Fifth Circuit <i>En Banc </i> Narrows FCA

'This is a case that should never have been brought,' wrote Judge Edith Jones, the dissenter on the original panel and author of a concurring opinion en banc, joined by four other judges. It all happened because the government decided to 'up the ante' in a protracted administrative dispute, first by threatening, and then by filing, an FCA treble-damages claim. Now the government has to live with a new defense to the FCA ' at least in the Fifth Circuit. And the en banc opinion may become a model for other jurisdictions construing other statutes, including criminal penalties for fraud against the government and government-financed programs.

Owners of HUD Section Eight multi-family housing projects in Mississippi were accused of submitting false claims by signing monthly payment vouchers whose printed text included a certification that the housing was 'decent, safe and sanitary.' They continued to submit the vouchers and collect payments after the government had repeatedly rated the housing complex unsatisfactory, and the government decided to get the owners' attention by filing a multimillion-dollar FCA complaint. But the district court granted the defendants summary judgment, holding that the false certifications were not material, and that the defendants did not 'knowingly' submit false claims because HUD's own reports showed that HUD was aware of the housing conditions when it paid the claims in question.

A divided three-judge panel of the Fifth Circuit reversed. Even though HUD was well aware of the condition at the time of payment, the majority held that the certificates were material as a matter of law because the statute requires the property to be 'decent, safe and sanitary.' The panel generally rejected the idea that government knowledge could preclude a finding of falsity.

The panel opinion at the time raised concern on the part of defense contractors and health care providers because it essentially read the element of materiality out of the statute. Left to stand, the case would have stood for the proposition that providers and contractors have to stop billing once they are engaged in an administrative dispute with the government or risk an FCA suit seeking treble damages. For that reason, the Federation of American Hospitals filed an amicus brief asking the Fifth Circuit to rehear the case. Fortunately for the hospitals and others who bill the government, the Fifth Circuit on September 23, 2002 vacated the decision and granted a rehearing en banc.

A New Theory Hatched En Banc

The en banc panel said the district court properly granted summary judgment to the owners of the property because the FCA did not apply. However, the court based its decision on novel grounds other than materiality and knowledge. The court en banc pointed out what should be obvious ' that 'only those claims for money or property to which a defendant is not entitled are 'false' for purposes of the FCA.' The court then went on to say the claims here were not false because they were subject to 'corrective action' under the contract, which contemplated that vouchers might be submitted and paid during the corrective period. As a consequence, when the owners submitted the vouchers, they were entitled to be paid unless HUD acted to stop paying the claims, as it was authorized to do under the contract and regulations.

According to the opinion, HUD had notified the owners that the property did not meet its requirements, and imposed deadlines for the owners to take corrective action. In the meantime, the owners continued to bill as if they were still entitled to the full rent supplement payments. The government's complaint demanded millions of dollars in FCA treble damages for the $865,000 disbursed during the time period, plus $10,000 for each voucher.

Judge Jones on rehearing wrote a lengthy 'specially concurring' opinion joined by four other judges of the 16-member panel. She pointed out that the majority's 'contract-based' theory was never argued or decided by the district court and was not even raised until counsel was ordered to submit letter briefs less than one week before the en banc oral argument. She warned that the basis of the decision as articulated by the en banc majority has 'broader ramifications.' Her concurring opinion said the district court's dismissal of the complaint should have been affirmed on different grounds, including that government knowledge can negate the elements of scienter and materiality.

Implications

The en banc panel was influenced by the fact HUD continued to pay the vouchers even after it found the housing had 'fallen below the decent, safe and sanitary standard.' Judge Jones recognized the significance of the majority opinion, saying: 'the broader ramifications of the court's unprecedented reasoning which flows from standard contractual provisions of the sort that probably exist throughout the vast breadth of federal government contracting, are uncertain and have been utterly unexplained.'

Judge Jones is wrong, however, in limiting the implications of the decision to government contract issues. Many cases involving both government contractors and health care providers arise from administrative disputes of just this type, where the range of questions regarding regulatory or accounting and billings issues can go on for years. Meanwhile, the contractor or provider continues to bill the government. Most of these issues can be addressed by administrative bodies such as a Board of Contract Appeals or Provider Review Board. If the parties fail to resolve their dispute, sometimes the FCA bursts into the midst of this process, either because a relator/whistleblower files a qui tam action, or the government just gets frustrated. This Fifth Circuit decision suggests that at least those claims submitted by the contractor/provider during the course of attempts to resolve the dispute administratively are not subject to the FCA.

One example would be a defense contractor who becomes enmeshed in an audit and FCA investigation shortly after negotiating a contract. According to this opinion, the contractor would not have to be concerned about the FCA's application to any claims continued to be filed for payment under the contract that is the subject of this administrative dispute. Even beyond the boundaries of the FCA, the court's decision creates support for the defense to criminal False Statement and False Claims charges where the accuracy of the claim or bill is in the midst of administrative litigation. See United States v. Race, 632 F.2d 1114 (4th Cir. 1980).

Conclusion

It makes sense that the government should be expected to elect its remedies. Assuming other courts agree with the en banc panel, the contractor/provider, concerned that the government may be headed toward raising the stakes by invoking the FCA, should fully litigate its position through administrative procedures and proceedings and not simply wait for the next shoe to drop.

James J. Graham is a partner at Jones, Day, Reavis & Pogue in Washington, D.C.

On April 1, 2003, the Fifth Circuit en banc filed an opinion that might seriously restrict the application of the False Claims Act (FCA) for the Department of Justice. United States v. Southland Management Corp. , 326 F. 3d 669 (5th Cir. 2003) ( en banc ). The court en banc overturned a controversial decision by a divided panel last year that essentially eliminated the materiality element of the FCA.

On rehearing, the en banc panel decided the case on a new basis, essentially holding that certain types of claims submitted in the midst of an ongoing contractual dispute with the government are not subject to the FCA. This might stop the Department of Justice from using the Act as a remedy to recoup overpayments in certain cases and force the government to rely exclusively on its contractual remedies for any claims submitted during the dispute. The court's rationale ' questioning whether the claim is 'false' when the claimant is contractually entitled to payment ' would be equally applicable to federal criminal charge filed under the criminal statutes for False Claims, 18 U.S.C. ' 287 or False Statements, 18 U.S.C. ' 1001, and perhaps other criminal statutes sounding in fraud.

Background

'This is a case that should never have been brought,' wrote Judge Edith Jones, the dissenter on the original panel and author of a concurring opinion en banc, joined by four other judges. It all happened because the government decided to 'up the ante' in a protracted administrative dispute, first by threatening, and then by filing, an FCA treble-damages claim. Now the government has to live with a new defense to the FCA ' at least in the Fifth Circuit. And the en banc opinion may become a model for other jurisdictions construing other statutes, including criminal penalties for fraud against the government and government-financed programs.

Owners of HUD Section Eight multi-family housing projects in Mississippi were accused of submitting false claims by signing monthly payment vouchers whose printed text included a certification that the housing was 'decent, safe and sanitary.' They continued to submit the vouchers and collect payments after the government had repeatedly rated the housing complex unsatisfactory, and the government decided to get the owners' attention by filing a multimillion-dollar FCA complaint. But the district court granted the defendants summary judgment, holding that the false certifications were not material, and that the defendants did not 'knowingly' submit false claims because HUD's own reports showed that HUD was aware of the housing conditions when it paid the claims in question.

A divided three-judge panel of the Fifth Circuit reversed. Even though HUD was well aware of the condition at the time of payment, the majority held that the certificates were material as a matter of law because the statute requires the property to be 'decent, safe and sanitary.' The panel generally rejected the idea that government knowledge could preclude a finding of falsity.

The panel opinion at the time raised concern on the part of defense contractors and health care providers because it essentially read the element of materiality out of the statute. Left to stand, the case would have stood for the proposition that providers and contractors have to stop billing once they are engaged in an administrative dispute with the government or risk an FCA suit seeking treble damages. For that reason, the Federation of American Hospitals filed an amicus brief asking the Fifth Circuit to rehear the case. Fortunately for the hospitals and others who bill the government, the Fifth Circuit on September 23, 2002 vacated the decision and granted a rehearing en banc.

A New Theory Hatched En Banc

The en banc panel said the district court properly granted summary judgment to the owners of the property because the FCA did not apply. However, the court based its decision on novel grounds other than materiality and knowledge. The court en banc pointed out what should be obvious ' that 'only those claims for money or property to which a defendant is not entitled are 'false' for purposes of the FCA.' The court then went on to say the claims here were not false because they were subject to 'corrective action' under the contract, which contemplated that vouchers might be submitted and paid during the corrective period. As a consequence, when the owners submitted the vouchers, they were entitled to be paid unless HUD acted to stop paying the claims, as it was authorized to do under the contract and regulations.

According to the opinion, HUD had notified the owners that the property did not meet its requirements, and imposed deadlines for the owners to take corrective action. In the meantime, the owners continued to bill as if they were still entitled to the full rent supplement payments. The government's complaint demanded millions of dollars in FCA treble damages for the $865,000 disbursed during the time period, plus $10,000 for each voucher.

Judge Jones on rehearing wrote a lengthy 'specially concurring' opinion joined by four other judges of the 16-member panel. She pointed out that the majority's 'contract-based' theory was never argued or decided by the district court and was not even raised until counsel was ordered to submit letter briefs less than one week before the en banc oral argument. She warned that the basis of the decision as articulated by the en banc majority has 'broader ramifications.' Her concurring opinion said the district court's dismissal of the complaint should have been affirmed on different grounds, including that government knowledge can negate the elements of scienter and materiality.

Implications

The en banc panel was influenced by the fact HUD continued to pay the vouchers even after it found the housing had 'fallen below the decent, safe and sanitary standard.' Judge Jones recognized the significance of the majority opinion, saying: 'the broader ramifications of the court's unprecedented reasoning which flows from standard contractual provisions of the sort that probably exist throughout the vast breadth of federal government contracting, are uncertain and have been utterly unexplained.'

Judge Jones is wrong, however, in limiting the implications of the decision to government contract issues. Many cases involving both government contractors and health care providers arise from administrative disputes of just this type, where the range of questions regarding regulatory or accounting and billings issues can go on for years. Meanwhile, the contractor or provider continues to bill the government. Most of these issues can be addressed by administrative bodies such as a Board of Contract Appeals or Provider Review Board. If the parties fail to resolve their dispute, sometimes the FCA bursts into the midst of this process, either because a relator/whistleblower files a qui tam action, or the government just gets frustrated. This Fifth Circuit decision suggests that at least those claims submitted by the contractor/provider during the course of attempts to resolve the dispute administratively are not subject to the FCA.

One example would be a defense contractor who becomes enmeshed in an audit and FCA investigation shortly after negotiating a contract. According to this opinion, the contractor would not have to be concerned about the FCA's application to any claims continued to be filed for payment under the contract that is the subject of this administrative dispute. Even beyond the boundaries of the FCA, the court's decision creates support for the defense to criminal False Statement and False Claims charges where the accuracy of the claim or bill is in the midst of administrative litigation. See United States v. Race , 632 F.2d 1114 (4th Cir. 1980).

Conclusion

It makes sense that the government should be expected to elect its remedies. Assuming other courts agree with the en banc panel, the contractor/provider, concerned that the government may be headed toward raising the stakes by invoking the FCA, should fully litigate its position through administrative procedures and proceedings and not simply wait for the next shoe to drop.

James J. Graham is a partner at Jones, Day, Reavis & Pogue in Washington, D.C.