Ambiguous Regulations Can Hamstring Earning Proof of Fraud

A recent whistleblower case decision has revealed how federal prosecutors going after providers for fraud have been frustrated by the murkiness of federal regulations.

United States Ex Rel. Deborah Sheldon v. Allergan Sales, LLC is in many ways a typical whistleblower qui tam case. It involves allegations against Allergan, formerly Forest Laboratories, and its corporate compliance with complex, inscrutable Medicaid pricing and rebate regulations. Despite the superficial banality of the case, it raises some important considerations.

This case furthers the circuit court split regarding key concepts in False Claims Act (FCA) litigation. In the decision, the majority cites the legal experts of Calvin and Hobbes, noting that “people have asked how to play Calvinball. It’s pretty simple: you make up the rules as you go.”

That quote is one of the best parts of this decision from a divided three-judge panel of the Fourth Circuit. It summarizes the frustrations inherent in dealing with Centers for Medicare & Medicaid Services (CMS) regulations. I expect this decision to be appealed due to the inter-circuit disparities – and the $680 million on the line. But for now, this decision is the law in the Fourth Circuit.

The case turns on the defendant’s knowledge of falsity.

As a quick review, the FCA imposes liability on anyone who “knowingly” makes or uses a false or fraudulent claim. The statute defines knowingly as:

  • Having actual knowledge; or
  • Deliberate ignorance; or
  • Reckless disregard of the truth or falsity of the information.

This knowledge is referred to as “scienter” in legal-speak. If someone lacks any of the legal knowledge requirements, fraud cannot be proved. It is this knowledge requirement that largely defines the outcome of this case.

It’s worth recalling that liability under the FCA requires no proof of intent to defraud.

As with most things in law, we also must consider two types of falsity: legal and factual. The straightforward case is factual falsity; this occurs when a false statement of a fact is made, such as saying that 100 items were sold when the actual sale was 50. In contrast, legal falsity arises when the claim is factually correct, but compliance with underlying statutes, regulations, or contract terms is knowingly misrepresented. The Sheldon case (and many others) relate to legal falsity. This is because following the guidance imposed by statutes or regulations may not be as straightforward as we’d like.

The majority opinion in the case dispenses with the case by concluding that the defendant did not act knowingly, so it need not address the falsity question. So why, you might ask, did the court conclude that the defendant did not act knowingly?

This is where things get murky. The three-judge panel disagrees based on potentially flawed logic and misapplication of legal precedent. But there are some transcendent messages we can glean from the judges’ dispute.

The clear message is that if the law or regulation is ambiguous, then under some circumstances, fraud may not even be possible. The court is divided over where the “ambiguity line” might be drawn. To take advantage of an ambiguity defense, you will probably need the following:

  • A belief that you’re not committing an illegal act. The courts are divided as to whether that should be an objective or subjective standard.
  • Next, your belief needs to be based on a combination of several things, including:
    • The wording of the applicable statute and regulations;
    • Any subsequent guidance related to the alleged ambiguity; and
    • Possibly, your attorney’s advice.

The bottom line is this: be sure to exhaustively research available guidance. Use the most conservative guidance available, and make sure your conclusions are objectively and subjectively realistic.

Read the decision in its entirety here.

Other useful references:


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