I Knowingly Drank Coffee With Cream Today . . .
Because I knew both that I was drinking coffee and that it contained cream. The Sixth Circuit applied similar reasoning in its most recent False Claims Act decision, U.S. ex. rel. Harper v. Muskingum Watershed Conservancy District, No. 15-4406, 2016 WL 6832974 (6th Cir. Nov. 21, 2016), in which it decided—as a matter of first impression—construction of the FCA’s scienter requirements for a reverse false claim (31 U.S.C. § 3729(a)(1)(G)) and a conversion (31 U.S.C. § 3729(a)(1)(D)), as amended in 2009 by the Fraud Enforcement and Recovery Act (“FERA”). Construing the FCA’s reverse false claim prohibition against knowingly avoiding an obligation to the United States, the court held that liability will attach only if the offender knows both of the obligation and that he avoided it. Similarly, to be liable for a conversion under the FCA, the offender must know both that he caused to be delivered “less than all” of certain property to the government and also that the property at issue belongs to the government. With these holdings, the Harper court reaffirmed the important threshold scienter distinctions separating an ordinary breach of contract from a violation of the FCA.
The Harper case involves sale by an Ohio state conservancy entity (the Muskingum Watershed Conservancy District or “MWCD”) of hydraulic fracturing (“fracking”) rights to land once held by the United States government. The United States deeded the land to MWCD in the 1940s, with a deed providing that title would revert to the United States if MWCD stopped using the land for certain purposes or if MWCD attempted to alienate the land. Fast forward six decades: In recent years, MWCD negotiated and executed several leases for fracking rights to the land. Relators, who opposed the fracking plans, discovered the deed restrictions and theorized that MWCD’s sale of the fracking rights violated the restrictions, causing the land to revert back to the United States. Relators filed an FCA complaint alleging that by remaining in possession of the land, MWCD violated the FCA’s reverse false claim and conversion provisions. The government declined to intervene, and the district court dismissed the case on public disclosure grounds and for failing to meet the requirements of FRCP 9(b).
The Sixth Circuit affirmed the dismissal on other grounds, sidestepping the public disclosure and 9(b) arguments, and instead holding that relators failed to plead facts from which MWCD’s awareness (or scienter) of the alleged FCA violations may be inferred even under the more liberal pleading standard of FRCP 8(a).
As amended, the FCA’s reverse false claim provision targets anyone who “knowingly conceals or 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). Similarly, The FCA’s conversion provision imposes liability on anyone who “has possession, custody, or control of property or money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property.” 31 U.S.C. § 3729(a)(1)(D). Borrowing an analogy from the Supreme Court, the Sixth Circuit explained: “If, for example, ‘we say that someone knowingly ate a sandwich with cheese we normally assume that the person knew both that he was eating a sandwich and that it contained cheese.’” Applying this analogy to the reverse false claim and conversion provisions, the court construed them to require knowledge of both the obligation under the statue and the violation of that obligation.
Applying these knowledge requirements, the court’s majority found that relators’ complaint falls short of FRCP 8(a) because it fails to allege facts showing how MWCD knew or should have known that the fracking leases violated the deed restrictions, such that title to the land reverted to the United States. Though one judge dissented on the question of whether relators had met FRCP 8(a), she agreed with the majority’s interpretation of the post-FERA reverse false claim and conversion statutory requirements.