On November 24, 2015, in United States ex rel. Purcell v. MWI Corp., No. 14-5210, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the government failed to establish that the defendant knowingly made a false claim therefore, the court reversed and remanded the case with instructions to enter judgment for the defendant, MWI. (A copy of the slip opinion can be found here.) Key in this decision was the Court’s interpretation of the knowledge standard under the False Claims Act (“FCA”) and whether the defendant’s interpretation of an ambiguous term was reasonable and done in good faith.
Former MWI employee Robert Purcell filed suit against the company in 1998 alleging that it had defrauded the government and violated the FCA by hiding $28 million in bribes it made to its sales agents in Nigeria. The Department of Justice intervened in 2002 and successfully brought a civil action pursuant to the FCA based on certifications by MWI to Ex-Im Bank (“the bank”), a U.S. agency that finances U.S. export sales to international buyers, to secure loans financing the sale of water pumps to Nigeria. The $74.3 million loan was to the government of Nigeria however, the bank required MWI to certify that it had paid only “regular commissions” to the sales agents responsible for the contracts.
A jury found the certifications were false and awarded the government $7.5 million with trebled damages totaling $22.5 million pursuant to the FCA. Because an FCA defendant is entitled to an offset from the trebled damages by any amount paid to compensate the government for the harm caused by the false claims, and the district court considered Nigeria’s repayment of the loan to be compensatory, MWI’s damages were reduced from $22.5 million to $0. Thus, MWI was subject only to civil penalties, which the district court imposed at the highest level permitted by the statute, $10,000 for each of the 58 certifications.
According to appellate case documentation, MWI contends when it made certifications to the bank, the government had yet to inform exporters that that the term “regular commissions,” referred to what is normally paid in the industry, not what an exporter had historically paid to its sales agents. MWI asserted that the term “regular commissions” was ambiguous and that it was entitled to its own reasonable interpretation of the term. Neither the bank nor the government had officially warned MWI that its payments were far above the industry standard. Consequently, the FCA’s objective knowledge standard was not met and the jury should not have been permitted to find that MWI “knowingly” made a false claim.
The government appealed the decision, asserting that the district court should have applied only $7.5 million of Nigeria’s loan repayment as an offset because, according to the government, the offset applies before trebling, not against trebled damages, and so it is entitled to recover $15 million in damages. MWI cross appealed on the grounds that the government failed as a matter of law to establish that it made a false claim or that it had done so knowingly, both of which are required to establish FCA liability.
The Appellate Court focused on the fact that in order to be liable under the FCA, a defendant must have made the false claims “knowingly.” Under the FCA, knowingly is defined as “(1) having actual knowledge, (2) acting in deliberate ignorance, or (3) acting in reckless disregard.” Strict enforcement of the FCA’s knowledge requirement helps to ensure that innocent mistakes made in the absence of binding interpretive guidance are not converted into FCA liability, thereby avoiding the potential due process problems posed by “penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule.” Because neither the government nor the bank officially warned MWI about their above industry standard payments, MWI was not given adequate notice prior to its certifications to the bank.
While this case involved an exporter of manufactured goods, the predominant number of FCA cases are in the healthcare industry. The Court’s decision will have impact on companies and executives across all healthcare industry sectors who are under investigation for alleged violations of the False Claims Act. Often regulations governing the healthcare industry are ambiguous or are created and retroactively applied to support what the government considers fraudulent. Significant in the ruling is that the Court held that “knowingly” and “objectively reasonable” interpretation of undisputed ambiguity of regulatory terms were questions of law that a judge could decide.
In light of the Yates Memo directing the Department of Justice to focus on individual culpability, the Purcell decision could have broad influence over the government’s actions. As the Yates Memo policies and procedures are implemented across the Department of Justice, executives and corporate officers are likely to be targeted in alleged false claims investigations. The Court’s decision in Purcell sets forth a strong directive that the three-part knowledge standard will be upheld and therefore, the government will have a greater challenge to prove culpable knowledge by individuals in false claims actions.