D.C. Circuit Rejects Expansive Theory of FCA Liability Predicated on Failure to Pay an Unassessed Penalty

On July 5, 2019, the D.C. Circuit affirmed the dismissal of a qui tam lawsuit against several chemical manufacturers alleging that they violated the False Claims Act by failing to pay civil penalties owed under the Toxic Substances Control Act, 15 U.S.C. §§ 2601 (1976) (“TSCA”) for the manufacturers’ repeated failures to report “information regarding the dangers of isocyanate chemicals” to the EPA.  The law firm Kasowitz Benson Torres LLP, which is the relator in the case, urged the D.C. Circuit “to become the first court to recognize FCA liability based on the defendants’ failure to meet a TSCA reporting requirement and on their failure to pay an unassessed TSCA penalty.” The D.C. Circuit declined that invitation.

The TSCA requires chemical manufacturers to inform the EPA about substances that present “a substantial risk of injury to health or the environment.” The EPA created the Compliance Audit Program, which was “designed to strongly encourage companies to voluntarily audit their files and disclose substantial risk information.” If a company voluntarily complies and is penalized, the program authorizes the EPA to issue a reduced civil penalty.

Kasowitz argued that Defendants, four chemical manufacturers, deprived the government of money because they concealed their liability under the TSCA and, as a result, avoided paying civil penalties. Kasowitz also argued that, by failing to disclose the adverse health effects of isocyanate chemicals, Defendants deprived the EPA of “property in the form of undisclosed substantial risk information regarding isocyanate chemicals.” The district court dismissed the Kasowitz’ complaint for failure to state a claim, and the D.C. Circuit affirmed, concluding that Kasowitz’s “TSCA civil penalty theory is a non-starter.”

The D.C. Circuit held that an “unassessed potential penalty for regulatory noncompliance does not constitute an obligation that gives rise to a viable FCA claim.” That is because the EPA never actually assessed TSCA penalties against Defendants. “There was, thus, no FCA ‘obligation’ for the defendants to conceal or avoid.”  The Court rejected Kasowitz’s contention that TSCA penalties are “automatically imposed at the moment a defendant commits a violation,” making these penalties “an existing obligation to pay under the FCA—not an unassessed, hypothetical penalty” (emphasis added).  The panel held that the EPA has “discretion to impose either an appropriate penalty or no penalty at all” and, thus, “TSCA does not create an obligation to pay a civil penalty at the moment of a statutory violation; an obligation arise[s] only if and when the EPA decides to impose a penalty.”

The Court also declined to adopt Kasowitz’s position that, by failing to disclose the adverse health effects of isocyanate chemicals, Defendants deprived the government of “property in the form of undisclosed substantial risk information.” Although the Court “assume[d], without deciding, that the substantial risk information identified in the complaint constitute[d] the defendants’ property,” the issue nonetheless was “whether the TSCA obligation to inform the EPA of substantial risk information qualifies as an obligation to transmit property.” (emphasis added).  The Court held it did not: “TSCA gives the EPA one—and only one—interest in substantial risk information: the right to be informed of it.” But, the Court reasoned, this right “does not constitute a traditional property right.” After all, the EPA “does not acquire information for its own economic benefit but to carry out its regulatory mission,” and the FCA should not be used as “a vehicle for punishing garden-variety . . . regulatory violations,” the Court concluded.

A copy of the Court’s opinion can be found here.