sufficiency of earlier-filed claims and permit later-filed FCA actions to remain pending until earlier-filed claims are adjudicated. On the other hand, Wood barely discusses the reasoning of the decisions with which it disagreed, and largely glosses over the statute of limitations problem that its holding creates – a relator who is forced to refile his complaint may well be barred from doing so simply due to bad luck in timing. Here, as elsewhere, the FCA early bird still catches the worm.