Overview

by Paul D.Scott
November 20, 1998

Published by the American Bar Association Center for Continuing Legal Education as part of A National Institute on the Civil False Claims Act and qui tam Enforcement

I. Introduction

Prior to 1986, the False Claims Act (“FCA” or “Act”), 31 U.S.C. § 3729 et seq., did not explicitly cover false claims made to reduce or avoid an obligation to the United States. As part of the 1986 Amendments to the Act, Congress added a provision to address these so-called “reverse false claims.” The provision reads, in pertinent part, as follows:

(a) Liability for certain acts. — Any person who — (7) knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government, is liable to the United States Government . . . 31 U.S.C. § 3729(a)(7).

A critical issue in the interpretation of subsection (a)(7) has been the exact definition of the term “obligation.” Courts are split on the issue. The first courts to consider the question construed subsection (a)(7) broadly to cover false statements made to avoid contingent fines, penalties, or forfeitures that might be imposed by the United States for the violation of a regulation or statute. See United States ex rel. Sequoia Orange Co. v. Oxnard Lemon Co., 1992 WL 795477 (E.D. Cal.); United States ex rel. Stevens v. McGinnis, Inc., 1994 WL 799421 (S.D. Ohio); United States ex rel. Terry J. Wilkins v. State of Ohio, et al., 885 F. Supp. 1055, 1064 (S.D. Ohio 1995); and Pickens v. Kanawha River Towing, 916 F. Supp. 702 (S.D. Ohio 1996). More recently, however, the Eighth Circuit Court of Appeals and at least two district courts have construed the term obligation more narrowly as referring only to an existing duty to pay money or property and have specifically rejected the notion that a contingent fine, penalty or forfeiture constitutes an “obligation” under the terms of the Act. See United States v. Q International Courier, Inc., 131 F.3d 770 (8th Cir. 1997); United States ex rel. American Textile Manufacturers v. The Limited, Inc., 1997 U.S. Dist. LEXIS 18142 (S.D. Ohio November 13, 1997) (American Textile I); United States ex rel. American Textile Manufacturers v. The Limited, Inc., 179 F.R.D. 541 (S.D. Ohio 1997) (American Textile II); and United States ex rel. S. Prawer & Co. v. Verrill & Dana, 946 F. Supp. 87 (D. Me 1996). A few additional cases have acknowledged the viability of reverse false claims causes of action under circumstances that satisfy the standards set forth in both the earlier cases and in the recent Eighth Circuit decision Q International Courier, Inc. See United States. v. American Heart Research Foundation, Inc., 996 F.2d 7, 9 (1st Cir. 1993); United States ex rel. Maclennan v. JCB, Inc., Civ. No. WN-88-874 (D. Md. Nov. 3, 1992); United States ex rel. Dunleavy v. County of Delaware, 1998 WL 151030 (E.D. Pa. 1998).

Each of the foregoing cases is reviewed in turn below under the heading “Current Cases.” The legislative history of subsection (a)(7), other related cases, the Government’s position on the issue, and the subject of preemption are dealt with separately. The ultimate conclusion of the paper is that the Eighth Circuit’s narrow definition of the term “obligation” as “a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness,” or some close variation of this definition, is likely to carry the day, and the successful use of the FCA to prosecute false statements made to avoid potential fines, penalties or forfeitures is unlikely to continue in the future. Q International Courier, Inc., 131 F.3d at 773.

II. Current Cases

A. Subsection (a)(7) Construed Broadly

In United States ex rel. Sequoia Orange Company v. Oxnard Lemon Company, et al., 1992 U.S. Dist. LEXIS 22575, the relator filed suit against several lemon importers, the Secretary of Agriculture and several lower level employees of the Department of Agriculture. The suit alleged, inter alia, that the defendant importers conspired together to submit false reports of their lemon shipments to the Lemon Administrative Committee (“LAC”) to avoid paying per carton assessments to the LAC and to avoid paying statutory forfeitures for shipments of lemons in excess of weekly shipping quotas. The United States intervened in the action and filed a motion to dismiss, arguing, in pertinent part, that the relator could not state a reverse false claim with respect to the potential fines or forfeitures that it avoided through its false statements, “because violation of an administrative enforcement statute does not constitute an obligation to transmit money or property to the Government.” 1992 U.S. Dist. LEXIS 22575, *5 (internal citations omitted).

The district court rejected the argument, holding that the relator’s claims based on alleged false statements to avoid payment of fines or forfeitures were actionable under the FCA. In reaching this conclusion, the court reviewed the applicable regulations under the Agricultural Marketing Agreement Act of 1937 (“AMAA”), 7 U.S.C. § 608c, which provided for the imposition of criminal penalties and civil fines, and which also provided for the imposition of a forfeiture in an amount equal to the market value of the excess fruit imported in violation of the quota or allotment fixed by the Secretary. Id. at *25. These regulations, in the view of the court, “established a fixed amount of damages recoverable by the Government for shipments in excess of quota, a claimed obligation equal to the market value of the overshipped fruit.” Id. As a result, “the Government had ‘potential claims’ for forfeitures and fines against defendants for the alleged overshipments,” which defendants concealed by submitting false shipping reports. Id. at 26. “Had the Government successfully prosecuted defendants for the violations, the United States Treasury would have been enhanced through the payment of the appropriate fines and forfeitures.” Id. The court thus effectively held that the term “obligation” in subsection (a)(7) covered contingent fines and forfeitures.

In United States ex rel. Darrell Edward Stevens, et al. v. McGinnis, Inc., et al., 1994 U.S. Dist. LEXIS 20953, *14, the allegation of a reverse false claim arose out of the defendant’s “failure to record its discharge of bilge slop and other pollutants into the Ohio River on its logs, and its failure to report these pollution spills to the United States Government as required by the Clean Water Act.” The court held that “the conclusion reached in the Sequoia Orange case . . . is equally applicable to this case.” Id. at *18. “By failing to record and report these illegal discharges of pollutants into the Ohio River, defendant McGinnis may have made misrepresentations to the Government thus, avoiding the fines, penalties, and cleanup costs imposed by § 311(f) of the Clean Water Act, 33 U.S.C. § 1321(f).” Id. at *19. The court only required that the plaintiff prove that the false information, whether in the form of an affirmative false statement or omission, have been knowingly submitted to the United States, id. at *20, and the court suggested that the defendant’s vessel logs “arguably constitute[d]” such misrepresentations. Id.

Both McGinnis and Sequoia Orange were cited approvingly in United States ex rel. Terry J. Wilkins v. State of Ohio, et al., 885 F. Supp. 1055, 1064 (S.D. Ohio 1995). While the definition of the term “obligation” was not central to the case, the court essentially reiterated the reasoning in Sequoia Orange and McGinnis on that issue. The court then focused on the question of whether subsection (a)(7) required proof that defendants actually submitted a false representation to the Government.

The reverse false claim allegation in Wilkins was based on allegations that the “defendants destroyed documents, tried to cover up the misuse of funds, failed to conduct proper audits, and failed to inform the Government about the improper use of funds” in the Community Services Block Grant Program, a federally funded program administered by the State of Ohio. The complaint failed to allege, however, “that defendants were obligated to identify misspent funds” or “any other allegations concerning records or statements which were false due to omissions submitted to or reviewed by the government.” Id. at 1064-1065. The court thus distinguished the case from McGinnis, where such misrepresentations had allegedly been made in the form of false entries in vessel logs. Id. at 1064. In the view of the court, the simple allegation that “defendants did not tell the United States Government about the misuse of federal funds and that they all acted to prevent repayment to the United States Government” was not sufficient to state a claim under subsection (a)(7). Id.

Violations of the Clean Water Act, 33 U.S.C. § 1251 et seq., were again the basis for reverse false claims allegations in Earl O. Pickens v. Kanawha River Towing, 916 F. Supp. 702 (S.D. Ohio 1996). The relator in Pickens alleged that the defendants discharged bilge into the Ohio River, then failed to record that fact in the vessel’s log. The court held that such failures to report can create liability under subsection (a)(7). In reaching its decision, the court agreed with the holding in Wilkins that the Act requires proof that “the defendant prepare, create or submit some type of statement or record that is false” and that “a failure to report does not constitute a statement or record.” Id. at 708. The court also acknowledged that defendants’ had no statutory obligation to make a record of discharges. Id. Nonetheless, the court concluded that defendants’ alleged failure to record the discharge in the vessel’s log would have created a false record, and since the Government relies upon such logs as part of its regulatory role, then such a record would constitute a false statement to avoid an obligation to the Government. Id. The court referred to the “payment of fines owed to the United States under the CWA” as the obligation that defendants were seeking to avoid. Id. at 705. It did not engage in any analysis to explain its conclusion that potential fines constituted an “obligation” under the Act.

B. Subsection (a)(7) Construed Narrowly

The first decision to construe subsection (a)(7) to exclude claims based on false statements to avoid fines, penalties and forfeitures was United States ex rel. S. Prawer & Co. v. Verrill & Dana, 946 F. Supp. 87 (D. Me. 1996). In Prawer, the relator brought suit against several attorneys who had represented Fleet Bank of Maine (“Fleet”) and the Federal Deposit Insurance Corporation in connection with the FDIC’s repurchase of a non-performing loan from Fleet. Id. Fleet had taken over the relator’s $2 million line of credit with Main National Bank when it was declared insolvent in early 1991. Id. at 88. Under the terms of its agreement with the FDIC, Fleet could make a “put” (that is, require the FDIC to repurchase) non-performing loans, including lines of credit, under certain conditions. Id. at 89. The relators alleged that Fleet made false statements to the FDIC in order to make the put of the relator’s loan. Id. The relators further alleged that Fleet’s lawyers and the FDIC attorney who supervised the firm learned after the fact that the put had been improper, but did not disclose that fact to the FDIC; instead, they concealed the impropriety. Id. The Government intervened to pursue Fleet but not the lawyer defendants. The case before the court involved the lawyer defendants only.

The relators made two principal arguments. First, relators contended that in paying for the put, the FDIC purchased an asset it was not obligated to purchase because of defects in the put. Id. at 90. Under its agreement with the FDIC, Fleet thus had an immediate obligation, in relators’ view, to repurchase the put. Id. When the lawyers concealed that obligation, reasoned the relators, they violated subsection (a)(7). After an extensive review of the agreement between Fleet and the FDIC, the court disagreed, concluding that, while Fleet may be liable to the FDIC on other grounds for any false representations made in connection with its put, “no contractual obligation to pay automatically [sprang] into existence” under its agreement with the FDIC after the FDIC accepted the put. Id. at 93. Accordingly, there was no existing obligation under the agreement for the lawyers to conceal in violation of subsection (a)(7). Id.

Relators’ second contention was that the lawyer defendants’ false representations concealed Fleet’s obligation to pay funds to the FDIC for violations of the False Claims Act, common law fraud and breach of the implied covenant of good faith and fair dealing. The court rejected this argument, observing “that obligation’ in the False Claims Act refers to something more than potential liability or moral or social duty; a legal obligation seems to be the touchstone.” Id. at 94. The court then focused on when a legal obligation to pay or transmit money exists, and it concluded that no such obligation exists immediately after the commission of a tort, a violation of the False Claims Act, or a breach of a contract (unless there is a specific remedy provided in the contract). Id. at 94. “Money is not owed’ without a specific contract remedy, a judgment or an acknowledgment of indebtedness.” Id. at 95. Since “Fleet had no such obligation to pay at the time the lawyer defendants acted,” the lawyer defendants thus could not be held liable under subsection (a)(7) for false statements to reduce an obligation to pay. Id.

The court criticized the decisions in Sequoia Orange, McGinnis, and Pickens for failing to discuss “why violations gave rise to an immediate obligation’ prior to any judgment except the general recitation of legislative history . . . .” The court conceded, however, that “the Sequoia Orange case is perhaps closer to the tax and lease cases where there was a fixed remedy that could be construed as an obligation.” Id. at 95, n. 14.

In a subsequent holding on relators’ motion for reconsideration in the same case, the court conceded that “the matter was not free from doubt,” but still maintained its basic position that the term “obligation to pay” included “judgment[s] . . . settlements, other contract remedies and acknowledgments of indebtedness.” U.S. ex rel. Prawer v. Verrill & Dana, 962 F. Supp. 206, 209 (D. Me. 1997) (emphasis added).

The Eight Circuit Court of Appeals cited the Prawer court decision with approval in United States v. Q International Courier, Inc., 131 F.3d 770 (8th Cir. 1997). The defendant in the case, Q International Courier (“Quick”), was engaged in a practice known as “ABA remail.” Id. at 772. In order to take advantage of differences in domestic and international mailing rates, Quick would transfer bulk mail from the United States to Barbados, then remail the letters individually back to the United States at reduced rates, thus achieving postage savings for its customers. Id. The United States alleged that Quick violated the reverse false claims provision of the Act, since it had made false statements to reduce its obligation to pay postage. Id.

In analyzing the Government’s claims, the Eighth Circuit echoed the reasoning set forth in Prawer, but expanded the definition of “obligation” to include a duty to pay money arising from a “statute” or “regulation.” Id. at 773: To recover under the False Claims Act, we believe that the United States must demonstrate that it was owed a specific, legal obligation at the time that the alleged false record or statement was made, used or caused to be made or used. The obligation cannot be merely a potential liability: instead, in order to be subject to the penalties of the False Claims Act, a defendant must have a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness. The duty, in other words, must have been an obligation in the nature of those that gave rise to actions of debt at common law for money or things owed. Id. at 773 (emphasis added).

In applying this rationale to the facts before it, the court of appeals reviewed the Postal Service’s International Mail Manual (June 9, 1997) (“IMM”). The Government relied upon language in the IMM indicating that “payment of domestic postage ‘is required to secure delivery of mail’ sent by or on behalf of a resident of the United States, if the foreign postage applied to the mail is lower than the comparable United States domestic postage rate.” Q International Courier, 131 F.3d at 773 (quoting IMM § 791). The court rejected this argument, however, based on the notion that the “language serves only to release the Postal Service from an obligation” to deliver mail sent by United States residents from certain foreign locations, “not to impose an obligation on anyone to pay postage.” Id.

The Government also claimed that the Private Express Statutes, 39 U.S.C. §§ 601-606, which prohibit the private carriage of letters in the United States, created an obligation on Quick’s part to pay postage. Id. at 773. The court disagreed with this contention as well. Even assuming that Quick may have violated the Private Express Statutes, the court concluded that the statutes did not create any fixed obligation to pay postage. Id. at 774. The implementing regulations of the Private Express Statutes permit the Postal Service to seek payment of a penalty in “‘an amount or amounts not exceeding the total postage,’” but it does not create an obligation to pay postage; it just sets the limit of a potential penalty. Id. at 774. The court thus held that the penalties did not provide a basis for liability under the Act. Id. “A potential penalty, on its own, does not create a common-law debt. A debt, and thus an obligation under the meaning of the False Claims Act, must be for a fixed sum that is immediately due.” Id.

The court reached similar conclusions with respect to the possible criminal penalties for violating the Private Express Statutes. Id. The court emphasized that “the fine is unrelated to the postage due,” and are “designed to punish one who violates the Private Express Statutes, not to create an obligation to pay postage.” Id.

Lastly, the court rejected the Postal Service’s assertion that Quick owed postage because ABA remail is in reality domestic mail, not international mail. The court assumed arguendo that the mail was domestic but still concluded that the Government had failed to establish a duty for Quick to pay postage, noting that the Government did not direct it “to any source imposing a duty on Quick’s part to pay postage on any mail other than those already rejected above.” Id.

In United States ex rel. American Textile Manufacturers Institute, Inc. v. The Limited, et al., 1997 U.S. Dist. LEXIS 18142 (S.D. Ohio November 13, 1997) (“American Textile I”) and United States ex rel. American Textile Manufacturers Institute, Inc. v. The Limited, Inc., et al., 179 F.R.D. 541 (S.D. Ohio 1997) (“American Textile II”), the court followed the trend of interpreting subsection (a)(7) narrowly. The relator in American Textile alleged that the defendants knowingly permitted manufacturers to misidentify the country of origin of goods in order to import amounts of those goods in excess of quotas imposed by the United States. Id. at *6-7. This conduct, in the relator’s view, violated statutes and regulations under which the United States could assess fines and penalties. Id. at *9-15. According to the relator, when defendants subsequently falsified the corresponding entry documents, they attempted to avoid obligations owed to the U.S. Government in violation of subsection (a)(7). Id.

The district court rejected the argument in two decisions — the first on a motion to dismiss (“American Textile I”) and the second on a motion to alter judgment (“American Textile II”). In the first decision, the court thoroughly reviewed the legislative history and relevant case law before concluding that Congress did not intend, by the 1986 amendments to the FCA, “to convert that Act into an all-inclusive vehicle for the enforcement of any federal statute or government regulation . . . whenever it can be found that some false statement has been made regarding conduct subject to monetary sanctions.” American Textile I, 1997 U.S. Dist. LEXIS 18142, *38. The court gave several examples of how a contrary interpretation of the Act (in the context of environmental statutes, OSHA regulations, and even civil rights claims under 42 U.S.C. § 1983) would create a “super enforcement tool with a private right of action for the imposition of some new additional penalty” beyond those already available under federal law. Id. at 38-45. The Court concluded that “[s]o drastic an expansion in the scope of the False Claims Act, through the use of language which strongly implies that there be some type of financial relationship between the defendant and the United States which is subject to being affected by an act of concealment or avoidance, could not reasonably have been intended.” Id. at *45.

The court did not, however, come up with a final definition of the term “obligation.” Id. at 48. The court stated that “the proper definition of the term ‘obligation’ may well go beyond that contemplated by the Prawer court to include matters other than direct contractual obligations or claims which have been reduced to judgment.” Id. But as to what additional matters might be covered, the court did not comment; it only held that “the language of § 3729(a)(7) is not so broad as to encompass every statutory or regulatory violation which might lead the United States to attempt to assess a fine or other type of monetary penalty against the violator.” Id. at *49.

In applying its reasoning to the facts before it, the court summarily rejected the relators’ claims based on defendants’ alleged concealment of potential liability for fines or penalties under the various importation laws cited by the relators. Id. The court spent more time, though, on the “closer question” of whether defendants could be held liable for allegedly concealing an obligation to pay a ten percent ad valorem duty (assessed on mismarked goods) through the filing of false entry documents. Id. at *50. In that situation, the court did not dispute that the amount of the duty was fixed; it focused instead on the contingent nature of the duty, noting that “[t]he act of importing such goods does not itself create “an obligation to pay or transmit money or property to the Government.” Id. at *51. (internal citations omitted). “Rather, if, after importation, the goods are then exported, destroyed or properly marked, there is no obligation to pay the additional ad valorem duty.” Id. Accordingly, the court concluded that the obligation did not exist at the time the false statements were made.

In further support of its position, the court pointed out that if it were to accept the relators’ position, it would be difficult for courts to determine the amount of the Government’s damages. Id. at *46. “It is difficult to envision what procedure would be used in an FCA case to determine exactly what amount of money, in the form of penalties or fines, the government would hypothetically be entitled to for violations of statutes or regulations which the government has chosen not to enforce directly against the defendant.” Id. at *47.

The court distinguished the case before it from one where the defendant falsely represented the country of origin in order to pay a lower duty. Id. at *50. In such a case, the court stated “there is clearly an existing obligation to pay the correct duty and, if not paid, the government has been deprived of duties to which it is entitled.” Id. The customs duties owed by the defendants in American Textile would have been the same whether or not the country of origin had been misrepresented. Id.

The court also explicitly distinguished situations where a government contractor falsely certifies that it has complied with a federal statute in order to qualify for payment by the Government. Id. at 40, n. 6. (citing United States ex rel. Fallon v. Accudyne Corporation, 880 F. Supp. 636 (W.D. Wis. 1995)). In the case before the court, no such false statements were being made to qualify for payment.

The district court’s second decision on defendant’s motion to alter judgment was reached after the Eighth Circuit’s holding in Q International. American Textile II, 179 F.R.D. 541. The district court relied heavily on the Eighth Circuit’s decision as well as the district court decision in Prawer in upholding the court’s original decision. Id. at 548-549. It offered little in the way of new analysis of the issues.

C. Neutral Decisions

Several courts considering subsection (a)(7) have reached conclusions that are generally consistent with both lines of authority referenced above.

In United States. v. American Heart Research Foundation, Inc., 996 F.2d 7 (1st Cir. 1993), defendants allegedly made false statements to qualify for a nonprofit mailing permit, which they used prior to 1986 to make for-profit mailings. The issue on appeal was the retroactivity of the reverse false claims provision of the Act. While ruling on this issue, the court indicated that the present version of the False Claims Act “clearly embraces” postage deficiency cases. Id. at 9. Since the obligation to pay postage at specified rates is a product of regulations promulgated by the Postal Service, the Court thus implicitly held that false statements made to reduce an obligation created by regulation can be the basis for an action under subsection (a)(7).

In United States ex rel. Maclennan v. JCB, Inc., Civ. No. WN-88-874 (D. Md. Nov. 3, 1992), an obligation created by regulation was again the focus of the case. The relator alleged that defendant knowingly misclassified vehicles imported from the United Kingdom in order to avoid customs duties. In denying defendant’s motion to dismiss, the court reviewed the FCA’s legislative history, concluding that “[w]hen the entire legislative scheme is evaluated, it becomes clear that the FCA is a detailed comprehensive enforcement mechanism” designed to address fraudulent attempts to avoid paying customs duties. Id. at 8.

The most recent decision on the subject of reverse false claims — United States ex rel. Dunleavy v. County of Delaware, 1998 WL 151030 (E.D. Pa. 1998) — came in the context of a sale by Delaware County of property that had been purchased in part with a Community Development Block Grant (“CDBG”) provided by the Department of Housing and Urban Development (“HUD”). Under the applicable regulations, the County was obligated to record the proceeds from the sale in reports submitted to HUD as “program income,” then treat the funds as additional CDBG funds subject to the requirements governing the use of CDBG funds. Id. at *3. The relator claimed that the County had failed to record the proceeds it received from the sale of the land and had used the funds for ineligible purposes. Id. The district court briefly reviewed the cases concerning subsection (a)(7) before concluding that “even under the most restrictive reading of § 3729(a)(7), the County was obligated to return the program income to the Government because once it failed to abide by the preconditions to retention . . . there was a present duty to pay money to the Government pursuant to HUD regulations.”

All of these decisions thus reach conclusions that are consistent with the broad reading of the term “obligation” in the Sequoia Orange, McGinnis, and Pickens cases yet are also compatible with the Eighth Circuit’s narrower definition of the term in Q International Courier. 131 F.3d at 773 (defining obligation as “a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness”). But see Prawer, 946 F. Supp at 95 (“Money is not owed’ without a specific contract remedy, a judgment or an acknowledgment of indebtedness”).

III. Legislative History

Since the FCA did not explicitly cover reverse false claims prior to 1986, there was a division among courts as to whether the Act created liability for such claims. The debate was resolved by the addition of 31 U.S.C. § 3729(a)(7) in 1986, which specifically imposed liability for the use of a false record or statement “to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.” The precise meaning of the term “obligation,” however, was not addressed directly in either the statute or the legislative history.

The Senate Report describes subsection (a)(7) as meant to apply to a person who fraudulently “attempts to defeat or reduce the amount of a claim or potential claim by the United States against him.” S. Rep. 99-345, 99th Cong., 2d Sess. 18 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5283 (emphasis added). The Report also states that “the Committee strongly endorses” the Supreme Court’s “opinion in United States v. Neifert-White Co., 390 U.S. 228 (1968), . . . that the False Claims Act “‘was intended to reach all types of fraud, without qualification, that might result in financial loss to the Government.’” Id. at 19. These two statements suggest that Congress intended the term “obligation” to refer to contingent obligations such as fines or penalties, not just to fixed legal obligations.

On the other hand, the Senate Report also states at another point that the amendment was intended “to provide that an individual who makes a material misrepresentation to avoid paying money owed to the Government would be equally liable under the Act as if he had submitted a false claim to receive money.” Id. (emphasis added). Moreover, the cases cited favorably in the Senate Report as the types of cases the Act was meant to cover all involved situations where the defendants had made false statements to avoid or reduce the amount of money they would otherwise have been obligated to pay the Government, without the Government first making a discretionary decision to assess a fine or penalty. Id. at 9, 18-19 (citing Smith v. United States, 287 F.2d 299 (5th Cir. 1961) (false expense reports reduced rent due to Government from public housing authority); United States v. Douglas, 626 F. Supp. 621 (E.D. Va. 1985) (film maker liable for understating amount owed to the Government for use of Navy F-14 aircraft); United States v. Gardner, 73 F. Supp. 644 (N.D. Ala. 1947) (defendant held liable for understating payments due Government for operating a housing project); United States ex rel. Rodriguez v. Weekly Publications, Inc., 9 F.R.D. 179 (S.D.N.Y. 1949) (false statements made to avoid payment of higher postage rate a violation of Act)).

Similarly, the Senate Report criticized decisions where the courts had failed to recognize reverse false claims as actionable when the amount due was fixed by regulation or contract. Id. at 9, 18 (citing United States v. Marple Community Record, Inc., 335 F. Supp. 95 (E.D. Pa. 1971) (false statements made to qualify for second class postage rates held not to violate the Act); United States v. Howell, 318 F.2d 162 (9th Cir. 1963) (court declined to hold concessionaire liable for under reporting profits, portion of which were to be paid to PX); United States v. Brethauer, 222 F. Supp. 500 (W.D. Mo. 1963) (same)).

The House Report discussing the House Bill, which contained language identical to that ultimately enacted in subsection (a)(7), contains language akin to that in the Senate Report. It states that the proposed bill “allows the Government to prosecute a false claim which has been filed for the purpose of reducing the amount the claimant owes to the Government.” H.R. Rep. No. 660, 99th Cong., 2d Sess. 20 (1986) (emphasis added).

The legislative history thus provides grounds for arguing both for and against an expansive interpretation of the term “obligation” in subsection (a)(7). See American Textile I, 1997 U.S. Dist. LEXIS 18142, *26.

IV. Related Cases

Several False Claims Act cases that do not deal directly with subsection (a)(7) nonetheless contain language that may be useful in interpreting the meaning of the term “obligation.”

In United States v. Neifert-White, 390 U.S. 228, 232 (1968), the Supreme Court stated that it “refused to accept a rigid, restrictive reading [of the False Claims Act].” In concluding that defendant could be held liable for making a false statement in an application for a loan by the Commodity Credit Corporation, the Court held that the Act “was intended to reach all types of fraud, without qualification, that might result in financial loss to the Government.” Id. Such language suggests that the Act should be construed expansively to reach false statements made to evade potential fines, penalties or forfeitures, as such false statements “might result in financial loss to the Government.” Id. The distinguishing factor in Neifert-White, though, is that the case focused on whether a false statement made in an application for a loan could constitute a false claim, which is obviously a very different issue from what definition should be given to the term “obligation” under subsection (a)(7). This is particularly true, since the Court has also stated in another case unrelated to subsection (a)(7) that the False Claims Act “was not designed to reach every kind of fraud practiced on the government.” United States v. McNinch, 356 U.S. 595, 599 (1958).

Also potentially helpful are several recent lower court decisions on the question of whether a more typical FCA action can be maintained under subsections (a)(1) or (a)(2) where the alleged false statement did not impact on either the amount of money to be paid the Government or the existence of the obligation to pay. In United States ex rel. Pogue v. American Healthcorp., Inc., 914 F. Supp. 1507 (M.D. Tenn. 1996), for instance, the principal allegation was that the defendants had referred Medicare and Medicaid patients to other providors in violation of self-referral and anti-kickback statutes, then presented claims for payment for services on behalf of the patients, implicitly representing that they had not violated any Medicare or Medicaid statutes or regulations. The Court concluded that the case could proceed because the relator “alleged that the government would not have paid the claim submitted by Defendants if it had been aware of the alleged kickback and self-referral violations.” Id. at 1513. In reaching this decision, however, the Court stated its belief that the FCA “was not intended as a stalking horse for enforcement of every statute, rule or regulation” that might give rise to a monetary claim by the Government. Id.

In United States ex rel. Thompson v. Columbia/HCA Health Care, 938 F. Supp. 399 (S.D. Tex. 1996), mod. 125 F.3d 899 (Fifth Cir. October 23, 1997), the district court dismissed a claim based on the same allegations. In reaching its decision, the court defined a false claim as a claim “that the government would not have had to pay but for the fraud.” Id. at 405. It also stated that the Act was not “intended to be used as a private enforcement device for the Medicare anti-kickback statute and [self-referral] laws.” Id. The court of appeals vacated the decision in part on the basis that the complaint alleged that compliance with the anti-kickback and self-referral laws were prerequisites to payment. United States ex rel. Thompson v. Columbia/HCA Health Care, 125 F.3d 899, 903 (Fifth Cir. 1997), But the court of appeals otherwise “agree[d] with the district court that claims for services rendered in violation of a statute do not necessarily constitute false or fraudulent claims under the FCA.” Id. at 902. See also United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996) (“[v]iolations of laws, rules, or regulations alone do not create a cause of action under the FCA;” false certifications of compliance create liability under the FCA when certification is a prerequisite to obtaining a Government benefit); Ab-Tech Constr. v. United States, 31 Fed. Cl. 429 (1994), aff’d 57 F.3d 1084 (Fed. Cir. 1995) (payment vouchers submitted by defendant held to be false claims, despite Government receiving fair value for its money, since defendant impliedly certified that it was eligible to participate in the program when it was not).

The foregoing cases, while not specifically addressing the issue of reverse false claims, all implicitly suggest that the term “obligation” in subsection (a)(7) should not be read to include potential claims for fines, penalties or forfeitures. None of the courts was prepared to recognize a False Claims Act action based on false representations concerning compliance with a statute, unless compliance with the statute was a prerequisite to payment. Under the broad reading of subsection (a)(7) suggested by Sequoia Orange, McGinnis and Pickens, however, no such requirement would be necessary, as relators could simply allege that the false statements submitted in connection with the statutory violations were false records to avoid an obligation to pay the relevant fines, penalties or forfeitures associated with violating the underlying statute. An expansive view of subsection (a)(7) thus is in direct conflict with the holdings in Pogue, Ab-Tech, Thompson, and Hopper. The question of whether or not false statements caused the Government to pay any monies would be irrelevant, so long as false statements in connection with statutory violations could be proven. See American Textile Manufacturers I, 1997 U.S. Dist. LEXIS 18142, *29-38.

V. Preemption

Several courts have considered and rejected the argument that a False Claims Act action predicated on a violation of another statute should be preempted by the remedies set forth in the subject statute. In United States ex rel. Sequoia Orange Company v. Oxnard Lemon Company, et al., 1992 U.S. Dist. LEXIS 22575, the United states argued that the forfeiture provisions of the Agricultural Marketing Agreement Act of 1937 should provide the exclusive remedy for sanctioning the excess importation of fruit in violation of quotas or allotments set by the Secretary of the Treasury. Id. at *30. The court rejected the argument, inferring from the FCA’s express exclusion of false claims under the Internal Revenue Code that “all other regulatory schemes are covered by the FCA.” Id. at *31. The court also pointed to Congress’ decision to expand the qui tamprovisions of the Act despite concerns expressed by the Department of Justice at the time concerning possible interference with pending criminal investigations. Id. at *33. The court reasoned that Congress’ willingness to expand the private enforcement provisions of the Act, despite concerns about overlapping efforts to address the same fraud, demonstrated its intent to accept cumulative remedies in cases like the one before it. Id. at *34.

In Pickens v. Kanawha River Towing, 916 F. Supp. 702 (S.D. Ohio 1996), the court rejected a similar preemption argument in the context of an alleged failure to report bilge discharge in violation of the Clean Water Act. The defendants in Pickens argued, under Middlesex County Sewerage Authority v. National Sea Clammers Assoc., 453 U.S. 1, 101 S.Ct. 2615 (1981), that the comprehensive enforcement provisions of the Clean Water Act preempted application of the False Claims Act to their conduct. Id. at 705. The court disagreed, noting that the implied preemption doctrine described in Sea Clammers only applied in cases where the statute sought to be applied was a “purely remedial act” and the underlying statute provide[d] its own specific and detailed remedies.” Id. at 706. Since the False Claims Act is not a purely remedial statute (i.e., it provides distinct remedies for different conduct than the CWA), the court concluded that the doctrine did not apply. Id.

The court’s decision on this issue was buttressed by the well established principle that federal law disfavors preemption amongst federal laws except when there is an “expressed manifestation of preemptive intent.” United States v. General Dynamics, 19 F.3d 770, 774 (2d Cir. 1994); see also Connecticut National Bank v. Germain, 503 U.S. 249, 253, 112 S. Ct. 1146, 1149 (1992) (quoting Wood v. United States, 16 Pet. 342, 363, 10 L. Ed. 987 (1842) (effect should be given to both statutes unless there is a “positive repugnancy between the two laws”).

VI. Government’s Position

The Department of Justice has taken varying positions on the scope of subsection (a)(7). In Sequoia Orange, the Government argued that “the phrase ‘obligation to pay’ encompasses only money owed to the Government under a contract for goods, services, concessions or other benefits.” Sequoia Orange, 1992 U.S. Dist. LEXIS 22575, *24. The Government supported this position as follows in its memorandum of points and authorities in support of its motion to dismiss:

“An attempt to circumvent an obligation to pay created solely as the result of a violation of an administrative enforcement statute does not constitute a cognizable claim under the Act. . . . Not every false statement or record submitted in connection with even a bona fide Government benefits program gives rise to liability under the Act; rather, only those fraudulent records and statements that (1) seek to obtain more Government money or property than would otherwise be due; or (2) represent that the Government is owed less money or property than is actually the case, constitute actionable False Claims Act violations. False claims submitted by individuals or entities seeking to avoid payment to the Government of administrative fines, penalties or forfeitures (OSHA, FAA, SEC, etc.), or criminal fines imposed pursuant to Title 18 of the United States Code, are not the stuff of False Claims Act lawsuits, regardless of whether the fine or forfeiture, payment of which has been evaded, is imposed in connection with the violation of a federal benefits program.”

American Textile, Slip. Op. at 39 (quoting Government’s Memorandum of Points & Authorities in Support of Motion to Dismiss in Sequoia Orange at pp. 6-7); see also Sequoia Orange, 1992 U.S. Dist. LEXIS 22575, *5.

In the Government’s reply brief, it added the following:

The government believes that the touchstone in determining whether the FCA applies to past conduct must be the identification of some loss or potential loss to the Treasury through a false claim or statement submitted pursuant to a contract or agreement with the United States. . . . Relator’s interpretation, which would authorize private parties to unilaterally use the FCA as an omnibus federal regulatory enforcement statute, finds no support in the Act itself or its legislative history.

American Textile, 1997 U.S. Dist. LEXIS 18142, *60 (quoting Government’s Reply to Relator’s Opposition to Motion to Dismiss in Sequoia Orange at pp. 6-7, n. 4).

In Prawer, however, the Government altered its view, stating in its amicus brief that “a cause of action for a reverse false claim does not turn upon whether or not [there is] a present contractual obligation.” Prawer, 946 F. Supp. at 93, n. 10.

The Government maintained this new position in American Textile Manufacturers I, wherein it hotly contested the Prawer court’s holding that no obligation to pay money exists under subsection (a)(7) “without a specific contract remedy, a judgment or an acknowledgment of indebtedness.” Prawer, 946 F. Supp. at 94.

First, the court’s conclusion that an obligation must be contractual in nature — unless it is, in a rare instance, based on an existing judgment or acknowledged indebtedness — is antithetical to the purpose of the False Claims Act, which is to reach all instances of fraud where the government has suffered financial loss. United States v. Neifert-White Co., 390 U.S. 228, 232 (1968). In the context of reverse false claims, obligations to pay money to the government arise not only by contract, but also by statute and regulation. For example, a classic reverse False Claims Act case involves the submission of a false application for reduced postage rates.

. . .Second, the Prawer court is also mistaken in its requirement that the government or relator obtain a judgment or an “acknowledgment of indebtedness.” . . . The legislative history of the reverse false claims provision describes the offending conduct as an attempt to “defeat or reduce the amount of a claim or potential claim by the United States against [defendant].” S. Rep. 99-345 at 18 (emphasis added). The conjunctive phrase demonstrates Congress’ awareness that “obligations” under the reverse false claims provision can be created without the finality of an enforceable judgment.

American Textile II, United States’ Supplemental Amicus Brief, pp. 4-5.

VII. Conclusion

The clear trend in the foregoing cases is toward a narrower interpretation of subsection (a)(7) that excludes false statements made in connection with statutory violations that may give rise to the assessment of fines, penalties or forfeitures. This conclusion makes intuitive sense for, as the Prawer court said, there would be “no way to define the scope of such cases, which would seem to be as broad as any lawyer’s creative impulses in defining a possible claim in the first place.” Prawer, 946 F. Supp. at 95, n. 13.

It is unlikely, however, that the Prawer court’s definition of the term “obligation” will become the rule. By holding that subsection (a)(7) requires proof that the alleged obligation to the government must arise from a “specific contract remedy, a judgment or an acknowledgment of indebtedness,” the Prawer court excluded the possibility of prosecuting a case under subsection (a)(7) for false statements made to reduce or to avoid an obligation owed to the United States pursuant to statute or regulation. Id. at 95. This conclusion appears clearly incorrect. Virtually every court faced with the issue directly has held that false statements made to reduce such obligations constitutes a violation of subsection (a)(7). See United States. v. American Heart Research Foundation, Inc., 996 F.2d 7 (1st Cir. 1993) (underpaid postage); United States ex rel. Maclennan v. JCB, Inc., Civ. No. WN-88-874 (D. Md. Nov. 3, 1992) (customs duties); United States ex rel. Dunleavy v. County of Delaware, 1998 WL 151030 (E.D. Pa. 1998) (reimbursements owed to HUD). Indeed, Congress had precisely such cases in mind when it passed the False Claims Amendment Act of 1986. S. Rep. 99-345, 99th Cong., 2d Sess. 9, 18-19 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5274, 5283-5284 (emphasis added).

The Eighth Circuit’s formulation of the term “obligation” in Q International as “a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness,” which addresses the foregoing concern, is thus closer to a satisfactory definition. It remains to be seen, however, under the myriad of scenarios likely to be presented, whether even this definition will prove adequate. As the court suggested in American Textile I, it may not even be necessary to create a definition; it may be enough simply to determine on a case-by-case basis what is not a qualifying “obligation” under subsection (a)(7). If a definition has to be selected, though, the one proposed by the Eighth Circuit is a reasonable starting point.