Two Courts Confirm Penalties Not Yet Issued Do Not Support Reverse False Claims
The D.C. Circuit and the Tenth Circuit recently joined several other circuits, including the Fifth, Sixth, and Eighth, in holding that liability for reverse false claims cannot be based on contingent obligations to pay the government (meaning obligations to pay that may arise after future discretionary actions), reaffirming that when Congress amended the FCA in 2009 to define the term “obligation,” it intended that liability would result for reverse false claims only where there are failures to pay specific, definite obligations owed to the government.
In the D.C. Circuit in United States ex rel. Schneider v. JP Morgan Chase Bank (878 F.3d 309), a relator alleged that a bank falsely claimed compliance with certain consumer relief provisions contained in a settlement agreement that resolved accusations of impropriety in the origination and servicing of mortgages thought to have contributed to the housing crash. The relator argued that the defendant bank violated the FCA’s reverse false claim provision by withholding money that would have been due to the government as a result of the noncompliance with the settlement terms. The D.C. Circuit rejected the relator’s arguments, holding “contingent exposure to penalties which may or may not ultimately materialize does not qualify as an ‘obligation’ under [the FCA].” The court explained that the settlement agreement contained intermediate steps to be taken before the bank would be penalized for violating its provisions, stressing the indefinite nature of the bank’s potential exposure to penalties for its conduct. The court concluded that liability was a “highly contingent outcome,” and such a “hypothetical” penalty could “hardly be described” as an obligation under the FCA.
The Tenth Circuit addressed a similar issue in United States ex rel. Barrick v. Parker-Migliorini Int’l, LLC (2017 WL 6614466), an exports case in which the relator alleged that Parker-Migliorini International (“PMI”) perpetuated a beef-smuggling scheme that prevented the government from collecting inspection fees that would have been paid had PMI complied with relevant export laws. PMI allegedly ordered beef from various suppliers to ultimately be shipped to China and Japan but provided sham destination countries with lower inspection standards. China bans all imports of American beef, while Japan bans all imports of beef slaughtered over 30 months in age, requiring a different type of inspection. Inspections required to comply with Japan’s heightened standards constitute reimbursable expenses, while inspections for meat exported to the sham destination countries with lower standards are free.
The relator argued that PMI violated an established duty to pay the government for inspections for the smuggled meat that would have to occur prior to export from the U.S. The court disagreed for reasons similar to the D.C. Circuit above, explaining that “an established duty is one owed at the time the improper conduct occurred, not a duty dependent on a future discretionary act.” The relator could not argue that there was an established duty to pay the government for these inspections with respect to China because the meat was altogether banned from being imported in China, and the regulations at issue in the case did not impose any charge for a determination of whether the meat to be inspected was banned by a certain destination country. Regarding the meat that ended up in Japan, because the relevant suppliers used by PMI were not eligible to export beef to Japan, an obligation to pay the government only would have arisen if the supplier had reported that the meat was destined for Japan despite that the supplier was ineligible to export there. The court found this possibility too remote and the connection between the scheme and an “established duty to pay” too tenuous to trigger FCA liability.
With these two cases, the D.C. Circuit and the Tenth Circuit have joined the majority of circuits in requiring a definite duty to pay, confirming what appears to be well-understood from Congress’s 2009 amendment — that the term “obligation” requires an established, not contingent, duty to pay. Although a cert. petition in Victaulic Co. v. U.S. ex rel. Customs Fraud Investigations, LLC, No. 16-1398, suggested the Third Circuit has allowed reverse false claims cases to proceed based on contingent obligations, as we noted previously, that case might be limited to its facts, as the obligation there was “accrued at the time” of the violation, was “not avoidable for any cause,” and was therefore far more definitive than the obligations here. We will be keeping an eye out for other cases involving contingent duties to pay.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.