United States: First To File: Issue 11

In this issue:

• Department of Justice (DOJ) authors amicus brief in Supervalu case before SCOTUS
• A hospital survives summary judgment on its claim that defendants filed a false FCA action in bad faith to interfere with its business
• Detroit Land Board Authority settles TARP-Related FCA claim
• Ninth Circuit to wrestle with Court of International Trade jurisdictional issue

Confusing Regulations No Excuse, DOJ Argues

United States ex rel. Schutte v. Supervalu Inc., Nos. 21-1326 & 22-111.

With four separate groups having already filed amicus briefs, DOJ has submitted its own brief in the combined Supervalu and Safeway cases before the Supreme Court. Before the Court is the contentious issue of whether under the False Claims Act (FCA) a "reasonable interpretation" of a regulation renders their "subjective intent" legally irrelevant in determining liability. The Seventh Circuit sided with the defendant pharmacies, affirming the district court's grant of summary judgment.

DOJ urged the Court to reverse the Seventh Circuit, arguing that defendants should not escape liability by claiming they followed a reasonable interpretation of a given regulations, regardless of their subjective intent in doing so. DOJ further argued that the FCA's definition of knowledge already provides for liability where a defendant has subjective intent and that the Seventh Circuit's ruling overly restricted these definitions. DOJ also relied on the Safeco decision from 2007 where the Court interpreted the Fair Credit Reporting Act's (FCRA) "willfulness" requirement to establish a defense for objective-reasonableness. DOJ argued that the Court's decision cannot apply to a statute such as the FCA which specifically contemplates a defendant's subjective intent in the three definitions of "knowledge" thereunder. DOJ further emphasized that "[t]he fact that a defendant who believes she is submitting false claims might not be certain about the claims' falsity does not absolve her of culpability under the FCA's statutory standard." DOJ argued that a defendant who can "identify wrong-but-reasonable exculpatory theories or interpretations after those events occurred" cannot be permitted to "retroactively alter the state of mind with which the person engaged in the specified conduct."

The Court's decision is expected by the end of June 2023. We will provide analysis of the decision upon its release.

Liar, Liar, Relator's Pants On Fire

Marietta Area Healthcare, Inc. v. King, No. 5:21-cv-25 (D.W. Va. Feb. 23, 2023).

Marietta Memorial Hospital (Marietta) survived a motion for summary judgment in its suit against a former employee of a business rival and that rival's general counsel alleging that they acted in "concerted efforts" against Marietta by filing a false FCA suit in 2016. The 2016 FCA suit alleged that Marietta paid kickbacks to physicians and submitted false claims to federal programs, such as Medicare and Medicaid. The government declined to intervene in the 2016 suit and sought dismissal of the complaint.

In its suit for malicious prosecution, tortious interference with business relationships, abuse of process, fraudulent legal process, and civil conspiracy, Marietta alleged that defendants, who were employees of the rival hospital Camden Clark Health Services, filed the initial FCA suit in bad faith to "interfere with the business and reputation of Marietta." The complaint alleged that defendants planned to file the lawsuit, which would begin a judicial action and federal investigation, with insufficient support knowing that the existence of the suit and investigation would spread widely among the surrounding community.

The court ultimately denied the defendant's summary judgment motion. The court held that the litigation privilege, which protects communications uttered or published during the course of a judicial proceeding from forming the basis of a civil action, did not bar suit at this stage because there remained a genuine issue of material fact as to whether the defendants were in a concerted effort against Marietta. The court also held that the FCA does not preempt state remedies for improper conduct, so Marietta's suit is not barred under the federal preemption doctrine. The court also rejected defendant's argument that the court should grant summary judgment because Marietta had no experts, agreeing with Marietta's arguments that expert testimony regarding the law of qui tam actions is unnecessary. And it held the First Amendment does not, as a matter of law, protect defendants from suit under Noerr-Pennington, which otherwise protects those who engage in "petitioning activity" including litigation, and held there is a genuine issue of material fact as to whether the 2016 FCA claim was a "sham," which would trigger an exception to the Noerr-Pennington protection. Having overcome these hurdles, the court finally found a genuine issue of material fact as to each of Marietta's claims against the defendants.

Blast from the Past: Detroit Settles TARP-Related FCA Claim

The Detroit Land Bank Authority announced that it shall pay $1.5 million to the federal government as part of an FCA claim for demolition invoices that were allegedly not properly verified. The three-year federal investigation alleged that the Detroit Land Bank Authority improperly received $13 million for backfill dirt utilized by demolition contractors that it was unable to verify. The funds were given to Detroit beginning back in 2013 under the Troubled Asset Relief Program, known as "TARP," and the federal Hardest Hit Fund program. As part of the settlement, the Detroit Land Bank Authority has not admitted to liability and instead maintains it verified amounts correctly.

Ninth Circuit Appeal Gets Universally Bananas in Customs FCA Case

Island Industries, Inc. v. Sigma Corporation, 22-55063 (9th Cir. 2022)

Island Industries, a manufacturer of pipes and related components, brought a qui tam relator FCA case against Sigma, a supplier of water and wastewater infrastructure products alleging that Sigma submitted false documents to the US Customs and Border Protection (CBP) to avoid paying anti-dumping duties on pipe fitting it had imported from China. In October 2021, a jury sided with the relator and awarded roughly $24.2 million in damages against Sigma under the FCA's treble damages provision, and $1.8 million in civil penalties.

In June 2022, Sigma appealed to the Ninth Circuit, arguing it was wrongly penalized in light of the US Commerce Department ruling that antidumping duties for pipe fittings from China were only owed prospectively from October 30, 2020 onward. In light of that ruling, Sigma asserted that (1) without an obligation to pay the government, there cannot be any false claims or damages and (2) it hadn't acted "knowingly" because it had made an "objectively reasonable" interpretation of the relevant antidumping order. ¹ Island countered by stating that, regardless of the Commerce Department's ruling, Sigma had lied about the type of products that it was importing. On January 10, 2023, the circuit court heard oral argument on these issues but, on January 23, 2023, it issued an order requesting briefing on the issue of jurisdiction – whether the relator is "the United States" for the purposes of jurisdiction in an FCA case where the government does not intervene.

The jurisdictional briefing centered around United States v. Universal Fruits and Vegetables Corp., a 2004 Ninth Circuit decision holding that the Court of International Trade (CIT) has exclusive jurisdiction over actions to recover customs duties that are "commenced by the United States." Sigma argued that the Ninth Circuit should extend the Universal Fruits ruling and hold that FCA qui tam cases are effectively "commenced by the United States" because they are brought under the powers of the federal government. According to Sigma, then, the CIT has exclusive jurisdiction over this case. ² The federal government, as amicus curiae, and relator, urged the Ninth Circuit to hold that a district court could decide a False Claims Act case alleging that an importer wrongly skirted duties on pipe fittings through the submission of false documentation to CBP. The government and relator emphasized that although filing a qui tam case where the government does not intervene is simply for the benefit of the government, the FCA is clear that a private relator is not the same party as "the United States." The government and relator also distinguished the facts of Universal Fruits, pointing out that while the government itself filed the case against Universal Fruits, Island, in contrast, filed the case against Sigma, acting as FCA relator. Therefore, the government and relator argued that the district court's jurisdiction over the underlying customs duties FCA case was proper.

The government argued that Universal Fruits was wrongly decided and urged an en banc Ninth Circuit panel to overturn the decision but, at a minimum, argued that the three-judge panel should find that Universal Fruits does not apply to cases involving qui tam relators.

Footnotes

1. The "knowingly" issue is currently before the Supreme Court in United States ex rel. Schutte v. Supervalu Inc., Nos. 21-1326 & 22-111.

2. The government and relator point out, however, that Sigma's argument is based on the mistaken assumption that the CIT would find it had jurisdiction over FCA cases. Instead, the CIT found that its jurisdiction did not extend to all customs-related matters, but only to actions to "recover customs duties" and that FCA cases do not recover customs duties, they impose liability for a defendant's fraud on the government.