United States of America, ex rel, CORI RIGSBY; KERRI RIGSBY, Plaintiffs-Appellants - Cross-Appellees
STATE FARM FIRE & CASUALTY COMPANY, Defendant-Appellee - Cross-Appellant
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Appeals from the United States District Court for the Southern District of Mississippi.
Before STEWART, Chief Judge, and SOUTHWICK and COSTA, Circuit Judges.
CARL E. STEWART, Chief Judge:
In April 2006, Plaintiffs Cori and Kerri Rigsby (hereinafter, " the Rigsbys" or " relators" ) brought this qui tam action under the False Claims Act, 31 U.S.C. § 3729 et seq. (" FCA" ), claiming that State Farm Fire and Casualty Company (" State Farm" ) submitted false claims to the United States government for payment on flood policies arising out of damage caused by Hurricane Katrina. At trial, the Rigsbys prevailed on a single bellwether false claim under the FCA. The district court subsequently denied their request to conduct further discovery, and denied State Farm's motions for a new trial and judgment notwithstanding the verdict. Both parties appealed. The Rigsbys primarily challenge the district court's discovery ruling and State Farm principally challenges the jury verdict. We REVERSE in part and AFFIRM in part.
After Katrina, Gulf Coast residents whose homes were damaged or destroyed looked to their insurance companies for compensation. Many of these homeowners were covered by at least two policies, often provided by the same insurance company: a flood policy excluding wind damage, and a wind policy excluding flood damage. A private insurance company would frequently administer both policies, but wind policy claims were paid out of the company's own pocket while flood policy claims were paid with government funds. This arrangement generates the conflict of interest that drives this case: the private insurer has an incentive to classify hurricane damage as flood-related to limit its economic exposure.
We relate the pertinent facts in the light most favorable to the Rigsbys, as the jury rendered a verdict in their favor. See Wharf (Holdings) Ltd. v. United Int'l Holdings, Inc., 532 U.S. 588, 590, 121 S.Ct. 1776, 149 L.Ed.2d 845 (2001). The Rigsbys were certified, experienced
claims adjusters employed by a State Farm contractor that provided disaster claims management services and claims representatives. They claimed that State Farm (other defendants have since been dismissed or settled) sought to unlawfully shift its responsibility to pay wind damage claims on homeowner's insurance policies to the government, through the National Flood Insurance Program (" NFIP" ), by classifying damage to properties covered by both a homeowner's policy and a flood policy as flood damage instead of wind damage.
The NFIP, administered by the Federal Emergency Management Agency (" FEMA" ), provides flood insurance coverage " at or below actuarial rates" in areas where it " is uneconomical for private insurance companies to provide flood insurance." Gowland v. Aetna, 143 F.3d 951, 953 (5th Cir. 1998). In 1983, FEMA established the " Write Your Own" Program (" WYO" ), which allows participating private property and casualty insurance companies to issue, under their own names, government-backed flood insurance policies with limits of up to $250,000 for flood-based building damage and $100,000 for flood damages to personal property. See Flick v. Liberty Mut. Fire Ins. Co., 205 F.3d 386, 389 (9th Cir. 2000); Nat'l Flood Ins. Program, Summary of Coverage 1 (2012). The policies conformed to FEMA's Standard Flood Insurance Policy (" SFIP" ), which generally provided coverage for flood damage but excluded coverage for wind damage. See 44 C.F.R. pt. 61, app. A(1), arts. I, V(D)(8) . WYO insurers take a fee for administering the policy, but when claims are made, they are paid out of the federal treasury. See Mun. Ass'n of S.C. v. USAA Gen. Indem. Co., 709 F.3d 276, 280-81 (4th Cir. 2013).
At all relevant times, State Farm was a participating WYO insurer. State Farm and other WYO insurers often issued, to the same customers, homeowner's policies that provided coverage for wind damage, but excluded coverage for flood damage. To address the inherent incentive to classify ambiguous damage as flood damage, regulations characterize the WYO insurer's relationship to the government as " one of a fiduciary nature." 44 C.F.R. pt. 62, app. A, art. XV.
On August 29, 2005, Hurricane Katrina struck the Gulf Coast. Shortly thereafter, State Farm set up an office in Gulfport, Mississippi, to address claims involving its policies. Alexis " Lecky" King (" King" ) was one of two primary Gulfport supervisors and a catastrophe coordinator with substantial experience adjusting claims. According to Rigsby's trial testimony, a meeting was convened soon after Katrina during which State Farm trainers, including King, told its adjusters that " [w]hat you will see is, you will see water damage. The wind wasn't that strong. You are not going to see a lot of wind damage. If you see substantial damage, it will be from water."
Prior to Katrina, State Farm's general policy was to conduct line-by-line and item-by-item estimates of home damages using a program called Xactimate. In the wake of Katrina, and because of the immense number of claims, FEMA authorized WYO insurers--through FEMA directive W5054--to use an expedited procedure to pay two particular types of claims: 1) claims in which a home " had standing water in [it] for an extended period of time" and 2) claims in which the home was " washed off its foundation by flood water." All other claims fell into a third category that required WYO insurers to follow their " normal claim procedures." The Rigsbys presented evidence at trial that State Farm failed to comply with that directive.
After Katrina, State Farm--rather than using Xactimate to generate a line-by-line printout of flood damages to a home--often used a program called Xactotal, which estimates the value of a home based on square footage and construction quality. State Farm told its adjusters that any time damage to a home appeared to exceed the flood policy's limits, the adjuster should use Xactotal. There was also evidence that State Farm officials told adjusters to " manipulate the totals" in Xactotal to ensure that policy limits were reached.
On September 20, 2005, a few weeks after Katrina, Rigsby and Cody Perry, another State Farm adjuster, inspected the home of Thomas and Pamela McIntosh (" the McIntoshes" ) in Biloxi, Mississippi. The McIntoshes had two insurance policies with State Farm: a SFIP excluding wind damage, and a homeowner's policy excluding flood damage. Using Xactotal, and thereby foregoing a line-by-line estimate, Rigsby and Perry presumed that flooding was the primary cause of damage to their home. On September 29, 2005, State Farm supervisor John Conser (" Conser" ) approved a maximum payout of $350,000 ($250,000 for the home, $100,000 for personal property) under the SFIP. Three days later, State Farm sent checks to the McIntoshes.
State Farm later retained an engineering company, Forensic Analysis Engineering Corporation (" Forensic" ), to analyze the damage. Forensic engineer Brian Ford (" Ford" ) concluded that the damage was primarily caused by wind. His report (the " Ford Report" ) was prepared on October 12, 2005. But the Rigsbys presented evidence that after State Farm received it, the company refused to pay Forensic and withheld the Ford Report from the McIntosh NFIP file. A note on the Ford Report from King read: " Put in Wind [homeowner's policy] file -- DO NOT Pay Bill DO NOT discuss." State Farm commissioned a second report, written by another Forensic employee, John Kelly (the " Kelly Report" ). The Kelly Report determined that while there had been wind damage, water was the primary cause of damage to the McIntosh home. There was evidence that King pressured Forensic to issue reports finding flood damage at the risk of losing contracts with State Farm. Ford was subsequently fired. These events led the Rigsbys to believe State Farm was wrongfully seeking to maximize its policyholders' flood claims to minimize wind claims.
The Rigsbys brought suit under the FCA on April 26, 2006. They alleged violations of 31 U.S.C. § 3729(a)(1), (a)(2), (a)(3), and (a)(7), but only the claims under § 3729(a)(1) and § 3729(a)(2)--now codified at § 3729(a)(1)(B)--are at issue in this appeal. The government declined to intervene on January 31, 2008. The district court focused discovery and the subsequent trial on the McIntosh claim, rather than permitting the Rigsbys to seek out and attempt to prove other claims, in order to " protect the interests of both parties." The district court stated that it sought to " strike a balance between the Relators' interest in identifying . . . other allegedly false claims and the defendants' interest in
preventing a far ranging and expensive discovery process." The court then explained that, " [i]n the event the Relators prevail on the merits of their allegations concerning the McIntosh claim, I will then consider whether additional discovery and further proceedings are warranted." After a new district judge was assigned to this case, the Rigsbys did prevail at trial. They were aided by expert testimony from Dr. Ralph Sinno that the McIntosh home had been " wracked" by winds that completely destroyed it before the flood waters came.
The jury concluded that the McIntosh residence sustained no compensable flood damage and that the government therefore suffered damages of $250,000 under the FCA as a result of State Farm's submission of false flood claims for payment on the McIntosh property. The jury also found that State Farm submitted a false record. The district court denied State Farm's motions for judgment notwithstanding the verdict and for a new trial. The Rigsbys moved after trial for additional discovery to seek out other instances of false claims that were part of the alleged general scheme, but the court denied that motion, concluding that they had failed to plead sufficient facts about any claims unrelated to the McIntosh claim. The court, however, awarded the Rigsbys the maximum possible share under the FCA for relators pursuing claims without the government as a party--30 percent of $758,250 (the court trebled damages on the $250,000 false claim and added a civil penalty of $8,250), or $227,475. See § 3730(d). The court also awarded the Rigsbys $2,913,228.69 in attorney's fees and expenses. Both parties appealed.
These cross-appeals present four issues: 1) whether the Rigsbys are entitled to further discovery; 2) whether the Rigsbys' alleged violations of the FCA's seal requirement independently warrant dismissal; 3) whether the district court retained subject matter jurisdiction throughout the litigation; and 4) whether the jury's verdict was supported by sufficient evidence. We will address the applicable standards of review in each section and provide additional relevant background where necessary.
A. Rule 9(b) and Further Discovery
The Rigsbys seek further discovery into the same alleged scheme they argue produced the McIntosh claim. The district court denied this request, explaining that " [b]eyond the McIntosh claim, Relators' conclusory allegations in the Amended Complaint as to the existence of other specific FCA violations do not satisfy the particularity requirements of [Federal Rule of Civil Procedure] 9(b), and expanded discovery would lead to an inappropriate fishing expedition for new claims."
We review the district court's decision barring discovery for abuse of discretion. See Moore v. CITGO Ref. & Chems. Co., 735 F.3d 309, 315 (5th Cir. 2013). " A district court has broad discretion in all discovery matters, and such discretion will not be disturbed ordinarily unless there are unusual circumstances showing a clear abuse." Id. (internal quotation marks and citation omitted). Even if we determine that the district court has abused its discretion, " we will only vacate a court's judgment if it affected the substantial rights of the appellant." Green v. Life Ins. Co. of N. Am., 754 F.3d 324, 329 (5th Cir. 2014) (citation omitted). Notwithstanding " this stated discretion over discovery, the lower court is directed to exercise carefully its authority in light of the intent of the federal litigation process and the federal rules. It must in discovery
'adhere to the liberal spirit of the Rules.'" Steven A. Childress & Martha S. Davis, Federal Standards of Review § 4.11 (4th ed. 2010) (quoting Burns v. Thiokol Chem. Corp., 483 F.2d 300, 305 (5th Cir. 1973)); see also Fed.R.Civ.P. 26(b)(1) (" Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense . . . . For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action." ).
What makes this case unique is the manner in which the district court treated the Rigsbys' allegations. A limited procedural background is therefore necessary. In addressing State Farm's 9(b) motion filed early in this litigation, the district court recognized that the allegations in the Rigsbys' amended complaint went " well beyond the two specific instances of misconduct specifically identified." But the district court, " [i]n order to protect the interests of both parties," struck a " balance between the Relators' interest in identifying these other allegedly false claims and the defendants' interest in preventing a far ranging and expensive discovery process that relates only to claims that are not, for now, specifically identified." The district court then effectively sent the McIntosh claim to trial, but not before explaining that, should the Rigsbys " prevail on the merits of their allegations concerning the McIntosh claim," it would " then consider whether additional discovery and further proceedings [were] warranted."
The parties and the district court have framed this dispute as one almost entirely dependent on the application of Rule 9(b). True, complaints under the FCA must comply with Rule 9(b), which provides that " [i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake."  But Rule 9(b) is a pleading rule that would almost always come into play in pre-trial proceedings (as it did in this case). The renewed application of that rule in the post-trial posture here is highly unusual, if not sui generis. Indeed, the parties have not ...