When in Reasonable Doubt, Wrong Still Means No Recovery

In an (unfortunately) unpublished opinion, the Third Circuit has now joined the D.C. Circuit in holding that a defendant's reasonable interpretation of an ambiguous regulation or statute (even if erroneous) defeats scienter under the FCA. Putative FCA defendants navigating the regulatory morass of doing business with the federal government can take some comfort from this ruling, which we at Qui Notes hope other courts will readily embrace.

In United States v. Allergan, – F. App'x –, 2018 WL 3949031 (3d Cir. 2018), drug manufacturers who participated in the Medicaid Drug Rebate Program (MDRP) were alleged to have violated regulations relating to the proper calculation of the rebate owed to the government and the states. While the underlying substance of the regulatory dispute is not our focus here, suffice it to say that the court found the defendants' interpretation of the regulatory regime was reasonable, albeit ultimately not the "best" reading. Given the absence of any agency regulatory guidance to the contrary, the reasonable but wrong interpretation was held insufficient to satisfy the FCA's knowledge element.

The Third Circuit adopted more or less wholesale the D.C. Circuit's holding in United States ex rel. Purcell v. MWI Corporation that "[c]onsistent with the need for a knowing violation, the FCA does not reach an innocent, good-faith mistake about the meaning of an applicable rule or regulation. Nor does it reach those claims made based on reasonable but erroneous interpretations of a defendant's legal obligations." 807 F.3d 281, 287-88 (D.C. Cir. 2015) (internal citation omitted). It found three "distinct inquiries" relevant to the review: "(1) whether the relevant statute was ambiguous; (2) whether a defendant's interpretation of that ambiguity was objectively unreasonable; and (3) whether a defendant was 'warned away' from that interpretation by available administrative and judicial guidance."Using traditional tools of statutory interpretation and taking judicial notice of agency guidance, the court of appeals found the elements met and affirmed the district court's dismissal of the action. Allergan, slip op. at 10.

If adopted by other courts, this means that an allegation of a "knowing" FCA violation (and knowledge may be plead generally, even under Rule 9(b)) can be defeated on a pre-discovery motion to dismiss based solely on parsing the regulation or statute (and canvassing available regulatory guidance). A "careless" or "unreasonable" reading of a statute or regulation will not carry the day, but objectively reasonable interpretations cannot give rise to fraud. While we wish of course the decision had been published as was the D.C. Circuit's in Purcell and the Eighth Circuit's in U.S. ex rel. Hixon v. Health Mgmt. Sys., Inc., 613 F.3d 1186 (8th Cir. 2010), we applaud the proposition that a fraud case should and cannot not be brought based on a point on which reasonable minds can differ.

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.