September 24, 2018

September 24, 2018

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DOJ Seeks Rehearing in D.C. Circuit Case, Hoping to Resurrect Liability for a Contractor’s “Objectively Reasonable” Interpretation of an Ambiguous Contract Provision

We previously reported on a D.C. Circuit case in which a three-judge panel held that when the government is silent, there is no False Claims Act (FCA) liability for a contractor’s “objectively reasonable” interpretation of an ambiguous contract provision. The government is now seeking a rehearing en banc (a rehearing by all of the D.C. Circuit judges) in the hopes of rolling back the panel’s ruling. 

This, you might recall, is the case arising out of a company’s agreement with the Export-Import Bank. The agreement required MWI to certify 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.” The dispute in this case is what constitutes a “regular commission” and whether MWI falsely certified compliance with the “regular commission” provision when it paid a 30% commission to its sales agent. MWI argued it calculated its regular commissions using the same formula it used to determine commissions for all its agent and it had paid its sales agent this 30% commission for more than twelve years. The Circuit panel held there could be no FCA liability for a contractor’s objectively reasonable interpretation of the phrase “regular commission,” unless the government had authoritatively communicated to the defendant a contrary interpretation.

In the government’s view, the circuit panel misconstrued the scienter (i.e., knowledge) element of the False Claims Act (FCA). See Petition for Rehearing and Rehearing En Banc at 1, United States ex rel. Purcell v. MWI Corp., No. 14-5210 (D.C. Cir. Nov. 24, 2015) [hereinafter Petition]. Scienter, the government argues, turns on the defendant’s actual state of mind. This means either actual knowledge or deliberate ignorance. Petition at 2. And in the government’s view, it showed at least deliberate ignorance, if not actual knowledge, by presenting evidence that MWI “knew” it was improperly concealing the agent’s commissions of over thirty percent and “just hoped that [it] would never get caught.” See Petition at 9-10.

In this regard, the government’s brief distinguishes between two types of cases: cases in which the only evidence of requisite scienter is a competing, reasonable interpretation of the relevant government requirement on one hand, and cases in which there is other evidence that submitted information was false on the other. Petition at 7-9. The government concedes that courts have rejected FCA liability in the former case, Petition at 8, but that there must be a factual finding by a jury regarding scienter in the latter case. Petition at 9. The government asserts that it has submitted such other evidence in this case, namely “testimony that MWI had actually been told by [Export Import Bank] officials that ‘regular’ commissions should be around five percent, that the relevant actors at MWI ‘knew’ they were improperly concealing [] commissions of over thirty percent and ‘just hoped that [they] would never get caught,’ and that [the] commissions [at issue] were much higher both in absolute and percentage terms than other commissions MWI paid.” Petition at 9-10.

The government also argues the panel erred in holding that the government must warn a defendant away from its interpretation of an ambiguous provision. In the government’s view, this holding both deprives the government of the opportunity to prove actual knowledge of falsity and improperly places the burden on the government to issue guidance warning the defendant away from all possible permutations of any condition of payment.

In our view, the government’s argument fails to appreciate (or ignores) the Circuit panel’s basic point; it is unfair to hold a defendant liable for a knowingly or recklessly made false statement when there is more than one reasonable interpretation of the applicable regulation and the government failed to communicate its interpretation. A reasonable interpretation of a regulatory requirement does not become false merely because the contractor’s interpretation is more favorable to it than the government, even if questions are raised about what is meant. If the government’s argument prevails, then the falsity of any statement will be measured by the most favorable interpretation offered by any company employee. By arguing a statement can be knowingly false without establishing the underlying regulatory requirement, the government assumes the very fact it carries the burden to prove. The government’s argument that it should not bear the burden of communicating its interpretation of the regulations it adopts is unreasonable and opens the door to regulation by hindsight. Further, the government’s argument is bad policy because it punishes companies for engaging in robust internal discussion of their compliance responsibilities.

We will be following this important case as it proceeds to oral argument and decision.

Copyright © 2018, Sheppard Mullin Richter & Hampton LLP.

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About this Author

David Douglass, Sheppard Mullin, Government Contracts Attorney
Partner

Mr. David Douglass is a partner in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington, D.C. office.  For more than two decades David has drawn on his prosecutorial and trial experience to advise and represent life sciences companies, health care providers, payers and government contractors on compliance and risk management, defense of government investigations, litigation and, of course, trial. David has represented numerous companies and individuals in criminal and civil, False Claims Act (whistleblower),...

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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.

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Lisa C. Mays, Sheppard Mullin, Government Investigations Attorney, International Trade Lawyer
Associate

Lisa Mays is an associate in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington D.C. office.

  • J.D., The George Washington University Law School, 2015

  • B.A., University of Southern California, 2010

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