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False Claims Act Statistics, News & Analysis

False Claims Act Cert. Monitor: Defendant Asks Court to Resolve Asserted Rule 9(b) Split and Reverse FCA Liability for "Contingent" Obligations

Victaulic, a manufacturer of pipe fittings, asked the Supreme Court in late May to review a Third Circuit decision we have written about twice  before in a petition captioned Victaulic Co. v. U.S. ex rel. Customs Fraud Investigations, LLC, No. 16-1398. Victaulic asks the Court to take up two issues: (1) whether Rule 9(b)’s pleading standard requires allegations of an “opportunity for fraud,” of “actual false claims,” or of “particular details of a scheme paired with reliable indicia of fraud,” and (2) whether an alleged failure to pay a “contingent” obligation that arises only after the exercise of discretion by the government is actionable as a reverse FCA claim.

As we discussed previously, the relator—an entity formed for the purpose of pursuing the case against Victaulic—alleged that Victaulic knowingly failed to disclose to U.S. officials that its imported pipe fittings were unmarked or improperly marked with the country of origin, in violation of federal law. The relator alleged that it had conducted a survey of shipping manifests and eBay postings for Victaulic pipe fittings that showed that a significant number of Victaulic’s pipe fittings were being sold without the necessary import markings. The Third Circuit ruled that relator’s market study was sufficient to satisfy Rule 9(b)’s requirement of pleading fraud with particularity because it showed circumstances that “provide[d] an opportunity for fraud.” The Third Circuit also held that relator’s allegation that Victaulic avoided paying the marking duty to the government presented a reverse FCA claim for knowingly avoiding an obligation to pay the government. Victaulic asks the Supreme Court to review two of the Third Circuit’s holdings.

First, Victaulic argues that there is a split of authority on how relators can satisfy the requirements of Rule 9(b). According to Victaulic, four circuits require a relator plead allegations that include at least a sample of actual false claims with details such as the time, place, and content of the false claims, while five other circuits apply a more relaxed standard that requires “particular details” of a scheme paired with “reliable indicia” that false claims were submitted. Victaulic argues that the Third Circuit’s Victaulic decision presents a third standard, under which a relator can satisfy Rule 9(b) with allegations of the mere “opportunity for fraud” in cases where the fraud can only be substantiated by evidence in the defendant’s possession. This is the latest iteration of an issue that has repeatedly been presented to the Court, and that the Court has repeatedly declined to take up. We will see if the Court bites this time.

Second, Victaulic argues that the Third Circuit erred in holding that the failure to pay a “contingent” duty, here the marking duty, is actionable under the FCA. A reverse false claim is cognizable when a person “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay . . . the Government,” where obligation is defined as “an established duty, whether or not fixed.” 31 U.S.C. § 3729(a)(1)(G), (b)(3). Victaulic argues that the marking duty is a “contingent” obligation, meaning a person’s duty to pay is not automatically established by the law. Because the marking duty is “contingent” on the unmarked goods entering into commerce, on them being detected, on some other remedy not being selected, and on the agency deciding to impose the duty, Victaulic argues the marking duties are not established obligations to pay, and thus that the Third Circuit erred.

The relator’s response is currently due June 22, and this case will go into the Court’s long-conference in late September. Thus we will have a while to wait before we know whether the Court will take up Rule 9(b) and reverse false claims.

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Daniel T. Wallmuth

Daniel T. Wallmuth Associate