Fraudsters have regularly argued that they could evade FCA liability by simply conjuring up a “reasonable” interpretation of a controlling regulation or contract. As the argument goes, it makes no difference that the fraudster knows that the interpretation is wrong. The courts have uniformly rejected this nonsensical argument . . . until two weeks ago.
In United States ex rel. Hixson v. Health Management Systems, 2010 WL 2977396 (8th Cir. July 30, 2010), the Eighth Circuit, affirming the dismissal of a qui tam action, held that FCA liability does not attach where there are two “right” ways to read an applicable regulation. Notably, the court’s decision hinges solely on the ambiguity of the regulation, with no consideration of the evidence demonstrating that the defendant knew, or should have known, the correct meaning of the law. In short, the court held that the ambiguity negated scienter as a matter of law.
The Hixson decision jumped the tracks by blurring the lines between the “falsity” and knowledge elements of the False Claims Act. This conflated analysis permits a defendant to steal from the government with impunity. As the Ninth Circuit pointed out, this reading of the FCA would permit a defendant to “submit a claim, knowing it is false or at least with reckless disregard of its falsity, thus meeting the intent element, but nevertheless avoid liability by successfully arguing that its claim reflected a ‘reasonable interpretation’ of the requirements” and was therefore “not false.” United States ex rel. Oliver v. Parsons Co., 195 F.3d 457, 463 n.3 (9th Cir. 1999).
This “two rights” escape hatch is closed by separately assessing the defendant’s knowledge. First, in assessing the “falsity” of the claims, the court must interpret the underlying regulation or contract. Once the court determines the true meaning of the law, it then must determine whether the defendant’s claims were “knowingly” false. Ultimately, if the defendant did not have reason to know that the claims were false, FCA liability will not attach. However, the court cannot short-circuit this analysis by glossing over the individual defendant’s knowledge of the applicable regulations.