D.C. Circuit Rejects FCA Liability Based on Objectively Reasonable Construction of Ambiguous Contract Term

On November 24, 2015, the D.C. Circuit held in United States ex rel. Purcell v. MWI Corp. that representations made to the Government cannot be false when based on an objectively reasonable construction of a contract and in the absence of clear, contrary guidance from the Government.

The United States sued MWI Corp. on a false certification theory arising out of a $74.2 million loan from the Import-Export Bank to Nigeria for the importation and purchase of water pumps.  As part of the financing, the bank had required MWI to certify that it had paid only “regular commissions” to the sales agent.  Some years later, the relator filed suit alleging MWI had paid “non-regular commissions,” pointing to $28 million MWI had paid to its long-term Nigerian sales agent, approximately 30% of the total loan value.  The United States intervened.

MWI argued that because the term “regular commissions” was undefined in the contract and ambiguous, it could not as a matter of law have made a knowing, false statement.  The district court acknowledged that MWI would prevail if “regular” encompassed payments made routinely to a particular individual, but instead adopted the Government’s argument that a commission could be “regular” only if common industry-wide.  Applying this standard, the jury found the certifications to have been false and awarded $7.5 million in damages, trebled to $22.5 million.  (In a decision not reviewed by the D.C. Circuit, the district court treated Nigeria’s repayment of the entire $74.3 million loan as an offset, effectively erasing the award, leaving only penalties).

The D.C. Circuit reversed, holding that on account of the ambiguous meaning of “regular commissions,” the certifications could not have been knowingly false.  The FCA, the Circuit affirmed, “does not reach an innocent, good-faith mistake about the meaning of an applicable rule or regulation.”  Whether a contractual term is ambiguous is a question of law.  Here, the term was not defined in the loan documents, nor had the Government provided exporters with guidance regarding the meaning of the term.  The fact that commissions in the industry were generally about 5% did not constitute notice or guidance from the Government.  The fact that some MWI employees were concerned whether they were properly abiding by the contract was not proof that the claims were false, but rather supported the view that the contract was ambiguous.  Moreover, the Circuit held, the bank’s subjective intent was irrelevant so long as its interpretation was objectively reasonable.

Because MWI’s interpretation was objectively reasonable, and because the Government had not issued guidance warning exporters away from that interpretation, MWI’s certifications could not be knowingly false.