On July 22, 2014, the Ninth Circuit issued an important decision supporting the principle that good faith disputes about ambiguous or disputed interpretations of law should not be actionable under the FCA.

Gonzalez, the relator, alleged that the Medi-Cal billing manual required PPLA to bill Medi-Cal “at cost” for contraceptives, which Gonzalez alleged meant PPLA’s acquisition cost. However, when PPLA submitted bills to Medi-Cal, it billed its “usual and customary rates,” which were what PPLA would charge an average patient for contraceptives – a price higher than PPLA’s acquisition cost. In 1997, the California Department of Healthcare Services (CDHS) wrote to PPLA that claims to Medi-Cal should be made “at cost.” In 1998, PPLA responded stating that its clinics billed at the “usual and customary” rate, not at acquisition cost. In 2004, CDHS conducted an audit of PPLA and found that PPLA had not complied with the billing practices outlined in the billing manual. However, CDHS also wrote to PPLA that “no specific definition of ‘at cost’ is contained in [the billing manual]” and that the agency had been “concerned that, with regard to the definition of ‘at cost,’ conflicting, unclear, or ambiguous misrepresentations have been made to providers.’” For those reasons, CDHS did not seek reimbursement from PPLA. In 2005, Gonzalez, the former CFO of PPLA, filed suit alleging that PPLA violated the federal and California False Claims Acts by overbilling Medi-Cal for contraceptives.

The Ninth Circuit affirmed the dismissal of Gonzalez’s complaint on a motion to dismiss. Even assuming that PPLA’s claims were “false” because PPLA billed its “usual and customary prices” rather than acquisition costs – a question the court did not reach – it held that the exchange of correspondence between PPLA and CDHS “compellingly contradicted” Gonzalez’s allegations that PPLA “knowingly submitted false claims for reimbursement.” “Stated simply,” the court explained, “even if bills sent by Planned Parenthood were false in portraying its costs, one cannot plausibly conclude that there was knowing falsity on the part of Planned Parenthood given the explicit statements addressing this subject made by the State of California through CDHS and the State’s silence after being told what procedures Planned Parenthood was following.” CDHS’s acknowledgement that the guidance on “at cost” was “conflicting, unclear, or ambiguous” was, in the Ninth Circuit’s view, “persuasive in [its] determination that there was no knowing falsity under the FCA.” Furthermore, “Planned Parenthood actively engaged with CDHS officials, who themselves seemed to tacitly approve Planned Parenthood’s billing procedures by ending the correspondence without objection after being told that Planned Parenthood was not billing at acquisition cost but at usual and customary rates.” Accordingly, the Ninth Circuit held, Gonzalez’s allegations of a “knowing” violation of the FCA were implausible under Rule 8(a) and the Supreme Court’s decision in Ashcroft v. Iqbal, 556 U.S. 662 (2009).

The opinion is important for at least two reasons. First, it supports the principle that where the defendant’s interpretation of an ambiguous regulation is objectively reasonable, a “knowing” violation of the FCA cannot be found. The decision is therefore consistent with the Supreme Court’s opinion in Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007) (holding that a defendant cannot be deemed to have “recklessly” violated a statute’s terms where it’s interpretation was reasonable), and the federal district court opinion in U.S. ex rel. Streck v. Allergan (dismissing FCA claim based on regulatory ambiguity), which we previously wrote about here. Second, while the opinion does not expressly refer to the “government knowledge” doctrine – the argument that the government’s knowledge of the defendant’s conduct negates the element of intent – the opinion effectively affirms dismissal on that basis. The government frequently argues (and many courts have held) that government knowledge is a fact-specific inquiry that makes it inappropriate for consideration on a motion to dismiss. The Gonzalez opinion therefore provides important support for defendants who argue that, in appropriate cases, government knowledge is an issue that can, and should, be addressed through a 12(b)(6) motion.

The opinion in Gonzalez v. Planned Parenthood of Los Angeles can be found here.