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After Escobar: Proving the Defendant Acted With the Requisite Knowledge

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  • Posted on: Jul 26 2016

In Universal Health Services, Inc. v. United States ex rel. Escobar, the U.S. Supreme Court unanimously confirmed that the false certification theory “can be a basis for liability” under “some circumstances.” (See blog post here.)  Those circumstances are: (1) the defendant does not merely request payment, but also makes specific representations about the goods or services provided; and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading.  As to the second circumstance, the Court held that a misrepresentation about legal compliance does not become “material” simply because the government expressly labeled the legal requirement as a “condition of payment,” or because the government could choose to withhold payment if it knew about the noncompliance. “What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.”

Earlier this month, the Seventh Circuit considered the knowledge aspect of the second condition identified by the Supreme Court.  In United States ex rel. Sheet Metal Workers Int’l Assoc. v. Horning Investments, LLC, No. 15-1004 (7th Cir. July 7, 2016), the Seventh Circuit affirmed the dismissal of a False Claims Act complaint, finding that the relator failed to prove with sufficient evidence that the defendants knew they were submitting a false claim to the government in violation of a statute that, according to the court, was ambiguous in meaning.

Sheet Metal Workers involved a construction project for the U.S. Department of Veterans Affairs.  The defendant, Horning Investments doing business as Horning Roofing & Sheet Metal, LLC (“Horning”), was hired as a sub‐contractor for the project; its workers were represented by Local 20 of the Sheet Metal Workers International Association (the “Union”).  The Union contended that Horning was paying its workers less than the amount required under the Davis‐Bacon Act, which requires contractors who perform construction projects for the federal government to pay their workers the “prevailing wage” for pay and fringe benefits.  The Union claimed that Horning improperly deducted a flat $5.00 per hour contribution from member paychecks, which was to be paid into an insurance benefit trust.  The Union argued that Horning deducted the money regardless of whether the employee was eligible for any benefits and without tying the deduction to the actual monetary value of the benefit each employee received.  The Union sued under the False Claims Act rather than under the Davis‐Bacon Act, claiming that the payroll reports and applications for payment submitted to the federal government violated the False Claim Act.

The Seventh Circuit (by Chief Judge Diane Wood, writing for herself and Judge Frank Easterbrook) affirmed the district court’s summary judgment dismissal because there was insufficient evidence that Horning acted with the requisite knowledge that the claims it submitted were false.  First, the court addressed the Union’s contention that Horning never tried to determine whether each employee received the equivalent of $5.00 per hour in fringe benefits, holding that nothing in the Davis-Bacon Act and relevant regulations required employers to tailor fringe benefit contributions to the benefits each employee actually received. Consequently, “the fact that [Horning] failed to do so tells us nothing about whether [it] knew that [its] certifications of [its] compliance with the [Davis-Bacon] Act were false.” Second, the court addressed the Union’s contention that some employees from whose checks the deductions were made were not yet eligible to receive fringe benefits. In rejecting this argument, the court observed that there was nothing in the Department of Labor field operations handbook stating that the Davis‐Bacon Act permits an employer to count contributions to an insurance plan for employees who are not yet eligible for coverage when the plan itself requires the employer to make that contribution during the waiting period.  In the absence of government clarity and a record supporting a contractual obligation to make contributions during the waiting period, the court held that “there is enough ambiguity about this matter that we cannot infer that Horning either knew or must have known that it was violating the Davis‐Bacon Act.”

The Court concluded: “Horning may, or may not, have violated the Davis‐Bacon Act. But the Union did not bring a claim under that statute. Instead, it sued under the False Claims Act, which requires proof that the defendant knowingly submitted a false claim to the government for payment. The Union did not present enough evidence to survive summary judgment on that issue, and so we AFFIRM the judgment of the district court.”

Judge Richard Posner dissented, finding that “an experienced contractor on Davis-Bacon Act projects” like Horning “must have known about the statute’s requirements.”  If Horning did not know, “it must have been because [Horning] closed [its] eyes to those requirements — a good example of ostrich behavior, itself a good example of deliberate indifference within the meaning of the False Claims Act.”

Judge Posner further found that there was “uncontroverted evidence” showing that a number of employees had the $5.00 per hour deduction “credited to the trust” even though “they didn’t participate in the benefits program” and therefore “never benefited from the $5 that was an ostensible part of their compensation.”  According to Judge Posner, the record showed that “[n]o one in management attempted to match the $5 deductions to each employee’s eligibility to receive benefits .…” He also found evidence in the record showing that “at least $54,000” of the wage deductions “was diverted [i.e., misappropriated] to the company’s owner and to a relative of the general manager, neither of whom … was entitled to receive” the funds.  “This is further evidence that Horning knowingly made false statements in claiming that the $5 of ‘fringe benefits’ it took out of each worker’s hourly salary went to ‘appropriate programs for the benefit of such employees,’ that is, by buying insurance for the employee.”  Quoting Escobar, Judge Posner concluded that “[w]hen ‘a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant’s representations misleading with respect to the goods or services provided.’ That’s this case.”

Judge Posner would have remanded the case to the district court “[t]o understand the full scope and gravity of Horning’s conduct.”

TAKEAWAY:

The majority opinion suggests that when a statute is ambiguous in meaning, relators will have a difficult time proving that the defendant knowingly submitted a false claim in violation of that law.  The dissent, on the other hand, takes a different view, suggesting that differing interpretations of a statute should not overshadow clear requirements applicable to the alleged false statement.

In Sheet Metal Workers, the certification found to be false provided, in relevant part, that “no deductions have been made either directly or indirectly from the full wages earned by any person, other than permissible deductions.” The Davis-Bacon Act “permits an employer to count contributions to an insurance plan for employees not yet eligible for coverage only if the plan requires the employer to make those contributions during the employee’s waiting period—that is, after the employee has been hired but before he is eligible for benefits.” The evidence showed that a number of employees had $5.00 per hour deducted from their pay for a longer period than their waiting period without any corresponding benefit. Thus, “[b]ecause [they weren’t] receiving the $5 an hour either in cash or in insurance during that two‐month period, [they were] receiving less than the Davis‐Bacon Act entitled [them] to.”

This blog believes that the dissent’s analysis is consistent with the Supreme Court’s approach in Escobar

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