United States: How Were We Supposed To Know?
Last Updated: October 9 2018

To be liable under the FCA, a defendant must "knowingly" present or cause presentation of a false or fraudulent claim. But the FCA does not have a stringent knowledge (scienter) requirement—liability can attach based not only on actual knowledge but also on deliberate ignorance or reckless disregard of truth or falsity. This more forgiving scienter standard has made it difficult for defendants to win motions to dismiss complaints. But a couple of recent decisions granting motions to dismiss on just that ground could be the harbinger of greater scrutiny of an FCA's plaintiff's scienter allegations.

In the first case, United States ex rel. Grubea v Rosicki, Rosicki & Assoc., P.C. et al., 318 F. Supp. 3d 680 (S.D.N.Y. 2018), Judge Jed Rakoff of the Southern District of New York bounced claims against a group of mortgage loan servicers because plaintiff relator failed to plead scienter adequately. In Grubea, the government and relator claimed that lawyers charged excessive legal fees for foreclosures in connection with various government-insured mortgages. The government intervened against the law firms, while the relator also pursued a number of major banks that serviced the loans. The banks moved to dismiss the relator's claims for failing to allege that they knew about the lawyers' alleged overcharges. Citing Escobar for the proposition that "[t]he FCA's scienter requirement is 'rigorous,'" Judge Rakoff burrowed into the knowledge issue, finding that relator sought to tar the banks with the wrongs of the law firms based only on inference without any "particularized information" about scienter. He even gave the relator a shot at oral argument to describe specific conversations that he claimed to have had with the banks about excessive legal fees, but relator's counsel was unable "to name even one," leading Judge Rakoff to dismiss his claims with prejudice.

Just three days later, the Sixth Circuit affirmed the dismissal of a reverse FCA claim against a municipal watershed conservancy district on scienter grounds. United States ex rel. Harper v. Muskingum Watershed Conservancy District, No. 17-4098, 2018 WL 3153674 (6th Cir., June 26, 2018). The relator in Muskingum alleged that the municipal district violated the terms of federal funding it received for flood control improvements in 1939 by not transferring property to the federal government when it entered fracking leases for that property beginning in 2011. Holding that a reverse FCA claim requires awareness of both the obligation to the US and the defendant's violation of that obligation, the Sixth Circuit affirmed dismissal because relator did not adequately plead that the district was aware when it entered fracking leases that it was violating the more than 70-year-old terms of its flood control funding, even if the district knew of the obligation back in 1939. (We presume relator could not find any district employee from that depression-era year who survived long enough to be involved in fracking.)

While these cases breathe some life into dismissal motions by defendants based on scienter, the Ninth Circuit later threw some cold water on such optimism in United States ex rel. Silingo v. WellPoint, Inc. et al., 895 F.3d 619 (9th Cir. 2018). In Silingo, the Ninth Circuit reversed the district court's dismissal of a complaint for failure to differentiate claims against Medicare Advantage organizations (holding that no differentiation is required when the exact same conduct is alleged against multiple defendants). The Ninth Circuit then took on the Medicare Advantage organizations' additional argument that the complaint did not adequately plead their knowledge of inflated diagnoses codes and data by a company they each contracted with to examine beneficiaries at home. The Ninth Circuit found knowledge of all defendants was adequately pled because aspects of the company's practices were "serious red flag[s]" (such as the type of signature and the qualifications of those who made the diagnoses), and because "one would expect that a sophisticated company would notice when its contractor's work is too good to be true."

Despite this seemingly unbounded Ninth Circuit knowledge standard, defense counsel (especially those in cases outside that circuit), should still take hope that viable scienter-based dismissal motions can be made when the client says "how were we supposed to know that what we were doing was wrong?"

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