Recognition
that contractual matters are not
appropriate for treatment as fraud
violations is of long-standing duration.
As early as 1994, the Second Circuit
declared: "A breach of contract does not
amount to [ ] fraud. Failure to comply
with a contractual obligation is only
fraudulent when the promisor never
intended to honor the contract ...To
infer fraudulent intent from mere
nonperformance ... would eviscerate the
distinction between a breach of contract
and fraud." United States v. D'Amato, 39
F. 3d 1249, 1261 n. 8 (2d Cir. 1994).
Nonetheless, it is not an infrequent
occurrence when the Department of
Justice or a relator seeks to convert a
disagreement about the meaning of a
contractual term or a statutory/
regulatory provision into the purported
basis for an action under the False
Claims Act, 31 U.S.C. §§ 3729 et seq.
("FCA").
It is
well established under controlling
authority that a legal disagreement
cannot constitute the "knowing"
submission of false claims under the
FCA. United States ex rel. Hochman v.
Nackman, 145 F.3d 1069, 1075-1076 (9th
Cir. 1998) (holding that good faith
reliance by the defendants on their
interpretation of a Department of
Veterans Affairs contract provision
vitiated the "knowing" submission of
false claims under the False Claims
Act). "Imprecise statements or
differences in interpretation growing
out of a disputed legal question are not
false under the FCA." Lamers v. City of
Green Bay, 998 F. Supp. 971, 986 (E.D.
Wisc. 1998), aff'd, 168 F.3d 1013 (7th
Cir. 1999). See also Hagood v. Sonoma
County Water Agency, 81 F.3d 1465, 1478
(9th Cir.), cert. denied, 519 U.S. 1001
(1996) ("to take advantage of a disputed
legal question … is to be neither
deliberately ignorant nor recklessly
disregardful" and this is not enough to
support liability under the False Claims
Act); United States ex rel. Norbeck v.
Basin Electric Power Cooperative, 248
F.3d 781 (8th Cir. 2001), cert. denied,
2002 U.S. LEXIS 549 (2002) (court
rejected relator's claim and held that
improper interpretation of a contract
cannot constitute violation of the False
Claims Act); Tyger Construction Co.,
Inc. v. United States, 28 Fed. Cl. 35,
38 (1993) (Court of Federal Claims
struck two paragraphs of the
government's counterclaim "as legal
opinions not subject to FCA liability").
As is
evident from Hagood and Hochman, courts
in the Ninth Circuit in particular have
been especially rigorous in ensuring
that contractual disputes are not
converted into FCA actions. The key case
in this regard is United States ex rel.
Butler v. Hughes Helicopters, Inc., 71
F.3d 321, 326 (9th Cir. 1995). There,
the court held in rejecting a relator's
contention that a contractor's
compliance with negotiated modifications
to an Army contract were violations of
the FCA: [Relator's] argument raises
questions of contract interpretation
rather than false claims.
To the
extent that he alleges that [defendant]
failed to comply strictly with
contractual requirements in planning and
reporting the testing, and that those
making modifications had no authority to
do so, [relator's] is a contract
dispute. Such a dispute is under the
jurisdiction of the Armed Services Board
of Contract Appeals or the United States
Court of Federal Claims. Id. at 326. See
also, e.g., United States ex rel. Oliver
v. Parsons Co., 195 F.3d 457, 463 (9th
Cir. 1999), cert. denied, 530 U.S. 1228
(2000) (the reasonableness of
interpretation of "technical and
complex" federal regulations may be
relevant to determining "knowing"
submission of false claim); United
States ex rel. Bhatnagar v. Kiewit
Pacific Co., No. C 98-02068 MPH, 2000
U.S. Dist. LEXIS 14400 at *22 (N.D. Cal.
Sept. 22, 2000), rev'd on other grounds,
2002 U.S. App. LEXIS 806 (9th Cir.
2001).
However,
it is not just courts within the Ninth
Circuit that have been vigilant in
foreclosing the use of the FCA to
resolve contractual disputes. For
example, one district court (placing
heavy reliance upon Ninth Circuit
authority) emphasized that contract
disputes are "not actionable under the
FCA." United States v. Bald Eagle
Realty, 1 F. Supp. 2d 1311,1315 (D. Utah
1998).
The
Eighth Circuit has taken an equally
definitive position, also based on Ninth
Circuit authority, holding that the
improper interpretation of a contract
cannot constitute a FCA violation.
Norbeck , 248 F.3d at 792 . The Sixth
Circuit too has adopted this position.
Kaminski v. Teledyne Industries, Inc.,
No. 96-3620, 1997 U.S. App. LEXIS 19192
at *13-14 (6th Cir. July 21, 1997). In
Tyger Construction Co., Inc. v. United
States, 28 Fed. Cl. 35, 58 (1993), the
Court of Federal Claims struck two
paragraphs of the government's
counterclaim "as legal opinions not
subject to FCA liability...."
This
limitation is particularly important in
qui tam cases. Relators simply are
foreclosed from using 31 U.S.C. §
3730(b) as an all-purpose vehicle for
contract and common law claims; rather,
the allegations must fit within the
narrower ambit of the False Claims Act.
United States ex rel. Mayman v. Martin
Marietta Corp., 894 F. Supp. 218,
225-226 (D. Md. 1995) ("qui tam
relator's standing and recovery is
limited to claims under the False Claims
Act").
