Noncompliance with ambiguous regulations often presents a weak case for an FCA suit. A growing number of courts (as discussed here and here) have held that reasonable interpretations of regulations, absent contrary guidance from the government, reflect a mens rea inconsistent with the requisite “knowing” misconduct under the FCA. However, the Eleventh Circuit recently reached a contrary conclusion, holding that defendants who articulate reasonable interpretations of ambiguous regulations can nonetheless be liable under the FCA. See United States ex rel. Phalp v. Lincare Holdings, Inc., No. 16-10532 (May 26, 2017).
Relators, former salespersons for Lincare, Inc., filed a qui tam suit alleging that Lincare violated certain regulations designed to protect Medicare beneficiaries. The district court granted defendants’ motion for summary judgment. Quoting a line of Eighth Circuit cases, the district rule ruled that a defendant’s “reasonable interpretation of any ambiguity inherent in the regulations belies the scienter necessary to establish a claim of fraud under the FCA.” In the alternative, the district court ruled that the relators’ evidence of scienter—a mere two emails—did not create a genuine issue of material fact.
The Eleventh Circuit rejected the district court’s primary holding, explaining that “scienter is not determined by the ambiguity of a regulation, and can exist even if a defendant’s interpretation is reasonable.” The panel advised district courts to assess whether a defendant “actually knew or should have known that its conduct violated a regulation in light of any ambiguity at the time of the alleged violation.” One factor driving the Eleventh Circuit’s holding was concern that under the district court’s approach, defendants could insulate themselves from liability by manufacturing after-the-fact interpretations that were facially reasonable, despite knowing that such interpretations were incorrect. DOJ filed an amicus brief expressing the same concerns. Although DOJ further urged the Eleventh Circuit to adopt an even more relator-friendly standard, namely that falsity “depends on whether the defendant’s conduct violated the regulation as properly interpreted, regardless of whether the regulation was ambiguous,” the Eleventh Circuit stopped short of rendering ambiguity in regulations meaningless for defendants.
Even under this heightened standard for scienter, the Eleventh Circuit agreed with the district court’s alternative ruling that the regulations were ambiguous and the relators’ evidence of scienter was too paltry to raise a genuine issue of material fact as to whether the defendants should have known that their conduct violated those regulations.