United States: CIVIL FALSE CLAIMS ACT: Tenth Circuit Breaks New Ground by Requiring Dismissal of Reverse False Claim Jury Verdict Based on "Allison Engine" Intent Requirement

The Tenth Circuit's groundbreaking decision in United States ex rel. Bahrani v. ConAgra, Inc., No. 09-1163, 2010 WL 4188251 (10th Cir. Oct. 26, 2010) ("Bahrani II") demonstrates the power and scope of the intent requirement that emerged from the Supreme Court's 2008 decision in Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (2008). See FraudMail Alert No. 08-06-09. While the Tenth Circuit delivered several defense victories in Bahrani II on issues ranging from reverse false claims liability to original source status, the Tenth Circuit's application of Allison Engine overshadows those rulings. In particular, the Tenth Circuit found that the jury's answer to a special interrogatory applying the Allison Engine intent requirement required reversal of the nominal judgment ($107.50 in single damages and $27,500 in penalties) in favor of the relator on reverse false claims liability. That decision, in turn, required reversal of the award of attorney's fees, costs, and expenses to the relator; and dismissal of the case in its entirety.¹

Bahrani II makes clear that a jury's verdict on the Allison Engine intent requirement―a key requirement for liability in cases premised on conduct that occurred prior to FERA's FCA amendments―could be the single most important factor in the outcome of a case. As a result, FCA defendants should be seeking, and trial courts should be providing, an Allison Engine jury instruction in appropriate cases brought under Sections 3729(a)(2), (a)(3), and (a)(7). More broadly, the Tenth Circuit's decision may lead to a new direction in FCA litigation―a shift by defendants in cases based on those sections to rely more heavily on the issue of proof of intent to seek payment from, or avoid paying, the government. The decision also underscores the critical importance of special interrogatories in FCA jury trials which, because of their complexity, are not easily resolved by simple jury verdict forms.

Bahrani Background

The original qui tam allegations were that ConAgra employees altered over 100,000 USDA meat and hide export certificates after discovering inaccuracies in the original certificates. This conduct, according to relator's theory, amounted to reverse false claims under Section 3729(a)(7) because the alterations allegedly were made in order to avoid ConAgra's "obligation" to pay for and receive replacement certificates. After the district court initially found that there was no clear "obligation" to obtain replacement certificates or to pay a fee for them, the Tenth Circuit reversed, holding that, even though the regulations were silent on whether replacement certificates and payment for them were required, the evidence showed that a replacement certificate was required only for "significant" or "major" changes―as opposed to minor changes―in the certificates. See United States ex rel. Bahrani v. ConAgra, Inc., 465 F.3d 1189, 1201 (10th Cir. 2006) ("Bahrani I"). This interpretation of "obligation" became the law of the case on remand.

On remand, the district court oversaw a jury trial on the "jurisdictional" dispute over whether the relator was an original source of the meat certificate allegations, with the jury finding that the relator was not an original source of those particular allegations. The court then limited the second jury trial to the hide certificate claims. Applying the Tenth Circuit's interpretation of the defendant's "obligation" to acquire replacement certificates, the district court instructed the jury to decide whether ConAgra employees changed any hide export certificates in a major or significant way with knowledge that the change necessitated a replacement certificate. The jury overwhelmingly ruled in favor of the defendants, concluding that, of the more than 1,000 hide certificates at issue, only five met the requisite "major" or "significant" change criterion. Notably, the jury separately concluded that the single damages associated with those five claims were a total of $107.50 (and the court later assessed five civil penalties of $5,500 each), resulting in a judgment of a little over $27,800.

Although the district court had previously acknowledged that Allison Engine may impose a higher, specific intent standard of scienter for reverse false claims, the court declined to apply that standard, ruled that the FCA's "knowledge" standard was met in the case of these five certificates, and entered judgment in favor of relator on the five claims. The district court did, however, direct an Allison Engine intent requirement special interrogatory to the jury, asking the jury to specifically determine whether the defendant altered the hide certificates with the intent or purpose of avoiding or decreasing an obligation to pay the government for replacement certificates. On the special interrogatory, the jury answered "no" to this question. This special interrogatory response ultimately led the Tenth Circuit to reverse the district court's judgment on the five certificates.

The Tenth Circuit's Application of the Allison Engine Intent Requirement

In Allison Engine, the Supreme Court held that Section 3729(a)(2) did not require a false statement supporting a false claim to be presented to the government, and thus liability under that section was not limited by the "presentment" requirement that applied under Section 3729(a)(1). However, the Court imposed an additional intent requirement beyond the FCA's "knowing" standard of intent in order to prevent the FCA from becoming an "all-purpose antifraud statute." 553 U.S. at 672. The Court found that specific statutory language of intent limited a defendant's liability under Sections 3729(a)(2) and (a)(3) to the "natural, ordinary, and reasonable consequences of his conduct": Section 3729(a)(2) required that the purpose of the false statement must be "to get" a false claim paid or approved by the government; Section 3729(a)(3) required that the conspiracy to defraud must be for the purpose of "getting" a false claim allowed or paid. Id.

In Bahrani II, the Tenth Circuit agreed with the defendants that Allison Engine's intent requirement was equally applicable to claims brought under Section 3729(a)(7), even though the Supreme Court had not specifically resolved the issue. Bahrani II at *24. The court noted that, in its amicus brief to the Tenth Circuit, the government agreed that the connotation of purpose that the Supreme Court found in "to get" under Section 3729(a)(2) was also present in corresponding language ("to conceal, avoid, or decrease") in Section 3729 (a)(7). Id. (citing Gov't Br. at 10). Thus, in order to prove liability for a reverse false claim, the relator must "establish that the defendant "made a false record or statement for the purpose of" concealing, avoiding, or decreasing an obligation to pay or transmit money or property to the Government." Id. (quoting Allison Engine, 553 U.S. at 671).

Because Section 3729(a)(7) liability requires proof of this intent element, and because the jury specifically determined that the relator had not proved this element, the Tenth Circuit reversed the judgment in favor of the relator on the five hide certificate claims. The only question remaining was whether there should be a new trial on the five claims.

The government argued that the five claims should be remanded for a new trial due to ambiguity in the jury's verdict as to whether ConAgra "lacked the requisite intent [to defraud] only because it remained recklessly ignorant of whether it owed the obligation." Bahrani II at *24 (quoting Gov't Br. at 19). Given the FCA's potential for imposing punitive damages and civil penalties, liability should not be based on such a hyper-technical construction of intent. It would surely confuse a jury to ask them to determine whether the lack of intent to defraud the government was based on reckless ignorance of an obligation in every instance where a change was made to the five certificates. The Tenth Circuit properly and readily rejected the government's argument:

Bahrani II at *25.

Other Noteworthy Aspects of Bahrani II

Other interesting aspects of this case include the change in the number of claims over the 10-year period, two jury trials, and two appeals to the Tenth Circuit that were required to dispose of an unintervened qui tam case, which, after all that, resulted in a minimal judgment ultimately overruled on appeal. As noted, while the qui tam complaint alleged over 100,000 instances of reverse false claims, the jury ultimately concluded that only five of those were actionable, and the Tenth Circuit reversed the district court's judgment in favor of the relator on those five claims. Another noteworthy outcome of this case concerns relator's attorney's fees claim: Relator initially sought $3.5 million in attorney's fees, but the district court drastically slashed that demand to a mere $9,274, limiting the attorney fee recovery to the five hide certificate claims on which relator prevailed at trial. Even that modest recovery evaporated entirely with the Tenth Circuit's reversal.

Footnote

1. The reader should note that one of the authors of this Alert, Mr. Boese, was an expert witness for the defendants on the issue of the attorney's fees sought by relator, an issue rendered moot by the Tenth Circuit's reversal of the underlying FCA judgment.

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