A recent Court of Appeals holding gives government contractors, health care providers, and financial institutions a significant victory: Federal False Claims Act (“FCA”) liability cannot attach to an objectively reasonable interpretation of an ambiguous regulation. See United States ex rel. Purcell v. MWI Corp., No. 14-5210, slip op. (D.C. Cir. Nov. 24, 2015).
Interpreting the FCA’s objective knowledge standard, the Court ruled that a “facially reasonable interpretation” of an “undefined and ambiguous term” does not give rise to a finding that a defendant “knowingly” made a false claim. This decision has widespread implications for all industries exposed to liability under the FCA by providing some relief for parties who rely on their own good faith interpretations of ambiguous regulations in the absence of government guidance.
Trial Court Proceedings
The MWI saga began in 1998, when former MWI employee Robert Purcell (“the Relator”) filed suit alleging that MWI submitted false claims as a result of certifications the company made to the Export-Import Bank (the “Bank”) in connection with the Bank’s loans to Nigeria to finance the purchase of irrigation pumps and related equipment from MWI. To secure loan financing, MWI certified that it had paid only “regular commissions” to the sales agents in the transactions.
The Relator alleged that MWI paid non-regular commissions to its long-term Nigerian sales agent and that because the commissions were so high ($28 million for a contract worth $74.3 million), MWI should have disclosed them as payments other than “regular commissions.” The United States intervened and, focusing on MWI’s failure to disclose the commissions, alleged that, through the certifications, MWI both knowingly submitted false claims for payment and made false statements to obtain a false or fraudulent claim in violation of 31 U.S.C. §§ 3729(a)(1) and (a)(2).
MWI contended that the commissions were the same as previous commissions paid to the agent and thus were “regular.” MWI also argued that the term “regular” was not otherwise defined. The District Court acknowledged that the Bank had never issued any guidance on the meaning of “regular commissions.” Further, the District Court found support for MWI’s interpretation that a commission is regular if it is consistent with historical payments to an individual agent. Nevertheless, the District Court accepted the government’s proposed meaning – that “regular” means consistent with industry-wide benchmarks – and ruled that MWI should have “assumed the featherweight onus of disclosing any questionable commissions.”
The jury found that each of MWI’s certifications violated the FCA and that the government suffered $7.5 million in damages. These damages were then trebled by the District Court, consistent with 31 U.S.C. § 3729(a). The District Court then applied the Supreme Court’s holding in United States v. Bornstein, 423 U.S. 303, 314-17 (1976) and determined that the damages were entirely offset by Nigeria’s repayments of $108 million, constituting the full loan amount plus interest and fees. However, due to the jury’s finding that false claims had been submitted, MWI received the maximum civil penalties, $10,000 per claim, for each of the alleged false certifications.
Appellate Court Decision
On appeal, MWI argued that the term “regular commissions” was undefined and ambiguous, that it was entitled to its own interpretation of that term so long as its interpretation was reasonable, that it had not been provided notice of another meaning of the term from the government, and consequently, it should not have been found liable under the FCA.
The D.C. Circuit Court agreed with MWI and held that the term “regular commissions” was ambiguous (as was uncontested by the parties) and that there was no evidence of any guidance that would have suggested that MWI’s interpretation was wrong. Accordingly, the Court reversed the District Court and ruled that there was no showing of a “knowing” submission of a false claim or the making of a fraudulent statement in support of a false claim. The Court stated that “[s]trict enforcement of the FCA’s knowledge requirement helps to ensure that innocent mistakes made in the absence of binding interpretive guidance are not converted into FCA liability” and that “the FCA does not reach an innocent, good-faith mistake about the meaning of an applicable rule or regulation.”
This ruling is significant for all parties with exposure to FCA liability. Time will tell how this is applied in the healthcare fields where regulations are often ambiguous or the government attempts to apply regulations after the fact to conduct it thinks should be considered fraudulent.
This decision is also significant given the government’s focus on individual accountability and the recently published Yates Memorandum and updates to the USAM. The D.C. Circuit has reiterated the importance of the actual “knowledge” component and therefore focusing on the absence of a specifically pleaded theory of culpable knowledge may emerge as a successful tactic for individuals facing FCA liability.