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Regulatory: Sallie Mae case lowers Rule 9(b) standards

Previously filed complaints can bar later-filed complaints even if the rule is not met

On Nov. 4, 2011, the D. C. Circuit decided United States ex rel. Batiste v. SLM Corp., 659 F.3d 1204 (D.C. Cir. 2011), holding for the first time that a previously filed complaint need not meet the requirements of Federal Rule of Civil Procedure 9(b) to bar a similar, later-filed complaint under the first-to-file provision of the False Claims Act (FCA). Id. at 1210.

Relator Sheldon Batiste, a former employee of a subsidiary of defendant SLM Corp., filed a complaint as a qui tam relator under the FCA alleging the defendant had defrauded the U.S. government by presenting claims for funds which included false certifications. Id. at 1206.   

According to Batiste, SLM, which administered student loans under the Federal Family Education Loan Program (FFELP), had unlawfully placed loans into forbearance, allowing SLM to increase its return on the loans through accruing interest and also artificially maintain a low default ratio, which was required to maintain eligibility as a lender under Department of Education guidelines.   Id. 

A prior complaint alleging similar facts had been filed in 2005 by Relator Michael Zahara. Id. at 1207.  The Batiste and Zahara complaints did not allege identical facts; however, the Court determined “Zahara’s complaint suffices to put the U.S. government on notice of allegedly fraudulent forbearance practices at SLM” and therefore alleged the same material elements as Batiste. Id. at 1209.   The court therefore dismissed Batiste’s complaint based on the first-to-file provision of the FCA codified at 31 U.S.C. § 3730(b)(5), even though the Zahara complaint had not met the heightened pleading requirements of Rule 9(b) because “a complaint may provide the government sufficient information to launch an investigation of a fraudulent scheme even if the complaint does not meet the particularity standards of Rule 9(b).” Id. at 1210.

At first glance, this decision appears to be a resounding victory for the defense, providing another weapon defendants may use against relators. Indeed, this case likely will be cited by many defendants seeking to utilize the first-to-file bar, as it should. However, this decision also has the potential to be used by plaintiffs’ lawyers to attempt to weaken Rule 9(b), a requirement many relators cannot meet.

The Batiste court specifically held that a complaint that did not meet the requirements for Rule 9(b) might still be sufficient to put the government on notice of the alleged fraud such that it could launch its own investigation. Id. at 1209.   If a complaint is sufficient to put the government on notice, it can be argued it would also be sufficient to put a defendant on notice of the charges against him. Batiste can therefore be used by relators in FCA actions to argue against applying a strict version of Rule 9(b) in FCA cases.

Defendants facing FCA actions need to be aware of the D.C. Circuit’s decision in Batiste and should be aware of the possibility that relators will use this case in an attempt to lower the threshold required for a complaint to pass muster under Rule 9(b). While on balance, the case should assist defendants, they should also be particularly cognizant of the potential dangers of this case and the potential for inconsistency when they open the door by arguing for dismissal under Rule 9(b).

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Lisa Noller

Lisa M. Noller is a partner and member of the Government Enforcement, Compliance & White Collar Defense; Business Litigation & Dispute Resolution and Securities Enforcement...

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