Defending False Claims Act/Qui Tam Actions: Disputed Legal Interpretations Cannot Serve as the Basis for Liability Under the Act

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”).

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