September 24, 2018

September 24, 2018

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D.C. Circuit: When Government Is Silent, There Is No FCA Liability For Contractor’s “Objectively Reasonable” Interpretation Of Ambiguous Contract Provision

In a significant win for government contractors, health care providers, and financial institutions who operate in an increasingly onerous regulatory environment, the United States Court of Appeals for the D.C. Circuit issued an important False Claims Act (FCA) ruling in United States ex rel. Purcell v. MWI Corporation, No. 14-5210 (D.C. Cir. Nov. 24, 2015).  In Purcell, the D.C. Circuit held that the government cannot establish that a defendant “knowingly” submitted a false claim when it certifies compliance with an ambiguous contract provision based on its objectively reasonable interpretation of that ambiguous provision, and when the government had not officially warned the defendant away from its otherwise objectively reasonable interpretation of that provision.  The case provides some relief for those contractors who rely on their good faith interpretations of ambiguous regulations and contract provisions where there is otherwise no guidance or direction from the government.  It is also another example of the Justice Department expanding its FCA docket beyond traditional government contractor and health care defendants. 

The defendant in this case, MWI Corporation, sought to secure loans from the United States Export-Import Bank to finance the sale of water pumps to Nigeria.  The Bank agreed to lend Nigeria, MWI’s customer, $74.3 million in eight separate loans.  Before approving the loans, the Bank required MWI to certify that it had not paid “any discount, allowance rebate, commission, fee or other payment in connection with the sale” except “regular commissions or fees paid or to be paid in the ordinary course of business.”  On fifty-eight separate documents submitted to the Bank, MWI certified that it had paid only “regular commissions.”

In 1998, a former MWI employee, Robert Purcell, filed a qui tam FCA complaint.  Purcell alleged that MWI had paid $28 million in commissions, over 30% of the loan amount.  In Purcell’s view, these commissions were not “regular commissions.”  The government intervened in 2002.

For the government and Mr. Purcell’s case to succeed, they had to show, among other things, that MWI knowingly paid its selling agent something other than “regular commissions.”  The term “regular commissions,” however, was not defined in any published guidance, and MWI’s understanding of that term in practice differed from the government’s.  According to MWI, its commissions were regular because “they were consistent with what MWI had been paying [the selling agent] for over twelve years and were calculated using the same formula MWI used to determine commission for all of its agents.”  Op. at 12.  According to the government, however, “a commission is ‘regular’ only if it is consistent with industry-wide benchmarks.”  Op. at 5.  The district court accepted the government’s interpretation and left to the jury the question of whether MWI paid commissions consistent with industry-wide standards.  The jury agreed with the government and found that each of MWI’s fifty-eight certifications violated the FCA.  Because the loan repayments outweighed the actual damages, only civil penalties of $580,000 were assessed.  All of the parties appealed.

On appeal, MWI argued that it was improper for the district court to accept the government’s subjective interpretation of the term “regular commissions,” an interpretation that was not shared with MWI until after the government intervened in Mr. Purcell’s qui tam case.  MWI contended that it could not have knowingly submitted a false certification of compliance with the Bank’s “regular commission” rule if it had an objectively reasonable interpretation of the term “regular commission.”  MWI further asserted that the term “regular commission” was ambiguous as it was open to multiple interpretations.

Whether the term “regular commission” was ambiguous and whether MWI’s interpretation of “regular commission” was objectively reasonable were, according to the D.C. Circuit, pure questions of law.  The D.C. Circuit agreed with MWI’s legal interpretation and found that the term “regular commission” was ambiguous and that MWI’s interpretation was objectively reasonable.  Op. at 11.  The Court observed that “MWI could reasonably have concluded that [the sale agent’s] commissions were regular because they were consistent with what MWI had been paying him for over twelve years and were calculated using the same formula MWI used to determine commissions for all of its agents.”   Op. at 12.

With the legal questions decided in MWI’s favor, there remained a factual question of whether “there [was] interpretive guidance ‘that might have warned [MWI] away from the view it took.’”  Op. at 11.  This is a wholly separate consideration required by the Supreme Court’s decision in Safeco Insurance Co. of Am. v. Burr, 551 U.S. 47 (2007) and required MWI to meet the demanding standard imposed against litigants seeking to overturn a jury verdict—i.e., MWI had to show that no reasonable jury could have reached the conclusion that interpretive Bank guidance was given to MWI that might have warned the company away from the view it took.

The D.C. Circuit held that MWI met this high standard.  First, the court found that the Government’s after-the-fact interpretation of the Bank’s “regular commission” rule could not have warned MWI from the view it took since it was not provided to MWI at the time it made its 58-certifications.  Rather, it was “undisputed that the government has never published any written guidance on what the term meant.”  Op. at 13.  Second, the court rejected the Government’s argument that the Bank had provided sufficient informal notice through its Nigeria country officer that commissions should be somewhere near five percent.  Such verbal statements “hardly amounts to the necessary ‘authoritative guidance’ from the Bank.”  Op. at 14.  The court went on to note that “[i]n Safeco Insurance, the Supreme Court explained that informal guidance like the kind described here—in that case an informal letter from staff of the Federal Trade Commission—is not enough to warn a regulated defendant away from an otherwise reasonable interpretation it adopted.”  Op. at 14.  Lastly, the court rebuffed the Government’s suggestion that MWI should have sought legal guidance from the Export-Import Bank.  Citing an earlier case, the court held that “the defendant’s ‘failure to obtain a legal opinion or prior [agency] approval cannot support a finding of recklessness without evidence of anything that might have given it reasons to do so.’  Although MWI may have been concerned generally, there is no evidence that the Bank gave it particular reason to formally inquire about these commissions.”  The take-away from Purcell is clear: the government must provide “authoritative guidance” on the proper interpretation of its own regulations and contract provisions before pursuing a FCA action against a defendant based on that defendant’s otherwise objectively reasonable interpretation.

Although the Purcell ruling is welcome news for those defending FCA cases brought under a false certification theory, it remains yet another example of the government’s pursuit of FCA cases against defendants outside the government contracting and health care industries.  For those doing business through the Export-Import Bank, it is important to note that Purcell is not the first time a certification to the Export-Import Bank has been used as the basis for an FCA suit.  In fact, the same or similar certifications to the bank have been the hook for FCA liability and settlements in many recent cases, such as a $3.8 million settlement in March and a $3.5 million settlement in September 2014.  This perhaps serves as a good opportunity to repeat: anyone (insurers, banks, hospitals, etc.) who has any sort of business interaction with the federal government can be made a defendant in a FCA suit.

Copyright © 2018, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Matthew Turetzky, Government Contracts, Sheppard Mullin, Law firm
Associate

Matthew Turetzky is an associate in the Government Contracts, Investigations and International Trade Practice Group in the firm's Washington, D.C. office.

Matthew's practice focuses on False Claims Act litigation in federal district and appellate courts, government contractor-specific litigation and counseling, and bid protests before the Government Accountability Office and Court of Federal Claims. Matthew also assists with other government contracts and complex civil litigation matters.

202-218-0018
Christopher Loveland, Legal Specialist, sheppard Mullin, Business Trial
Associate

Christopher M. Loveland is a partner in the Business Trial and White Collar Practice Groups in the firm's Washington, D.C. office.

Areas of Practice

Mr. Loveland has represented corporate and individual clients in all phases of complex civil and criminal litigation in federal and state courts throughout the country.  He has extensive litigation and appellate experience involving a wide range of issues, including commercial contract and partnership disputes, securities and accounting fraud, the qui tam provisions of the False Claims Act, and the Sherman Antitrust Act .  In addition, Mr. Loveland has substantial experience advising financial institutions and trustees regarding their fiduciary obligations, and representing trustees and trusts in fiduciary litigation.

202-772-5313