No-Sanctions Dismissal of Fraudulent FCA Claim Is ‘Poster Child’ for Lawsuit Abuse Reduction Act

A federal judge’s choice this week to toss out of court a lawyer’s plainly fraudulent and frivolous False Claims Act (FCA) case without also ordering punishing monetary sanctions stands as the latest “poster child” for enactment of the Lawsuit Abuse Reduction Act (LARA), which is now pending in Congress and would mandate sanctions for those who promulgate frivolous litigation.

The dismissal of the case brought by attorney J. Michael Hayes, whose Buffalo, New York-based practice specializes in FCA lawsuits, came after a report and recommendation of dismissal made by a magistrate judge saying its many “misrepresentations simply cannot be tolerated.”

Hayes’s FCA suit incredibly alleged that 51 insurance companies, many of them household names, had engaged in a “nationwide scheme to deprive Medicare of [claims settlement] payments to which it was entitled” under federal law.

A provision in the FCA allows individuals to sue on behalf of the government and keep for themselves a significant percentage of any final award.  The law also requires a losing defendant to pay  triple damages, statutory “per-instance” penalties, and attorneys fees and costs, making wins for plaintiffs, known in such cases as “relators,” and their attorneys potentially quite lucrative.

But Hayes was so greedy that he designated himself as the relator so he wouldn’t have to share the lucre he dreamt of with an actual client.  Of course to do so, he had to claim “personal knowledge” of this alleged nationwide conspiracy involving the conduct of all 51 defendants and every settlement offer submitted to Medicare administrators since 2003.

If Hayes’s claim seemed wildly unproveable, that’s because it was.  He had no personal knowledge of any such scheme since no such scheme existed.  U.S. District Judge William Skretny found that Hayes “knew he had no such knowledge,” proceeded with his claim anyway, and thus “should not be allowed to simply walk away from his earlier misrepresentations.”

Yet that is effectively what Judge Skretny allowed Hayes to do.  Granted, the claim was “dismissed with prejudice,” meaning it cannot be amended and filed again.  But under Rule 11 of the Federal Rules of Civil Procedure, the judge had the discretion to impose monetary sanctions on Hayes and chose not to, saying that dismissal of the case was sanction enough.

But experience and common sense tell us such slaps on the wrist are never enough to deter attorneys who are so cravenly unethical that they’d perpetrate wholesale fraud on the civil justice system — at great expense to falsely accused defendants — for a chance to get rich beyond their wildest dreams.  Thus Judge Skretny should have made an example out of Hayes by hitting him hard in his bank account, and New York State legal authorities should immediately initiate disciplinary proceedings.

Meanwhile, back in Washington, LARA has passed in the House and is now pending in the Senate.  It would appropriately limit judicial discretion in the imposition of meaningful sanctions on those who make a mockery of our taxpayer-provided courts.  Senate leaders Mitch McConnell and Harry Reid should move LARA toward a vote on the Senate floor soon.