United States: Reasonable Interpretation of Ambiguous Regulation May Not Preclude False Claims Act Liability

Jerome W Hoffman and Michael G Prendergast are Partners in our Jacksonville office.

HIGHLIGHTS:

  • A recent ruling by the U.S. Court of Appeals for the Eleventh Circuit establishes that a defendant in a False Claims Act (FCA) case cannot rely on a defense that there was no intent to defraud the government just because the defendant had a reasonable interpretation of an ambiguous government regulation.
  • The ruling in a qui tam FCA lawsuit filed by former sales employees of a diabetic testing supplies distributor gives notice that, at least in the Eleventh Circuit, ambiguity alone will not provide an impenetrable shield against FCA liability for healthcare and other contractors responsible for ensuring the accuracy of claims they submit for reimbursement by the government.

A recent appellate court ruling governing all federal court cases in Florida, Georgia and Alabama establishes that a defendant in a False Claims Act (FCA) case cannot rely on a defense that there was no intent to defraud the government just because the defendant had a reasonable interpretation of an ambiguous government regulation.

In a qui tam FCA lawsuit filed by former sales employees of a diabetic testing supplies distributor, the U.S. Court of Appeals for the Eleventh Circuit rejected the district court's application of an "erroneous scienter standard" that would allow defendants to avoid liability by identifying a "reasonable interpretation of any ambiguity inherent in the [allegedly violated] regulations". In its place, the Eleventh Circuit announced that the "correct standard" should be "whether the defendant actually knew or should have known that its conduct violated a regulation in light of any ambiguity at the time of the alleged violation." United States of America, Ex Rel. Phalp, et al. v. Lincare Holdings, Inc. et al., Case No. 16-10532, 2017 WL 2296878 (11th Cir. May 26, 2017).

Applying the correct "known or should have known" standard, the Eleventh Circuit ultimately affirmed the lower court's order granting summary judgment for the defendants. Nevertheless, the Court's opinion gives notice that, at least in the Eleventh Circuit, ambiguity alone will not provide an impenetrable shield against FCA liability for healthcare and other contractors responsible for ensuring the accuracy of claims they submit for reimbursement by the government. 

Case Background

Lincare Inc. supplied oxygen, respiratory and other services to Medicare patients with Chronic Obstructive Pulmonary Disease (COPD). Lincare also sold diabetic testing supplies through Diabetics Experts of America – a fictional name registered by Lincare. Diabetics Experts called persons to whom Lincare had previously provided Medicare-covered items and services related to their COPD. Diabetics Experts offered these persons a free diabetic testing monitor and the opportunity to purchase blood-testing strips.

Diabetic Experts submitted claims for the blood-testing strips to Medicare, using assignments of benefits (AOBs) that the Medicare beneficiaries had previously given Lincare in connection with products and services Lincare had provided related to their COPD. Diabetic Experts did not obtain AOBs specifically related to diabetic testing, and the AOBs the Medicare beneficiaries had provided to Lincare were generic in nature, with no reference to diabetes, COPD, or any other specific medical condition, product, medication or service. The relators claimed that Lincare violated Medicare regulations by submitting claims to Medicare using the generic Lincare AOBs, instead of including new AOBs when requesting reimbursement for blood testing strips.

The relators sued Lincare and its holding company under 31 U.S.C. §3729(a)(1)(A-B) of the FCA, which imposes liability on any person who:

(A)    knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or]
(B)    knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim[.]

The relators sued under "false certification theory" – alleging that the defendants had falsely certified they had complied with a Medicare statute or regulation, the compliance with which was a condition for government payment.

The Eleventh Circuit affirmed the district court's ultimate determination that the relators' evidence was not sufficient to allow a reasonable jury to conclude that the defendants had knowingly submitted false claims. Namely, the Eleventh Circuit agreed that neither the plain language of the underlying Medicare regulation nor emails that the relators offered as evidence suggested that any of the defendants "believed or had reason to believe they were violating Medicare regulations."

Eleventh Circuit Modification

In so ruling, however, the Eleventh Circuit modified the district court's decision to explicitly disapprove the lower court's reasoning that "a defendant's reasonable interpretation of any ambiguity inherent in the regulations belies the scienter [or knowledge] necessary to establish a claim of fraud under the FCA." The Eleventh Circuit explained that, while ambiguity may be relevant to a scienter analysis, it does not foreclose a finding of scienter. In fact, the court specifically stated that scienter can exist even if a healthcare provider's interpretation of an inherently ambiguous regulation is reasonable. Thus, the Eleventh Circuit stated that the "correct standard" is "whether the defendant actually knew or should have known that its conduct violated a regulation in light of any ambiguity at the time of the alleged violation."

In its discussion leading to the enunciation of this standard, the Eleventh Circuit noted that the FCA defines "knowing" and "knowingly" to include not only "actual knowledge" and "deliberate ignorance" but also "reckless disregard", 31 U.S.C. §3729(b). The court further observed that Congress included the "reckless disregard" provision "to capture the 'ostrich' type situation", whereby a healthcare provider or other government contractor has "'buried his head in the sand' and failed to make simple inquiries which would alert him that false claims are being submitted."

Considerations and Takeaways

Accordingly, healthcare and other government contractors should proceed with caution when submitting Medicare and other claims that require the contractors to certify compliance with ambiguous regulations. Contractors should consider at least some limited inquiry before submitting claims, if the legitimacy of those claims will depend on the correct interpretation of an ambiguous Medicare or other regulation. The court's opinion in Phalp provides no clear guidance on what level of inquiry might suffice. At a minimum, however, healthcare and other contractors should consider obtaining up-to-date legal advice to ensure thorough legal research that might clarify an ambiguous regulation or provide support for the provider's or contractor's reasonable interpretation. Alternatively, the provider or contractor may seek formal or informal guidance from the purchasing agency as to the agency's interpretation of the regulation.

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.

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