In what is sure to be a frequently cited ruling, the D.C. Circuit has reversed a jury’s verdict against a False Claims Act (FCA) defendant, finding that there was insufficient evidence for the jury to find that the defendant “knowingly” made a false claim where the defendant relied upon a facially reasonable interpretation of an undefined and ambiguous term upon which the government had offered no pre-litigation guidance.
In the early 1990s, in connection with a financed foreign purchase of irrigation pumps and equipment by Nigeria, appellant-defendant MWI Corporation certified to a U.S. government agency, the Export-Import Bank, that in accord with regulatory requirements it had not paid “any discount, allowance, rebate, commission, fee or other payment in connection with the sale” except for “[r]egular commissions or fees paid or to be paid in the ordinary course of business to [its] regular sales agents.” In 1998, a relator filed suit alleging that these express certifications were false as MWI had paid a sales agent large commissions that allegedly were payments other than “regular commissions”. The government subsequently intervened in 2002. During the litigation, the government asserted that “regular commissions” were those consistent with industry-wide benchmarks, but prior to the litigation, the government had issued no written guidance on the meaning of the term “regular commissions.” Indeed, during trial Bank officials acknowledged that the Bank preferred to keep this standard flexible in order to improve efficiency in the loan approval process. MWI argued that the unsettled meaning of the ambiguous term “regular commissions” precluded the government, as a matter of law, from establishing the FCA elements of falsity and knowledge.
A jury found that MWI had violated the FCA 58 times. In reversing the jury’s verdict, the court focused in on the ambiguity of the undefined term “regular commissions,” finding that “[a]bsent evidence that the Bank, or other government entity, had officially warned MWI away from its otherwise facially reasonable interpretation of that undefined and ambiguous term, the FCA’s objective knowledge standard . . . did not permit a jury to find that MWI ‘knowingly’ made a false claim.” The court further noted the “potential due process problems posed by ‘penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule,’” due to the fact that the first actual notice of the meaning of “regular commissions” was not provided by the government until “long after the conduct giving rise to this litigation took place.” Additionally, the court noted that the government had not pointed to any guidance from the courts of appeals or the relevant agency that might have contradicted MWI’s interpretation of the ambiguous term.
In sum, the court held that MWI could not have knowingly submitted false claims because it relied on a reasonable interpretation of an ambiguous term that the government left undefined. Of particular note for future and current FCA defendants facing false certification charges on the basis of ambiguous, undefined regulatory terminology is the following admonition from the court to the government:
That MWI’s interpretation may not be the best interpretation does not demonstrate that MWI’s interpretation was necessarily unreasonable. Absent evidence that the negative consequences of an interpretation render it unreasonable, such consequences can play no role in evaluating whether an FCA defendant acted knowingly. . . . Had the government wanted to avoid such consequences, it could have defined its regulatory term to preclude them. Of course, the government may instead determine that its goals are better served by not doing so, much as the Bank officials’ testimony implied. This may be the government’s choice, but then the FCA may cease to be an available remedy if the government concludes after the fact that a particular commission is not “regular” because it is too high.
Other courts have expressed similar sentiments, holding that ambiguous terms cannot form the basis for an FCA claim if the defendant’s interpretation of the regulation was reasonable (see here). The D.C. Circuit’s decision strongly reinforces this point, and is important authority for any defendant facing FCA claims premised on previously undefined regulatory, statutory or contractual language that is subject to more than one interpretation.