The Fourth Circuit, evenly divided while sitting en banc, recently unwound a panel decision finding that Safeco’s “reckless disregard” standard applies to the False Claims Act (“FCA”).
In January 2022, a panel of the Fourth Circuit held, joining every other circuit to have considered the issue, that when allegations of false claims are premised on violations of ambiguous laws or regulations, the defendant’s scienter is properly assessed using the standard for “reckless disregard” established by the Supreme Court in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007). Under Safeco, courts ask whether a defendant’s interpretation of the ambiguous law or regulation at issue was objectively reasonable and whether authoritative guidance might have warned the defendant away from that interpretation. As discussed here, applying Safeco, the panel affirmed the district court’s dismissal of the case.
In a recent decision, the Fourth Circuit Court of Appeals for the second time in two years held that commission-based compensation arrangements with independent contractors cannot be safe harbored and do violate the Anti-Kickback Statute and FCA. See United States ex rel. Nicholson v. Medcom Carolinas, Inc., No. 21-1290 (4th Cir. July 21, 2022).
In a recent 2-1 decision, the Fourth Circuit joined every other circuit to have considered the issue in applying Safeco’s “reckless disregard” standard to legally false FCA claims based on alleged violations of ambiguous laws and regulations. Under Safeco, courts ask whether a defendant’s interpretation of the ambiguous law or regulation at issue was objectively reasonable and whether authoritative guidance might have warned the defendant away from that interpretation. The Fourth Circuit found that the Safeco standard “duly ensures that defendants must be put on notice before facing liability for allegedly failing to comply with complex legal requirements. Without such notice, defendants are not likely to receive due process.”
While there generally has been no question that the False Claims Act protects employees who suffer retaliation because of reporting suspected fraud by their employer, the Fourth Circuit recently made clear that the FCA whistleblower provisions protect disclosures that could lead to any viable FCA action regardless of whether the target is the employer of the whistleblower. O’Hara v. NIKA Technologies, Inc., No. 16-1805, _ F.3d. _, 2017 WL 6542675 (4th Cir. Dec. 22, 2017). This decision raises the bar for employers who learn of employees’ concerns about third-parties allegedly committing fraud on the government in the event the company takes subsequent adverse employment action against the so-called whistleblower. (more…)
Courts have focused their attention post-Escobar primarily on whether plaintiffs have met the heightened standard for pleading the violation of a material statute, regulation, or contractual requirement. Under the implied certification theory claims must also still be false, yet the Supreme Court in Escobar provided less guidance as to the contours of falsity. The Fourth Circuit recently advanced a broad definition that permits plaintiffs to avoid pointing to any specific misrepresentations. See United States ex rel. Badr v. Triple Canopy, Inc., No. 13-2190 (4th Cir. May 16, 2017).
As we previously discussed here, the government’s continued payment despite knowledge of contractual or regulatory noncompliance has become a powerful defense argument post-Escobar. The Fourth Circuit recently affirmed summary judgment in favor of government contractors after they obtained declarations from responsible government officials that undercut the relator’s theories of liability. See United States ex rel. Searle v. DRS C3 & Aviation Co., No. 15-2442 (4th Cir. Feb. 23, 2017).
The extent to which statistical sampling can be used to establish FCA liability remains a hotly disputed topic among federal courts. In a closely watched case, the Fourth Circuit last week declined to become the first circuit court directly to address the issue. See United States ex rel. Michaels v. Agape Senior Cmty., Inc., No. 15-2145 (4th Cir. Feb. 14, 2017).
The Fourth Circuit ruled recently in U.S. ex rel. Bunk v. Government Logistics N.V., No. 15-1088, 2016 WL 6695787 (4th Cir. Nov. 15, 2016), that the Relators had presented sufficient evidence to proceed to trial against Defendant Government Logistics (GovLog) based on the traditional fraudulent transaction theory of successor liability. The Court declined, however, to expand the scope of successor liability under the FCA to include the substantial continuation theory, which, as discussed here, would have allowed Relators to establish liability by showing merely that GovLog retained its predecessor’s employees, managers, assets, and operations, among other indicia of corporate continuity. See United States v. Carolina Transformer, 978 F.2d 832, 840 (4th Cir. 1992).
As we reported here and here, the question of whether statistical sampling can be used to establish FCA liability became intertwined in a Fourth Circuit interlocutory appeal challenging the government’s assertion that it has unfettered authority to veto FCA settlements. United States ex rel. Michaels v. Agape Senior Cmty., Inc., No. 15-2145 (4th Cir.). During oral arguments last week, the Fourth Circuit panel demonstrated a clear preference for avoiding the sampling component of the appeal, likely leaving the lower courts to continue to develop a piecemeal approach.
The Fourth Circuit will soon have the opportunity to clarify the circumstances under which successor liability may be imposed against an entity for False Claims Act judgments against its predecessor. Previously covered here, here, here, here, here, and here, the district court in United States ex rel. Bunk v. Birkart Globistics GmbH & Co. held that purported defendant GovLog could be defendant Gosselin’s successor in interest only if the plaintiffs – the Department of Justice and relators – could establish the elements of successor liability under the more-demanding common law rule instead of the more-lenient “substantial continuity” rule. Under the common law (or “traditional”) rule of successor liability, a corporation that acquires the assets of another corporation does not also assume its liabilities under the FCA unless either: (1) the successor agrees to assume liability; (2) the transaction is a de facto merger; (3) the successor is a “mere continuation” of the predecessor; or (4) the transaction is fraudulent.