Handing out a pre-Halloween treat to FCA defendants, the Seventh Circuit last week overruled its 1992 decision adopting a “but-for” causation standard to join its sister circuits in holding that FCA plaintiffs must prove that a defendant’s false claim was both the but-for and proximate (i.e., foreseeable) cause of the government’s loss.

In United States v. Luce, the government alleged that Luce, the owner of MDR, a mortgage loan correspondent, submitted false certifications regarding his criminal history in order to participate in the Housing and Urban Development (HUD) mortgage insurance program. More specifically, the government alleged that MDR filed yearly reports certifying that Luce was not involved in any proceeding that could result in a criminal conviction, despite that he had been indicted for fraud in an unrelated matter. When HUD learned of the indictment, it recommended that Luce be debarred, which he was following a guilty plea in the criminal matter. The government filed an FCA suit, seeking damages for HUD’s net loss on the loans that MDR originated since Luce’s indictment and that subsequently went into default. The district court entered summary judgment for the government on liability and damages. Relying on the Seventh Circuit’s 1992 decision in United States v. First National Bank of Cicero, which adopted a but-for causation standard under the FCA, the district court rejected Luce’s argument that the government was required to establish that HUD’s losses were “attributable directly” to his false certifications.

The Seventh Circuit reversed, overruling Cicero and holding that FCA plaintiffs must prove that a defendant’s false claims were the proximate cause of the government’s losses. Although acknowledging that Escobar itself did not speak to causation, the Seventh Circuit reasoned that the Supreme Court instructed courts to interpret the FCA consistently with common-law fraud principles absent an indication that Congress intended otherwise. And at common law, a fraudulent misrepresentation is the legal cause of a pecuniary loss “only if the loss might reasonably be expected to result from” reliance on the misrepresentation. The Seventh Circuit further reasoned that such a proximate cause standard was consistent with the FCA’s statutory purpose, “winnowing out those claims with only attenuated links between the defendants’ specific actions and the presentation of the false claim.” It therefore rejected its prior holding, and joined several circuits (including the Third, Fifth, Tenth, and D.C. Circuits) which have adopted this standard. It remanded for the district court to determine whether Luce’s false certifications regarding his criminal history — as opposed to, for example, defaults by mortgagors that would have occurred irrespective of those certifications — were the proximate cause of HUD’s losses.

Luce is a reminder this Halloween that Escobar continues to be far more “treat” than “trick” for FCA defendants. We at LLB have written extensively about the impact of Escobar’s heightened materiality standard. Now, despite that Escobar was silent on the issue of causation, it has provided the catalyst for the Seventh Circuit to overrule longstanding causation precedent that was unfavorable to FCA defendants. We will monitor Luce on remand and report back on whether the proximate cause standard in fact results in dismissal of the government’s claims.