What Must The Government Prove To Establish That A Defendant Recklessly Interpreted A Statute Or Regulation In Violation Of The False Claims Act?

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Learn what evidence the government or the relator must establish to prove that the defendant "recklessly" interpreted a statute or regulation in violation of the FCA. Understand the circumstances under which the defendant's reasonable interpretation of an ambiguous statute or regulation can provide the defendant with a dispositive defense under the FCA. Learn what additional evidence the government must establish to demonstrate that the defendant recklessly submitted a false claim, if the defendant's interpretation of a rule or regulation is objectively reasonable. Any company conducting business with the government must master a wide array of rules and regulations. And, certainly, companies are duty bound to comply with all the government's rules and regulations when they conduct business with the government.1

Indeed, to ensure compliance, the government frequently requires that the company affirmatively certify that it is operating in compliance with all the government's rules and regulations. This certification, in turn, provides fertile ground for False Claims Act (FCA) actions. The FCA is an attractive vehicle to enforce regulatory compliance, because it provides the plaintiff, if successful, with treble damages and the prospect of obtaining massive civil penalties.2 Additionally, private plaintiffs (known as "relators") may enforce the government's rules and regulations and receive a substantial bounty of up to 30 percent of the government's recovery.

However, notwithstanding a company's obligation to adhere to the government's rules and regulations, what happens when the government's rules and regulations are inherently vague and ambiguous? As one judge noted in the Medicare context, "Medicare regulations are among the most completely impenetrable texts within human experience."3 The government's propensity to write ambiguous rules is not limited to the Medicare program.

In light of this, from an FCA perspective, several questions arise, such as, if the defendant develops a contemporaneous, reasonable interpretation of an ambiguous regulation, can it "knowingly" submit a false claim in violation of the FCA? What if the defendant's conduct merely conforms with a reasonable interpretation, but the defendant never formally reviewed the regulation until an FCA lawsuit was filed, does the answer change? And if the defendant demonstrates that it acted within a reasonable, plausible interpretation of a regulation, what evidence must the government or relator produce to demonstrate that notwithstanding the reasonable interpretation, the defendant "knowingly" submitted a false claim?

Three recent FCA cases—United States ex rel. Purcell v. MWI Corp.,4 United States ex rel. Saldivar v. Fresenius Med. Care Holdings, Inc.5 and United States ex rel. Donegan v. Anesthesia Assocs. of Kansas City, PC6—shed important light on these questions. These cases, either expressly or tacitly, rely upon the Supreme Court's ruling in Safeco Ins. Co. v. Burr.7 In Safeco, the Court, in determining whether the defendant had recklessly interpreted the Fair Credit Reporting Act, ruled that the defendant's interpretation was not reckless, both because the interpretation was not "objectively unreasonable," even though the Court disagreed with the defendant's interpretation, and because there was no formal, authoritative guidance—such as an official government agency interpretation or a court decision—that might have "warned" the defendant away from the view it took.8

To better understand the implications of the Safeco precedent to the FCA, set forth below is a discussion of that case and a detailed analysis of court decisions applying the Supreme Court's precedent in MWI Corp., Fresenius and Anesthesia Assocs. What this review illustrates is that, just as the defendants have a duty to understand the law and follow it, the government has an equal and reciprocal duty to promulgate and publish clear rules and regulations to guide and inform those who elect to do business with the government.9

What the recent case law demonstrates is that FCA litigation should not be a "gotcha" game, where the government or relator announces a novel interpretation of a regulation in the course of FCA litigation where the plaintiff is seeking to impose treble damages and substantial civil penalties on the defendant for failing to adhere to a rule or regulation that has never been published. In these cases, courts have sensibly informed the government and relators that, if they seek treble damages and substantial civil penalties and brand defendants as fraudsters, then they had better be able to demonstrate that the government proffered clear guidance that legitimately would warn the defendant away from its reasonable interpretation of the law.

1. Supreme Court Precedent

   Although Safeco is not an FCA case, multiple courts, in FCA actions, have expressly relied upon the Supreme Court's decision in Safeco Ins. Co. v. Burr10 to determine when a party's reading of a statutory term is "reckless."11 In Safeco, in formulating a rule regarding when an interpretation is reckless, the Court ruled that an objective standard should be employed: "[w]hile the term recklessness is not self-defining, the common law has generally understood it in the sphere of civil liability as conduct violating an objective standard: action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known . . . . It is this high risk of harm, objectively assessed, that is the essence of recklessness at common law."12 The Court ruled, in applying this standard, that "a company subject to [the Fair Credit Reporting Act] does not act in reckless disregard of it unless the action is not only a violation under a reasonable reading of the statute's terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless."13

   The Court ruled that the defendant's reading was not "objectively unreasonable," because, (a) even though the Court disagreed with the defendant's interpretation, the defendant's reading had a foundation in the statutory text sufficient that the district court had agreed with it, and (b) the court of appeals and Federal Trade Commission had not offered contrary guidance "that might have warned it away from the view it took."14 "Given this dearth of guidance and the less-than-pellucid statutory text, [defendant's] reading was not objectively unreasonable, and so falls well short of raising the 'unjustifiably high risk' of violation the statute necessary for reckless liability."15

2. Recent D.C. Circuit Authority

   The D.C. Circuit applied the Supreme Court's Safeco rule to the FCA in United States ex rel. Purcell v. MWI Corp.16

   In MWI Corp., the defendant submitted certifications to the Export-Import Bank to secure loans of $74.3 million to finance the defendant's sale of water pumps to Nigeria.17 The defendant was required to certify in a Supplier's Certificate that it had not paid "any discount, allowance, rebate, commission, fee or other payment in connection with the sale," except "[r]egular commissions or fees paid or to be paid in the ordinary course of business to [its] sales agents."18

   The government alleged that the certification was false because nonregular commissions had been paid, pointing to $28 million in commissions — more than 30 percent of the loan amount — that the defendant had paid to its long-term (more than 12 years) Nigerian sales agent, Alhaji Indimi. The government alleged that those commissions were so great that the defendant should have disclosed them to the government as payments other than "regular commissions."19

   The court ruled that the precise legal question regarding the meaning of "regular commissions" is ambiguous and that the defendant's interpretation was reasonable.20 The court noted that the term "regular commission" could imply at least three different inquiries: What is a regular commission industrywide? What is a regulator commission for the company? What is a regular commission as to the company and the specific agent it used?21 The court found that the defendant's interpretation — that the regular commission it had paid this particular agent over their long-standing (12 years) relationship was the appropriate benchmark — was objectively reasonable.22 The court noted that the defendant only learned that the government possessed a different interpretation once the government announced the term's meaning in the litigation.

   Once the court found that the interpretation was objectively reasonable, it turned, under the Safeco test, to the second inquiry: whether the government set forth sufficient evidence that the defendant was warned away from its interpretation. The court found that the government could not satisfy this...