Defendant’s Objectively Reasonable Interpretation of Ambiguous Regulations Not Subject to FCA Liability
By Emma R. Cecil
In a highly anticipated decision resolving decades of litigation, the D.C. Circuit Court of Appeals reversed a jury verdict in favor of the government in an FCA case based on allegedly false certifications Moving Water Industries (MWI) made to the U.S. Export-Import Bank (the Bank) in the 1990’s, United States ex rel. Purcell v. MWI Corp.
, No. 14-5210, slip op. (D.C. Cir. Nov. 24, 2015). The Court’s decision comes 17 years after the relator first filed his FCA complaint, and 13 years after the Justice Department intervened in the case.
The certifications at issue in Purcell
involved loans made by the Bank to MWI to finance MWI’s sale of water pumps and related equipment to seven states in Nigeria. Before the Bank would approve the loans, it required MWI to submit a “Letter of Credit Supplier’s Certificate,” in which MWI certified that it had not paid any commission or other payments in connection with the sale, except for “regular commissions
” or fees paid in the ordinary course of business to its regular sales agents. The Bank required MWI to make an identical certification before the Bank would disburse any funds. In total, MWI certified in fifty-eight documents that it had paid only “regular commissions” in connection with the water pump sales.
In 1998, a former MWI employee filed an FCA qui tam
complaint in which he alleged that MWI had paid $28 million in non-regular commissions to its long-term Nigerian sales agent, and MWI should have disclosed those commissions to the Bank as payments other than “regular commissions.” The United States intervened in 2002 and filed an amended complaint alleging that MWI knowingly submitted false claims for payment or approval, in violation of 31 U.S.C. § 3729(a)(1), and knowingly made false statements to obtain a false or fraudulent claim, in violation of 31 U.S.C. § 3729(a)(2).
Following two rounds of summary judgment motions on whether the unsettled meaning of the ambiguous term “regular commissions” precluded the government from establishing the elements of falsity and knowledge, the district court accepted the government’s definition of that term and left the question of whether MWI knowingly made a false claim to the jury, which ultimately found that each of MWI’s fifty-eight certifications violated the FCA. Denying MWI’s motion for judgment as a matter of law, the district court ruled that there was sufficient evidence for the jury to find the commissions were not “regular” and to infer knowledge of falsity, and concluded that it lacked any basis to overturn the jury’s determination that MWI did not have a reasonable or good faith interpretation of “regular commissions.”
In reversing the jury’s verdict, the D.C. Circuit first found that the meaning of “regular commissions” was, as a purely legal matter, ambiguous, and that MWI’s interpretation of that term was reasonable. However, MWI was still required show that the evidence was insufficient for the jury to find that MWI was warned away from its interpretation such that it acted knowingly. Citing the U.S. Supreme Court’s decision in Safeco Ins. Co. v. Burr
, in which the Court held that informal agency guidance is not enough to warn a regulated defendant away from an otherwise reasonable interpretation it has adopted, the D.C. Circuit concluded that MWI had met this “demanding standard,” as the government had not pointed to sufficient record evidence that there was “guidance from the courts of appeals” or the relevant agency “that might have warned [MWI] away from the view it took.”
Importantly, the court reiterated that MWI’s subjective intent – that is, what it may actually have believed – was irrelevant to defeating a finding of knowledge based on its reasonable interpretation of a regulatory term. Rather, the FCA’s knowledge element focuses on the objective reasonableness of the defendant’s interpretation of an ambiguous term and whether there is any evidence that the agency warned the defendant away from that interpretation. Even if MWI acted in bad faith, its objectively reasonable interpretation of “regular commissions,” coupled with the lack of any evidence that it was warned away from this interpretation, precluded a finding of knowledge necessary to establish an FCA violation.
decision is important for several reasons, but primarily because it articulates the contours of a defense that is especially relevant in heavily regulated industries like health care where providers are subject to complex regulatory schemes containing thousands of regulations that are often ambiguous at best and indecipherable at worst.
The D.C. Circuit’s decision not only clarifies what a defendant what must show in order to prevail on the knowledge element of an FCA claim, but reinforces that the FCA is not a proper mechanism for enforcing complex and ambiguous regulations, particularly where a defendant has taken good faith efforts to operate within the framework of its reasonable interpretation of governing rules and regulations.
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