Last week, we discussed developing FCA precedent on liability premised on violations of ambiguous contractual or legal obligations with a focus on the Eleventh Circuit’s Lincare decision. Today, we follow up on that with a look at a recent Ninth Circuit decision affirming a 2015 decision by the District Court for the District of Arizona dismissing a qui tam complaint alleging microelectronic manufacturer Microsemi Corporation and its subsidiary White Electronic Designs Corporation (“WEDC”) violated the FCA by falsely certifying compliance with the International Traffic in Arms Regulations (“ITAR”), which prohibit exporting controlled information without a license. The court held that Microsemi’s good faith interpretation of the term “disclose” in the ITAR’s definition of “export” to not encompass merely providing foreign persons access to ITAR-controlled information was reasonable at the time and thus insufficient to establish the requisite scienter for an FCA violation. The Ninth Circuit’s opinion is light on analysis – and words in general – but the main takeaway appears generally to be consistent with Lincare.

The alleged misconduct arose following Microsemi’s acquisition of WEDC in 2010. The company migrated WEDC’s data, including certain ITAR-controlled technical information, to a shared server that was accessible by foreign national employees. The relator did not allege that any foreign person actually accessed or viewed the controlled information, just that the information was accessible. The relator asserted that potential access was sufficient to constitute an ITAR violation because the company had “exported” controlled information. The ITAR at the time defined “export” to include “disclosing . . . or transferring technical data to a foreign person.” The relator alleged Microsemi thus violated the FCA in connection with various government contracts because the company falsely certified compliance with the ITAR (either expressly or impliedly) by submitting packing lists and invoices under those contracts containing the phrase “ITAR controlled.”

Interestingly, in 2010 Microsemi voluntarily disclosed to the government that its data migration process created the possibility that foreign nationals could have accessed controlled information. Microsemi argued in its briefing, however, that the relator provided no basis to conclude that any Microsemi employees knew this mere possibility of access could qualify as an ITAR violation. Further, Microsemi argued that the potential ambiguity of the terms “disclose” and “export” precluded the requisite knowledge for an FCA violation.

In addition to finding that the relator could not establish scienter as a matter of law because of Microsemi’s reasonable interpretation of “disclose,” the Ninth Circuit held that the complaint failed to plead facts plausibly alleging compliance with the ITAR was material to the government’s payment decision. The Ninth Circuit did not elaborate on its reasoning and instead simply cited to Escobar, which was decided in the intervening time since the lower court’s decision. The court also appeared dubious that Microsemi’s submission of receipts containing the statement “ITAR controlled” could be sufficient to constitute a false representation of compliance with the ITAR.

The disputed term “disclose” was removed from the definition of “export” in a 2016 amendment of § 120.17 (replacing it with the term “releasing”). The modified language makes it unlikely that a conflict over this exact statutory language will arise in the future, but the case is still notable for its citation of Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007) in concluding that Microsemi’s reasonable interpretation of the ITAR prevented the relator from establishing scienter as a matter of law. As we have discussed previously here and here, Safeco’s knowledge standard—that the court need not consider the defendant’s subjective knowledge where a defendant’s interpretation of a contract provision or regulation was objectively reasonable—has been in flux since the Supreme Court’s decision in Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016). Even with its bare bones reasoning, Microsemi can nevertheless take its rightful place among the string of cases holding that an objectively reasonable interpretation of ambiguous regulations can defeat a plaintiff’s ability to establish knowledge.