United States: Seventh Circuit Emphasizes Limits Of Advice-Of-Accountants Defense In Affirming Summary Judgment For FCA Defendant

In United States ex rel. Horning v. Sheet Metal Workers Int’l Assoc., 828 F.3d 587 (7th Cir. 2016), the Seventh Circuit declined to grapple with the implied false certification standard announced by the Supreme Court in Universal Health Services v. United States ex rel. Escobar, 136 S.Ct. 1989 (2016), just weeks before. Instead, the court, with a dissent by Judge Posner, upheld a grant of summary judgment for the defendant on knowledge grounds.

Facts

In Horning, a union of construction workers brought a False Claims Act suit against Horning Investments (“Horning”), a roofing company hired to perform work at a VA medical center in Dayton, Ohio. The union claimed that Horning had violated the federal Davis-Bacon Act, 40 U.S.C. §§ 3141-43, which requires construction contractors hired by the federal government to pay their workers a “prevailing wage.” The prevailing wage, set by U.S. Department of Labor regulations, includes both base wage and fringe benefits components.

As part of its health insurance benefits program, Horning deducted a fixed, hourly fee from all employee paychecks and deposited those funds in a trust, which was then used to pay employee claims. The union claimed that this practice did not provide the full benefit of the deducted funds to each worker, resulting in a fringe benefit rate below the Davis-Bacon Act minimum. Specifically, the union complained, deductions were made (1) without regard for whether the employee had become eligible for insurance benefits after a waiting period upon hiring, and (2) without accounting for the amount of benefits each employee actually used.

As a result of these practices, the union alleged, Horning knowingly made false statements material to claims for payment, in violation of the False Claims Act, 31 U.S.C. § 3729(a)(1)(A), when it submitted payroll reports and applications for payment that contained certifications of compliance with the Davis-Bacon Act.

The Southern District of Indiana granted Horning’s motion for summary judgment. The lower court found that Horning lacked knowledge that its statements were false because it had relied on the advice of its accountants in implementing and reporting the deductions in question. Because of this reliance, the court reasoned, the union could not show that Horning had the requisite scienter to make out an FCA claim.

Majority Opinion

In a decision by Chief Judge Wood, joined by Judge Easterbrook, the Seventh Circuit affirmed the grant of summary judgment for Horning. Like the district court, the Seventh Circuit found that the union had failed to raise a genuine question of material fact as to scienter, but it did so under a different rationale, rejecting the lower court’s advice-of-accountants holding.

Notably, while the decision came down in the wake of the Supreme Court’s opinion in Escobar, the majority did not reach the application of Escobar’s implied false certification standard to these facts. It observed that the representations made by Horning might rise to the level of “specific representations” that “knowingly fail[] to disclose the defendant’s noncompliance with a statutory regulatory, or contractual requirement” such that “the omission renders those representations misleading.” Escobar, 136 S.Ct. at 1995. The Court noted, however, that the outcome here was “not clear,” and it declined to engage in the analysis. 828 F.3d at 592.

Instead, it held that the grant of summary judgment should be affirmed on scienter grounds. In doing so, the court rejected the district court’s reliance on Horning’s advice-of-accountants defense. The court explained that while such reliance can negate scienter in some cases, Horning had failed to lay the proper evidentiary basis for the defense here. Because Horning had made no showing of the precise facts communicated to (or withheld from) its accountants, or of the exact advice it had received, the district court had no way to determine whether Horning’s reliance was reasonable.

Nonetheless, the court held that summary judgment was appropriate because the union had failed to raise a genuine question of fact as to whether Horning knew that its flat, hourly deductions violated the Davis-Bacon Act. As the court explained, nothing in the Act required Horning to calculate the benefits actually used by employees to determine whether the deduction from a given employee’s paycheck exceeded the value that employee had received. As a result, Horning did not demonstrate a reckless disregard for the truth of its statements by failing to make such an inquiry.

The court reached a similar conclusion with respect to the deductions for employees not yet eligible for benefits. It noted that Department of Labor regulations permitted employers to make such deductions when required to do so by an insurance plan. Those regulations did not speak, however, to deductions like these, which were instead paid into a trust, and the factual record failed to reveal whether the contributions in this case were in fact contractually required.

The court found that these open questions created sufficient ambiguity to defeat any inference that Horning knew (or acted in deliberate ignorance of whether) it was violating the Act.

Dissent

In dissent, Judge Posner agreed with the majority’s advice-of-accountants analysis, but disagreed that no jury question existed on knowledge.

This disagreement primarily hinged on five employees who, based on Judge Posner’s view of the record, continued to have deductions taken out of their paychecks after they became eligible for benefits but chose not to enroll. As to these employees, he observed, there could be no ambiguity that the deductions were improper, since no conceivable regulation would permit withholdings from employees who had chosen to opt out of the plan. Horning, as an experienced contractor on Davis-Bacon Act contracts, knew or should have known that these deductions violated the Act.

While the dissent did not fully engage with Escobar’s implied false certification analysis, Judge Posner made clear that he viewed these facts as satisfying that standard. With relatively little discussion, he pointed to the company’s flat deduction practices, and to evidence that some of these funds had been improperly diverted to Horning’s owner and a relative of its general manager. In Judge Posner’s view, Horning’s failure to disclose this information rendered false its certification that deductions had gone towards insurance benefits.

Implications

On its surface, the underlying labor dispute in Horning would appear to be an odd fit for an action under the FCA. The union’s decision to proceed through a qui tam suit, rather than bringing a direct claim against Horning, may have been motivated in part by doubts about the availability of a private right of action under the Davis-Bacon Act. See, e.g., Lewis v. Gaylor, Inc., 914 F. Supp. 2d 925, 926 (S.D. Ind. 2012) (finding that the Seventh Circuit would likely depart from its earlier precedent and hold that no private right of action exists). This creative use of the statute serves as a reminder to companies receiving federal funds of the wide-ranging and sometimes unexpected ways in which they may be subject to FCA liability. Horning is also notable in showing a Seventh Circuit panel split over tackling the implications of Escobar so soon after the opinion issued.

Horning makes another thing clear: The advice-of-accountants defense, and its analogue, the advice-of-counsel defense, can be powerful tools in a defendant’s arsenal, but courts are reluctant to apply them unless the defendant has made fulsome disclosures about the consultations in question. Asserting that outside experts have sanctioned the defendant’s conduct may not be sufficient unless the content of those discussions is laid bare.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.