DC Circuit: No False Claims Act Liability for Reasonable, Good Faith Interpretations of Ambiguous Regulations
On November 24, 2015, in United States ex rel. Purcell v. MWI Corp., No. 14-5210, slip op. (D.C. Cir. Nov. 24, 2015), the District of Columbia Circuit Court of Appeals ruled that federal False Claims Act (“FCA”) liability cannot attach to a defendant’s objectively reasonable interpretation of an ambiguous regulatory provision. While outside of the health care arena, this decision has implications for all industries exposed to liability under the FCA.
In Purcell, the government alleged that false claims had been submitted as a result of certifications made by defendant MWI Corporation to the Export-Import Bank in order to secure loan financing connected with MWI’s sale of water pumps to the government of Nigeria.
As part of the loan process, the Export-Import Bank required MWI to certify that it had paid only “regular commissions” to the sales agent in connection with the transactions. Purcell alleged that non-regular commissions had been paid and that the commissions were, in fact, so great that MWI should have disclosed them as payments other than “regular commissions.”
MWI defended that the commissions it paid were at the same level it had previously paid to the agent—hence they were “regular”—and that the term was not otherwise elsewhere defined. The case was brought alleging the knowing submission of false claims for payment and the making of false statements to obtain payment of false or fraudulent claims in violation of 31 U.S.C. § 3729(a)(1) and (a)(2).
Ultimately, a jury awarded damages after finding that MWI’s certifications that it had paid only “regular commissions” were fraudulent. However, because the damages had been offset by other payments that had been made by MWI to the government, the District Court determined that there were no actual damages to be awarded. Nevertheless, because the jury found that false claims had been submitted, the Court imposed civil penalties at the then maximum amount ($10,000 per claim) for each of the alleged 58 false claims.
On appeal, MWI contended that it could not have been found liable under the FCA. It asserted that the term “regular commissions” was ambiguous and that it was entitled to its own reasonable interpretation of that term, absent notice of another meaning from the government or a court.
Holding that this presented questions of law, the Court focused on the fact that in order to be liable under the False Claims Act, a defendant must have made the false claims “knowingly”— specifically, “(1) [with] actual knowledge; (2) acting in deliberate ignorance; or (3) acting in reckless disregard.” The court held that the FCA did not reach an innocent, good faith mistake about the meaning of an applicable rule or regulation. Nor, the Court ruled, did it reach those claims made based on reasonable but erroneous interpretations of a defendant’s legal obligations. Holding that the term “regular commissions” was ambiguous (note: no party contested that the term was ambiguous) and that there was no record evidence of any guidance from any court or relevant agency that would have suggested that the interpretation MWI made was inaccurate, the Court ruled that there was no showing of a knowing submission of a false or fraudulent claim or the making of a false or fraudulent statement in support of a false or fraudulent claim and reversed the judgment of the District Court.
MWI prevailed because its conduct was objectively reasonable given the undisputed ambiguity of the regulation and the fact that MWI acted in a customary fashion under both meanings of the word “customary.” It is significant that the Court held that these were questions of law that a judge could decide.
This is of great importance to defendants, especially in the health care space where CMS and FDA regulations often are ambiguous or created ex post facto to conduct that the government decides should be considered fraudulent. While it is generally the case that to be liable under the FCA, a defendant must have made a false claim knowingly —and the Court here is essentially reaffirming what it correctly held last year in United States ex rel. Folliard v. Gov’t Acquisitions, Inc., 764 F.3d 19, 29 (D.C. Cir. 2014) —not all circuits have issued identical holdings. Thus, if one is not concerned about extra-regulatory acquired knowledge—the thing that could potentially send what otherwise would be a case decided on motions to the jury—this is a useful and, one hopes, transferable precedent.
As significant—in light of the Department of Justice’s recently published “Memorandum Re Individual Accountability for Corporate Wrongdoing” authored by Deputy Attorney General Sally Quillian Yates, where the focus is on the culpability of individual executives—the Purcell decision could have even broader influence.
In the civil arena, especially with regard to health care FCA cases against executives, the government is likely to advance derivative negligence theories of intent where, as usually is the case in larger companies, there is no direct participation by the individual in the alleged fraud. Here, the strong reiteration of the three-part standard enunciated in Folliard and reiterated in Purcell ought to have a lot of value. This is especially so, since recent amendments to the FCA, including under the Affordable Care Act, have made it more difficult for defendants to get summary relief in FCA cases. That is a particular problem in cases where the government has declined intervention but relators can now more easily perpetuate litigation and pursue settlements.
Focusing on the absence of a specifically pleaded theory of culpable knowledge may prove more fruitful than trying to take advantage of jurisdictional bars that have been grossly lowered. Doing so also helpfully implicates the Supreme Court’s teachings in Iqbal and Twombley.
 While the questions of law were dispositive here, there is a major caveat: The case was held properly to have gone to the jury on the question of fact as to whether MWI otherwise had been aware of what the government contended had become its new regulatory definition. While the DC Circuit ultimately held that the evidence was legally insufficient to demonstrate such tipping, the fact remains that the Court potentially left open the door – depending on the particulars of a given case – for the government to seek to recover even where a defendant has made an “objectively reasonable interpretation of an ambiguous regulatory provision.”