Less than a decade ago, the scope of the so-called “reverse false claim” provision of the False Claims Act (“FCA”) (previously 31 U.S.C. § 3729(a)(7), now 31 U.S.C. § 3729(a)(1)(G)) had been rationally limited by a number of well-established circuit court opinions. See John T. Boese, CIVIL FALSE CLAIMS AND QUI TAM ACTIONS, § 2.01[K] (4th ed. 2011 & Supp. 2017-1) (citing cases by circuit). But, seizing on a 2009 amendment to this FCA provision as an opportunity to revisit these limitations, relators began arguing that the amendment opened the door to FCA liability based on the failure to pay certain contingent fines and penalties. On December 13, 2016, the Fifth Circuit emphatically slammed the door shut on this argument once again. See United States ex rel. Simoneaux v. E.I. DuPont de Nemours & Co., No. 16-30141, 2016 WL 7228813 (5th Cir. Dec. 13, 2016).
Reverse False Claim Liability and the FERA Amendments
Liability under the FCA’s reverse false claim provision extends to any person who knowingly and improperly avoids or decreases an obligation to pay the government. See 31 U.S.C. § 3729(a)(1)(G). Prior to 2009, through a series of hard-fought appellate cases, it had been well established that reverse false claim liability did not extend to potential or contingent obligations, such as penalties or fines where the obligation to pay arises only after the exercise of government discretion. See, e.g., United States ex rel. Marcy v. Rowan Cos., 520 F.3d 384 (5th Cir. 2008); Am. Textile Mfrs. Inst., Inc. v. The Limited, Inc., 190 F.3d 729 (6th Cir. 1999); United States v. Quick Int’l Courier, Inc., 131 F.3d 770 (8th Cir. 1997). In 2009, however, through the Fraud Enforcement and Recovery Act (“FERA”), Congress amended the reverse false claim provision by defining the term “obligation” to include “an established duty, whether or not fixed, arising from . . . statute or regulation.” 31 U.S.C. § 3729(b)(3). That amendment sparked relators to argue anew that reverse false claim liability can be based on contingent penalties or fines.
Background in Simoneaux
The relator in Simoneaux alleged that DuPont, his former employer, violated Section 3729(a)(1)(G) by failing to report to the EPA certain Toxic Substances Control Act (“TSCA”) violations and, in so doing, concealed or avoided the obligation to pay penalties that could be assessed for such violations. DuPont moved for summary judgment, arguing that the FCA does not extend to potential or contingent obligations to pay the government penalties or fines. The district court denied DuPont’s motion, ruling that, under FERA’s definition of “obligation,” a claim could be based on the avoidance of unassessed and contingent monetary penalties. Following trial, which resulted in a verdict for DuPont, the district court granted relator’s motion for a new trial. But, this time, at DuPont’s request, the district court certified the matter for interlocutory appeal to address the question of whether reverse false claim liability can attach to these types of obligations. The Fifth Circuit accepted the appeal.
The Fifth Circuit’s Decision
The Fifth Circuit rejected the relator’s assertions that FERA’s definition of “obligation” covers contingent penalties, and that by imposing liability “at the statutory level,” the TSCA makes assessment of a penalty mandatory.
First, the court found that FERA’s definition of “obligation” as an “established duty, whether or not fixed” was intended to clarify whether the amount of an obligation must be fixed, but it “did not upset the widely accepted holding that contingent penalties are not obligations.” Simoneaux, 2016 WL 7228813, at *2. The court reached this conclusion after examining pre-FERA cases as well as FERA’s legislative history, including clear statements that the FCA should not be used to enforce “a fine before the duty to pay that fine has been formally established.” Id. at *5 (quoting Senator Kyl). The court agreed with defense and government (as amicus) arguments that “established” is the key word and that (a) the FERA amendments did not change the overarching requirement that the obligation must be one “to pay or transmit money or property to the Government,” and (b) “[a] statute enforceable through an unassessed monetary penalty . . . creates an obligation to obey the law, not an obligation to pay money.” Id. at *3.
It is worth noting that the Fifth Circuit recognized and went out of its way to specifically reject the relator’s broad construction of the term “obligation” and the harsh consequences that would result:
For example, 45 C.F.R. § 3.42(e) prohibits roller-skating at the National Institutes of Health, and a person violating that regulation “shall be fined under title 18, United States Code, imprisoned for not more than 30 days, or both.” 40 U.S.C. 1315(c). Under [the relator’s] reasoning, roller-skating at the NIH results in a penalty “of not less than $5,000” and three times the fine assessed under Title 18. And any private person who saw the roller-skater could bring a qui tam action against him. The statutory definition of “obligation” cannot bear the weight of that interpretation.
Id. at *6.
Second, analyzing the applicable regulations, the court held that the TSCA penalties at issue are discretionary, not mandatory. Id. at *6-7. As a result, since EPA had not assessed any penalty against DuPont for the supposed violations, and had not even commenced any penalty proceedings, there was no “established” duty to pay within the meaning of the reverse false claim provision. Id. at *6.
The Justice Department’s acknowledgement to the Fifth Circuit that the FCA did not reach the conduct alleged by the relator in this case is welcome, but begs the question as to why the Justice Department does not weigh in more often when relators are pursuing frivolous, vexatious, or otherwise inappropriate arguments.
The Fifth Circuit’s decision, coupled with the Justice Department’s clear statement against the excesses urged by the relator in this case, should discourage most relators from continuing to pursue reverse false claim liability based on contingent obligations of this type.
However, the application of this decision to reverse false claims cases arising in the “customs” arena remains uncertain. For instance, the Fifth Circuit distinguished allegations of failure to pay duties on mismarked goods (such as found in United States ex rel. Customs Fraud Investigations, LLC v. Victaulic Co., 839 F.3d 242 (3d. Cir. 2016), see FraudMail Alert No. 16-10-14) on the basis that “the customs law imposes a duty to pay,” whereas most regulatory statutes, such as the TSCA, “impose only a duty to obey the law, and the duty to pay regulatory penalties is not ‘established’ until the penalties are assessed.” 2016 WL 7228813, at *6.