Tuesday, December 20, 2016

Sixth Circuit Interprets 2009 Reverse False Claims Amended Provision: What Does It Mean to Knowingly Avoid Paying an Obligation to the United States?

Dear Readers:

I recommend to you the Sixth Circuit’s recent case addressing the application of the reverse-false-claim provision, 31 U.S.C. § 3729(a)(1)(G), of the False Claims Act: US ex rel. Harper v. Muskingum Watershed Conservancy District, --F.3d--, 2016 WL 6832974 (6th Cir. 2016).

According to Harper, prior to the 2009 amendment of the False Claims Act (“FCA”) by the Fraud Enforcement Recovery Act, the FCA’s reverse-false claim provision essentially imposed liability “only [on] those defendants who knowingly perpetrated a fraud against the government.” See 31 U.S.C. § 3729(a)(7)(2006) (“knowingly mak[e], us[e], or caus[e] to be made or use a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the government”). As a result of the 2009 amendment, the FCA omitted the requirement that a defendant make, use, or cause to be made or used, a false record or statement from the reverse-false-claims provision. Now, the reverse-false-claims provision provides for FCA liability against anyone who “knowingly conceals and knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” 31 U.S.C. § 3729(a)(1)(G). As there has been “little established case law” interpreting this amended provision, Harper provides an instructive and helpful analysis of the 2009 reverse-false-claim provision.
In Harper, the relators brought a qui tam against the Muskingum Watershed Conservancy District (“the District”) alleging, in part, that the District had violated the reverse-false-claims provision of the FCA. According to relators, the District violated deed restrictions on lands it had received from the federal government and, as a result, had an obligation to return the lands to the federal government and had failed to do so. The land grant from the federal government was subject to a proviso that the land revert and revest to the United States in the event that the District ceased using the lands for recreation,conservation, and reservoir development, or if the District alienated or attempted to alienate the lands. The District had negotiated easements with private firms permitting them the right to develop subsurface oil and gas reserves (i.e., conduct fracking) on these lands. Opposing the District’s plans to allow fracking, two relators brought a qui tam alleging that the District’s efforts to lease fracking rights represented an attempt to alienate the land that triggered the reverter clause in the deed. According to Relators, the District should have returned the lands to the federal government and was improperly in possession of them. The United States declined to intervene.

Observing that “none of our sister circuits” had applied the 2009 reverse-false-claims act provision, Harper explained that the provision’s “new scienter requirement . . . should be interpreted to apply to both the existence of a relevant obligation [to the government] and the defendant’s own avoidance of that obligation.” To show that “Smith knowingly avoided an obligation to the United States,” the Court instructed, means that “Smith knew he had an obligation to the United States and knew that he was avoiding it.” The Court went on “unless the circumstance of a case shows the defendant knows of or ‘acts in deliberate ignorance’ or ‘reckless disregard’ of, the fact that he is involved in conduct that violates the legal obligation to the United States, defendant cannot be held liable under the FCA.” Any other interpretation, Harper stated, “would make the FCA’s punitive damages and penalties interchangeable with remedies for ordinary breaches of contract or property law obligations.”
Affirming the District Court’s dismissal of the relators’ claim, Harper held that the relators failed to “state facts from which [the District’s] awareness of the alleged FCA violations may be inferred even under the more liberal pleadings standard set forth in Federal Rules of Civil Procedure 8(a). The relators had “not pleaded facts” showing that the District knew that its easements violated an obligation to the United States. The relators argued that “a defendant acts knowingly when [it] has notice of a legal obligation to the government, even if the defendant believes that the obligation does not apply under the circumstances.” The FCA, observed Harper, “is aimed at stopping fraud against the United States and does not create a ‘vehicle to police technical compliance with federal obligations.’” “[E]stablishing knowledge under FCA provisions that use knowledge as scienter requires plaintiffs to prove the defendant knows that he violated an obligation, not simply that he mistakenly interpreted a legal obligation.”

According to Harper, relators failed to meet their burden because neither their Complaint nor their proposed Amended Complaint showed how the District would have known that the fracking leases violated the deed restrictions or how the District acted in deliberate ignorance or reckless disregard of that fact. “In the absence of such facts,” the Court pointed out, “the relators failed to show anything more than a possibility that [the District] acted unlawfully.” “It is not enough,” stated Harper, “for the relators’ Complaint simply to infer the mere possibility of misconduct.” 

The Court acknowledged that relators had pled that the District knew about the deed restrictions, and that “such an inference would be consistent with the theoretical possibility that [the District] in fact believed that the restrictions forbade it from executing the oil and gas leases.” Yet, Rule 8’s plausibility standard, the Court noted, “asks for more than a sheer possibility that a defendant has acted unlawfully.” The relators’ claim, the Court explained, could only succeed “if the Court makes inference upon inferences to provide the facts missing from the Complaint.” Rule 8, however, “does not obligate the Court to engage in such speculation,” and as a result, the claim was properly dismissed.

Harper also sustained the District Court’s finding that the relators’ proposed amendment to correct these deficiencies was futile. In the face of the relators’ argument that they should have had another opportunity to cure the deficiencies pointed out by the District Court’s opinion, Harper noted that “relators are not entitled to an advisory opinion from the District Court informing them of the deficiencies of the Complaint and then an opportunity to cure those deficiencies.”

Overall, Harper is a very helpful case for defendants facing reverse-false-claim allegations. Essentially, the Court is saying that given the severity of the False Claims Act penalties and damages provisions, relators must show and plead that a defendant is not only aware of an obligation in the United States, but also that the defendant knows that it is violating that obligation. At least for a technical legal obligation, the Court will not infer that the defendant knew or was deliberately ignorant that its conduct violated a legal obligation to the federal government. Rather, a relator must plead some facts to show a defendant knows it is violating  such an obligation.

A. Brian Albritton
December 20, 2016

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