Last week, a 2-1 split panel on the US Court of Appeals for the Sixth Circuit affirmed the lower court’s dismissal of U.S. ex rel. Harper, et al. v. Muskingum Watershed Conservancy District, Case No. 15-4406 (6th Cir. Nov. 21, 2016). The Sixth Circuit’s decision comes nearly eleven months after the US District Court, Northern District of Ohio dismissed the relators’ False Claims Act (FCA) complaint, which alleged reverse false claims arising from hydraulic fracturing (“fracking”) leases executed by the Muskingum Watershed Conservancy District (MWCD). In this case, the Sixth Circuit became the first appellate court to address the requisite mental state for the so-called “reverse false claims” theory of liability, 31 U.S.C. § 3729(a)(1)(G), under which a defendant is liable if it “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”
The case involves a 1949 land grant from the United States to MWCD, a political subdivision of the state of Ohio responsible for developing reservoirs and dams to control flooding. The 1949 deed included a provision reverting the land to the United States if MWCD “alienated or attempted to alienate it, or if MWCD stopped using the land for recreation, conservation, or reservoir-development purposes.” Starting in 2011, MWCD began selling rights to conduct fracking on the land. Opposed to fracking, the three relators filed this FCA action based on a theory that the 1949 deed’s reversion clause was triggered by MWCD’s sale of fracking rights, thereby resulting in reverse false claims and conversion when MWCD “knowingly withholding United States property from the federal government.” The United States declined to intervene in the case.
The Sixth Circuit concluded that “knowingly” in the context of § 3729(a)(1)(G) applies “both the existence of a relevant obligation and the defendant’s own avoidance of that obligation.” In other words, to be liable, the defendant must have known it had (or have acted in deliberate ignorance or reckless disregard of) an obligation to the United States and known that it was avoiding (or have acted in deliberate ignorance or reckless disregard of) that obligation.
The Sixth Circuit provided an illustrative example in its opinion, noting that if “we say that someone knowingly ate a sandwich with cheese, we normally assume that the person knew both that he was eating a sandwich and that it contained cheese.” Flores-Figueroa v. United States, 556 U.S. 646, 651 (2009). Similarly, the Sixth Circuit posits that the phrase “ ‘Smith knowingly avoided an obligation to the United States,’ would mean that Smith knew that he had an obligation to the United States and knew that he was avoiding the obligation.”
Because the relators failed to allege the requisite knowledge, the Sixth Circuit affirmed the district court’s motion to dismiss. The court held that the relators “fail[ed] to plead facts showing that MWCD knowingly violated a deed restriction applicable to land it holds,” and, therefore, cannot show that MWCD violated the FCA’s reverse false claim and conversion provisions “by knowingly withholding the land from the United States.”
As the government and relators have increasingly relied on the reverse false claims provisions of the FCA, this decision carries significant guidance on the contours of that theory.