Fifth Circuit Reaffirms that Speculative Penalty Exposure Does Not a "Reverse False Claim" Make
In the context of an environmentally-based FCA case, the Fifth Circuit held last week that a contingent penalty cannot create reverse false claim liability because it is not an “obligation” to pay the government. This holding marks at least the third time in as many months that a circuit court has addressed the FCA’s reverse false claim provision and is the second of those decisions construing the definition of “obligation” under the FCA as amended by the 2009 Fraud Enforcement and Recovery Act (“FERA”). The two decisions resulted in different outcomes, however: one handed the defendant a resounding victory, and the other breathed life back into the relator’s case. Is this yet another circuit-split and potential fodder for Supreme Court review? Not so fast.
Fifth Circuit Decision: Relator Failed to State
In last week’s decision, U.S. ex. rel. Simoneaux v. E.I. DuPont de Nemours & Co., No. 16-30141, 2016 WL 7228813 (5th Cir. Dec. 13, 2016), the Fifth Circuit held that the relator failed to state a viable reverse false claim cause of action. The relator alleged that the defendant knowingly failed to report chemical leaks to the EPA as allegedly required under the Toxic Substances Control Act and therefore allegedly avoided paying penalties under those laws. On appeal, the Fifth Circuit held that those allegations could not support reverse false claim liability because the defendant had no “obligation” to pay a penalty under the FCA before one is actually assessed by a regulatory agency.
Prior to 2009, the FCA included no statutory definition of “obligation,”
but Fifth Circuit precedent established that a contingent penalty did not pass
reverse false claims muster. United
States ex. rel. Bain v. Georgia Gulf Corp., 386 F.3d 648, 657 (5th Cir.
2004); United States ex. rel. Marcy v.
Rowan Cos., 520 F.3d 384, 391 (5th Cir. 2008). In 2009, FERA supplied a statutory definition
for “obligation”: “an established duty, whether or not fixed,
arising . . . from a statute or regulation . . . .” 29 U.S.C. §
3729(b)(3) (emphasis added).The relator in Simoneaux argued that FERA abrogated the
Circuit’s earlier precedent.
The Fifth Circuit held to its earlier view, stating that FERA’s statutory definition of “obligation” leaves undisturbed the prior rule that failing to report an alleged violation, even when reporting that violation might trigger a fine, imposes no FCA liability. Simply put, the Fifth Circuit held that a duty to pay does not become “established” until imposed by the EPA.
Split with Prior Third Circuit Decision?
As we posted just two months back, the Third Circuit in United States ex rel. Customs Fraud Investigations, LLC v. Victaulic Co., No. 15-2169, 2016 WL 5799660 (3d Cir. Oct. 5, 2016), upheld a relator’s reverse false claim theory based on an alleged knowing failure to disclose to customs officials that goods were improperly marked and thereby avoidance of a 10% tariff. Are the cases inconsistent?
While we at LLB may have preferred a different outcome in the Third
Circuit case, the two are distinguishable. In Customs Fraud, the law
imposed a clear duty to pay that “accrued at the time of importation” and was
not “avoidable for any cause.” 19 U.S.C.
1304(i). In contrast, the putative
environmental penalty in Simoneaux
was far more contingent – requiring determinations of liability and potential
penalty exposure – before any obligation arose. A mere duty to obey the law – the violation of which may result in a
potential but not-yet-assessed penalty – is insufficient to trigger FCA
So, FCA fans, we at LLB, for now, do not see these decisions sufficiently
in tension to create any kind of viable split that could lead to Supreme Court
review. As always, however, let’s please