A False Claims Act theory gaining popularity among defendants is the “reasonable” but erroneous interpretation of the law defense. As this defense goes, if defendants claim the law, regulation, or contract requirement they allegedly violated is susceptible to multiple interpretations and the court finds that any alternate interpretation advanced by defendants’ is “objectively reasonable,” then the defendants could not have “knowingly” submitted false claims in violation of the False Claims Act.[i]
Video: Erin explains the reasonable misinterpretation defense and how it will apply to COVID-19 False Claims Act cases.
The problem with this defense is that the claimed misinterpretation is almost always an after-the-fact litigation defense. Sometimes courts will dismiss cases based on this litigation-induced interpretation, even when evidence is present demonstrating that the defendants actually knew (or deliberately ignored or recklessly disregarded) that the misinterpretation was erroneous. [ii] As so applied, the reasonable interpretation defense allows counsel to craft a reasonable sounding legal ambiguity and—as long as the court agrees that the ambiguity was “reasonable”—even defendants who acted in bad faith and “knowingly” violated the False Claims Act can escape liability.[iii]
The swiftness with which the Government has spent massive funds in responding to the coronavirus pandemic has resulted in some piecemeal regulations and agency clarifications. This could make False Claims Act actions targeting coronavirus relief and prevention fraud particularly vulnerable to reasonable misinterpretation defense challenges.
There are ways to combat the reasonable misinterpretation defenses in coronavirus fraud cases though. The D.C. Circuit determined that “a jury might still find knowledge if there is interpretive guidance ‘that might have warned [the defendant] away from the view it took.’”[iv] Regulations,[v] regulatory preambles,[vi] and judicial opinions interpreting regulations[vii] are all examples of authorities sufficient to warn defendants away from reasonable misinterpretations. Less formal guidance such as CMS manuals and bulletins should be sufficient to do the same under Medicare regulations,[viii] especially when evidence indicates that the Defendants knew about such guidance. Relator’s counsel should use discovery to obtain documents, testimony, and admissions concerning the defendant’s contemporaneous understanding of relevant legal requirements. And courts should—and often do–submit to the jury the question of whether a defendant “knew” the claims were false when evidence in the record indicates that the defendant had reason to know its claimed misinterpretation was wrong.[ix]
Courts evaluating reasonable misinterpretation defense should consider that the Supreme Court has ignored litigation-created explanations. In a recent opinion refusing to consider post hoc justifications of a Government agency for its actions, the Court explained that “[c]onsidering only contemporaneous explanations … instills confidence that the reasons given are not simply ‘convenient litigating position[s],” and to do otherwise violates the Supreme Court’s longstanding “square corners rule” that square corners must be turned in dealings involving the Government.[x] And in considering a patent infringer’s degree of knowledge, the Supreme Court explained that “culpability is generally measured against the knowledge of the actor at the time of the challenged conduct.”[xi]
The public is entitled to better protection of their generous funding of coronavirus prevention and relief than to see defendants escape liability for fraudulently obtaining taxpayer funds by engineering misinterpretations of the law. When defendants claim the law is ambiguous, juries should be permitted to decide if the evidence shows that they truly believed their asserted defense.
[i] See, e.g. United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 287–88 (D.C. Cir. 2015). This defensive theory has been erroneously engrafted onto the False Claims Act’s “reckless disregard” knowledge standard by courts applying an interpretation of the Fair Credit Reporting Act’s “willful” scienter standard discussed in Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007). See James B. Helmer, Jr., False Claims Act: Whistleblower Litigation, Ch. 10.II.C. (8th ed.) (forthcoming from ABA Publishing).
[ii] United States ex rel. Donegan v. Anesthesia Assocs. of Kan. City, 833 F.3d 874, 879 (8th Cir. 2016) (affirming summary judgment based on claimed regulatory ambiguity even though a prior Eighth Circuit decision explained what the regulation required); United States v. Safeway Inc., No. 11-cv-3406, 2020 U.S. Dist. LEXIS 103094, at *49–52, 70–78 (C.D. Ill. June 12, 2020) (granting summary judgment even though a CMS manual warned defendant away from its interpretation and evidence indicated defendants’ executives knew membership discounts and price matching set its usual and customary prices).
[iv] Purcell, 807 F.3d at 288 (internal quotations omitted, alteration in the original). The Purcell court found that informal guidance, such as a letter from the Government, “is not enough to warn a regulated defendant away from an otherwise reasonable interpretation it adopted.” Id. at 289–90 (citing Safeco Insurance Co. of America v. Burr, 551 U.S. 47, 70 n.19 (2007)).
[v] United States ex rel. Streck v. Takeda Pharm. Am., Inc., 381 F. Supp. 3d 932, 939–40 (N.D. Ill. 2019).
[vi] Id.; United States ex rel. Swoben v. United Healthcare Ins. Co., 848 F.3d 1161, 1178 (9th Cir. 2016).
[vii] United States ex rel. Streck v. Bristol-Myers Squibb Co., 370 F. Supp. 3d 491, 497–98 (E.D. Pa. 2019), see contra United States ex rel. Donegan, 833 F.3d at 879 (affirming summary judgment based on claimed ambiguity of the regulation even though a prior Eighth Circuit decision had explained what the regulation required).
[viii] 42 C.F.R. § 411.406 (“It is clear that the provider, practitioner, or supplier could have been expected to have known that the services were excluded from coverage on the basis of . . . [i]ts receipt of CMS notices, including manual issuances, bulletins, or other written guides or directives from intermediaries, carriers, or QIOs, including notification of QIO screening criteria specific to the condition of the beneficiary for whom the furnished services are at issue and of medical procedures subject to preadmission review by a QIO.”).
[ix] See United States ex rel. Oliver v. Parsons Co., 195 F.3d 457, 463–65 (9th Cir. 1999); United States v. Newman, 2017 U.S. Dist. LEXIS 131056, at *25–26 (D.D.C. Aug. 17, 2017), United States v. Kellogg Brown & Root Servs., No. 4:12-cv-4110-SLD-JAG, 2014 U.S. Dist. LEXIS 43000, at *23–25 (C.D. Ill. March 31, 2014); United States ex rel. Chilcott v. KBR, Inc., No. 09-cv-4018, 2013 U.S. Dist. LEXIS 153331, at *31 (C.D. Ill. Oct. 24, 2013).
[x] Dep’t of Homeland Sec. v. Regents of the Univ. of Cal., Nos. 18-587, 18-588, 18-589, 591 U.S. __, 2020 U.S. LEXIS 3254, at *29–32 (June 18, 2020).
[xi] Halo Elecs., Inc. v. Pulse Elecs., Inc., 136 S. Ct. 1923, 1933 (2016)) (citations omitted).