On July 5, 2019, the D.C. Circuit Court of Appeals affirmed dismissal of a qui tam lawsuit against several chemical manufacturers that set forth a unusual theory of liability: the relator alleged that the manufacturers violated the False Claims Act (FCA) by failing to self-report information about the dangers of their chemicals under the Environmental Protection Agency’s (EPA) voluntary Compliance Audit Program.

According to the relator, the manufacturers should have self-disclosed certain information to the EPA, who in turn would have assessed civil penalties under the Toxic Substances Control Act. By failing to do so, the relator alleged that the defendant manufacturers concealed their obligations to transfer property (the risk information) and money (the unassessed penalties) to the government.

Unassessed Penalties Do Not Trigger an Obligation to Pay

In affirming dismissal of the case, the D.C. Circuit explained that the relator’s expansive new theory was a “non-starter” because an “unassessed potential penalty for regulatory noncompliance does not constitute an obligation that gives rise to a viable FCA claim.” The court emphasized that, contrary to the relator’s claims, the hypothetical penalties would not automatically be assessed for the manufacturers’ alleged noncompliance; rather, like most government agencies, the EPA has discretion to impose an appropriate penalty for a violation, or to impose no penalty at all.

Thus, an obligation to pay a civil penalty arises not when the purported violation occurs, but “only if and when the EPA decides to impose a penalty.” The D.C. Circuit further held that the EPA’s right to information regarding potentially dangerous chemicals is not a “traditional property right” such that it could trigger an obligation to transmit property under the FCA.

Regulators, Not Relators, Should Enforce Reporting Requirements

The court added that the relator’s property-interest claim also failed because regulatory agencies, not private relators, are charged with enforcing federal reporting requirements. The court noted that the relator’s theory, “if adopted, would make any violation of countless reporting requirements actionable under the FCA.”

Self-Reporting Should Be Encouraged, Not Chilled

The D.C. Circuit’s decision comes in the wake of recent efforts by the Department of Justice (DOJ) to encourage more self-disclosures and cooperation. As discussed in a previous blog post, the DOJ recently revised its Justice Manual to create a new path for self-disclosing potential fraud to the government.

Under the new guidance, potential FCA defendants can receive reductions in FCA fines and penalties for voluntarily self-reporting information to the DOJ when it is “proactive, timely, and voluntary.” The revisions to the Manual also make clear that the DOJ would consider a potential defendant’s self-reporting to a relevant agency when appropriate in determining whether to award cooperation credit.

New Defenses against Claims of Failure to Self-Report or Failure to Pay Unassessed Penalties

The Kasowitz decision may provide FCA defendants facing allegations of reverse false claims with a defense argument that failing to take advantage of voluntary self-reporting options does not support a viable FCA claim.

The decision also provides a defense to allegations that an FCA defendant is liable for failing to pay an unassessed penalty. For example, there has been some disagreement as to whether a defendant’s breach of a Corporate Integrity Agreement (CIA) with the Department of Health and Human Services Office of the Inspector General (HHS-OIG) triggers FCA liability. See, e.g., U.S. ex rel. Boise v. Cephalon, Inc., No. 08-287, 2015 WL 4461793, at *4–7 (E.D. Pa. July 21, 2015) (holding that the relators adequately pled a reverse false claim based on the defendant’s alleged violation of its CIA).

Applying Kasowitz, defendants should have a stronger argument that a breach of their CIA would not on its own trigger FCA liability given that HHS-OIG, like the EPA, has discretion whether to impose financial penalties.