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“Ambiguous” Government Regulation Not an Automatic Defense

May 13, 2015

A common defense in a False Claims Act case is to argue that the defendant cannot be liable because the applicable government regulation was “ambiguous” and the defendant’s interpretation of the regulation is “reasonable” therefore the defendant could not have “knowingly” submitted a “false” claim (two key elements of FCA liability). Indeed, this defense is central to a declined qui tam case pending in U.S. District Court in Missouri against Anesthesia Associates of Kansas City (“AAKC”). Last week the Justice Department supported the whistleblower by filing a Statement of Interest debunking this defense.

The U.S. first addressed the argument that the defendant could not have acted “knowingly” or in other words with the requisite scienter to have violated the FCA. The FCA defines “knowingly” to mean having actual knowledge, reckless disregard, or deliberate ignorance of the falsity of the claim, and no proof of specific intent to defraud is required. 31 U.S.C. § 3729(b)(1). Defendant AAKC argued that CMS’ regulation was ambiguous and that AAKC could now advance a reasonable interpretation of the regulation. The U.S. rebutted this argument stating:

“An FCA defendant’s scienter, or lack thereof, depends on the surrounding facts as they existed at the time, not on whether its lawyers can point to ambiguities in regulatory language and advance plausible post hoc interpretations… To hold otherwise would mistakenly absolve of liability any defendant who can later advance a plausible regulatory basis for the submission of false claims. It would allow a defendant who fully intended to submit false claims to escape liability. It would eliminate liability, across the board and regardless of circumstances, for those who recognized an ambiguity and made the decision not to inquire.”

Brief at 2-3 (emphasis added).

As part of the court’s fact finding exercise, it may look at the defendant’s state of mind at the time the claims were being submitted; the U.S. acknowledged that “evidence of whether or not the defendant reasonably interpreted the governing regulation and submitted claims it, in good faith, believed to be truthful at the time of submission is important to consider.” Brief at 4. However, the U.S. reminded the court that the defendant cannot engage in “ostrich-like conduct” by effectively sticking its head in the sand. Brief at 6.

The U.S. then turned its fire on the argument that the claim could not have been “false” because of defendant’s purported reasonable interpretation. The U.S. rejected this argument out of hand, characterizing it as a “misstatement of the law.” Brief at 8. Explaining that “knowledge” and “falsity” are separate elements of FCA liability, the U.S. went on to note that it is up to the court to determine “falsity” by using “normal tools of statutory construction to determine whether statements or claims are ‘objectively’ false.” Id. (emphasis added).

This case is worth keeping an eye on to see how the district court rules. Anyone litigating a FCA case should consult the U.S. Brief for an excellent summary of the law of “knowledge” and the meaning of “falsity” under the FCA.