What happens when a government contractor who thinks its contract performance complied with applicable statute or regulation later learns that it actually was out of compliance?  Are its invoices for that performance false claims that violate the False Claims Act?

The answer depends on whether the contractor acted “knowingly.”  A March 30, 2012 decision of the Fourth Circuit Court of Appeals highlights the fact that proving a False Claims Act violation requires not only the submission of a claim that is false, but also that the false claim was submitted “knowingly”—the contractor knew the claim was false or acted with deliberate ignorance or reckless disregard for the truth or falsity of the claim. United States ex rel. Drakeford v. Tuomey Healthcare System Inc., No. 10-1819 (4th Cir. Mar. 30, 2012) [pdf].

The Tuomey case was a qui tam case—a False Claims Act lawsuit brought by an individual—and the Government joined in the case. A hospital submitted Medicare claims for procedures referred to the hospital by physicians who had a financial relationship with the hospital. The Stark Law prohibits such referrals in order to remove an incentive for unnecessary medical procedures. The hospital used split billings, allegedly trying to conceal violations of the Stark Law.

The trial judge instructed the jury that a claim resulting from a violation of the Stark Law was “false” within the meaning of the False Claims Act. But he also instructed that finding a violation of the False Claims also required the jury to determine that the hospital “knowingly” submitted the false claims.

The jury found that the hospital violated the Stark Law but that the hospital did not violate the False Claims Act, thus apparently finding that the hospital did not knowingly submit a false claim. The district court judge set aside the jury’s verdict as to the False Claims Act violations.  He ordered the hospital to pay $44 million for the Stark law violations and granted a new trial “on the whole issue of the FCA.”

The Fourth Circuit vacated the district court order and remanded the case for a new trial on all issues. While the Fourth Circuit decision largely involves interpretation of statutes and regulations applicable to the health care industry, the court’s approach to False Claims Act implications of statutory and regulatory noncompliance is of interest should be of interest to all government contractors. The Tuomey decision demonstrates that such noncompliant requests for payment do not violate the FCA unless they are submitted knowingly.  The claimant must have known them to be false or did not care about whether they were false. 

This “knowing” requirement should be of some comfort to those of us who work hard to understand and comply with the complex web of statutes and regulations governing the various industries in which government contractors work. We do our best to address adopt accurate interpretations of rules that are not always clear. But what happens if years later some contrary interpretation comes down from on high indicating that we got it wrong and that the contractor’s performance failed to comply with applicable statutes and regulations? With a proper application of the “knowing” requirement, a contractor who submits claims for payment in a good faith and reasonable belief that they are proper is not liable for False Claims Act violations even if later on it turns out that the initial interpretation was wrong. We should continue to take conservative positions to avoid having to return payments for performance later found to violate a statute or regulation. But there is reason for confidence that good faith performance will not result in FCA violations.