Multiple Appellate Courts Now Rule That Government And Relator Cannot Take Advantage Of Ambiguous Law To File False Claims Act Lawsuit To Obtain Treble Damages And Civil Penalties

• Published date: 02 May 2022
• Subject Matter: Government, Public Sector, Food, Drugs, Healthcare, Life Sciences, Criminal Law, Government Contracts, Procurement & PPP, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Akin Gump Strauss Hauer & Feld LLP
• Author: Mr Robert S. Salcido

Key Points

• Courts have routinely observed that Medicare and Medicaid texts are among the most completely impenetrable texts within human experience.
• In recent developing case law, more than a half dozen appellate courts, based upon Supreme Court precedent, have now ruled that when a defendant has a reasonable interpretation of an ambiguous statute, regulation or contract and there is no official governmental guidance to warn defendant away from its reasonable interpretation, there can be no FCA liability.
• Courts have also observed that this reasonable interpretation doctrine serves multiple purposes, including that those charged with violating the law should have notice of the law, government agencies should not be allowed to draft amorphous rules and regulations to enhance flexibility but then use the ambiguity they created to bring fraud actions, and essentially penal statutes like the FCA, should not be applied "through ambush."
• In light of this trending case law, companies can reduce their exposure to liability by staying actively abreast of the government's rules and regulations regarding payment and, when those rules are ambiguous, adopting a reasonable interpretation of what those rules require and documenting their deliberative process.

The federal government spends more than $1.2 trillion each year financing health expenditures, such as payments made under the Medicare and Medicaid programs.

Multiple volumes in the United States Code and Code of Federal Regulations govern how payments shall be made under Medicare and Medicaid. Additionally, the Centers for Medicare & Medicaid Services (CMS) issues dozen of manuals encompassing tens of thousands of pages of rules and instructions.¹

Those operating in the health care industry must master this guidance because failure to heed the plethora of rules and regulations in requesting federal payment could result in a violation of the False Claims Act (FCA). The FCA arms law enforcement officials with a penal remedy of treble damages and civil penalties against those who knowingly or fraudulently present false claims to the government. It also empowers private citizens (known as relators) to sue on the behalf of the government (known as qui tam actions) and to obtain a substantial bounty if they prevail. In January 2022, DOJ reported that it recovered more than $5.6 billion in FCA recoveries in fiscal year (FY) 2021, with over $5 billion relating to matters involving the health care industry.

But mastering the volumes of Medicare and Medicaid guidance and instructions is no easy chore. This is true not only because of the plethora of rules and regulations but also because, as more than 50 courts have observed, Medicare and Medicaid statutes and regulations "are among the most completely impenetrable texts within human experience."²

Given the "completely impenetrable texts" and the vast riches potentially available under the FCA, there is an almost overwhelming temptation for the government and relators to attempt to take advantage of ambiguities in the impenetrable texts by bringing FCA actions and seeking treble damages and massive civil penalties. Fortunately, for those operating in the industry, recently a tsunami of more than a half dozen appellate courts have rejected FCA plaintiffs' attempts to enforce the FCA in this fashion. Instead, multiple appellate courts have ruled that a company that has a reasonable interpretation of ambiguous government rules'that is, of the impenetrable texts'has a dispositive defense under the FCA when there is no official governmental guidance to warn the company away from its interpretation.³

Set forth below is a description of the 4th Circuit's recent decision in U.S. ex rel. Sheldon v. Allergan Sales, LLC.,⁴ which recently ruled that a reasonable interpretation of ambiguous law is a dispositive defense under the FCA. Also set forth is an analysis, as illustrated by multiple other recent appellate courts, of how FCA plaintiffs have sought to take advantage of ambiguity in law to institute FCA actions and reasoning courts have applied to reject those lawsuits. Finally, in light of the developing case law, concrete steps are provided that companies can take to substantially enhance their opportunity to invoke this defense to eliminate potential exposure to FCA liability.

Fourth Circuit's Ruling in Sheldon Follows Multiple Other Appellate Courts in Adopting Supreme Court's Reasonable Interpretation Standard in Safeco

In Sheldon, relator alleged that defendant engaged in a fraudulent price reporting scheme under the Medicaid Drug Rebate Statute by failing to aggregate discounts given to separate customers for purposes of reporting "Best Price."⁵ Best Price is defined as "the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity," which "shall be inclusive of cash discounts, free goods that are contingent on any purchase requirement, volume discounts, and rebates."⁶

Relator and defendant had different interpretations regarding what discounts to report in computing the Best Price. Relator alleged that all discounts provided along distribution chains must be aggregated in calculating Best Price. For example, if defendant furnished a 20% discount to a patient's insurance company and a 10% discount to the same patient's pharmacy, two different entities on the distribution chain, defendant was required to aggregate these discounts and report a Best Price of 70% and provide Medicaid a 30% rebate.⁷ Defendant read the statute differently. It believed that it did not need to aggregate these discounts because they were given to different entities. Defendant reported a Best Price of 80% (based on the highest discount given to a single entity).⁸

Because defendant had a reasonable interpretation of what was, at most, an ambiguous statute regarding whether certain discounts must be aggregated in determining Best Price and there was no official governmental guidance to warn defendant away from its interpretation, the court affirmed the dismissal of relator's action at the pleading stage.⁹

The court based its ruling upon the Supreme Court's decision in Safeco Insurance Co. of America v. Burr.¹⁰ In Safeco, the Court construed reckless disregard consistently with its common law meaning to hold that one cannot act "knowingly" if it bases its actions on an objectively reasonable interpretation of the relevant statute when it has not been warned away from that interpretation by authoritative guidance.¹¹

Aside from being anchored in Supreme Court precedent, the common law, and the precedent of six other appellate courts, the court identified several significant policy interests that bolstered its construction of the FCA. First, the court's rule ensures that individuals and industry have notice of what the law requires and due process. As the court observed, it "is profoundly troubling to impose such massive liability on individuals or companies without any proper notice as to what is required," and if "the government wants to hold people liable for violating labyrinthine reporting requirements, it at least needs to indicate a way through the maze."¹² Defendants should not read the agency's official position for the first time in an FCA complaint seeking treble damages and massive civil penalties. "After all, [a] defendant might suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements for that claim are unknown."¹³

Second, the court's ruling protects individuals and industry from arbitrary agency action. As the court acknowledged, "CMS may not wish to specify its position on the issue" because "[c]lear regulations constrain regulatory power and limit future flexibility" but "such reasons are not necessarily permissible."¹⁴ Retaining "ambiguity in order to expand potential liability for regulated entities cannot pass muster" because "allowing agencies to take advantage of companies like this would not be right."¹⁵ In short, government agencies should not draft amorphous rules and regulations to enhance flexibility but then use the ambiguity they created to bring fraud actions.

Third, it protects individuals and industry from FCA abuse. As the court noted, the FCA should "not assess liability through ambush."¹⁶ If courts permitted FCA actions based upon ambiguous guidance, the government and private, financially self-interested relators would be empowered to invoke the FCA to recover treble damages and massive civil penalties regarding each ambiguity in the impenetrable, multivolume health care governmental texts. As multiple courts have now recognized, neither the government nor private whistleblowers should be able...