Law360 (September 4, 2020, 3:46 PM EDT) --
|Marc Van Allen|
If past is prologue, these vague provisions will soon become fertile ground for qui tam relators bringing False Claims Act cases. Accordingly, in the coming months, we anticipate a surge of FCA suits alleging that a contractor has failed to comply with an ambiguous contractual or regulatory requirement.
To mitigate this risk, contractors need to familiarize themselves with two defenses and have them in their arsenal for attacking FCA claims predicated on ambiguous language. First, a number of courts have dismissed such claims for lack of falsity. Alternatively, some courts have dismissed these claims for lack of scienter.
These two defenses are particularly powerful because they can be presented to the judge for decision as a matter of law on a motion to dismiss or a motion for summary judgment. As recent FCA decisions illustrate, contractors will want to consider both of these defenses when confronting potential FCA claims based on an ambiguous contract or regulatory requirement.
A necessary element of a FCA claim is a false statement made in connection with a claim for payment. In many FCA cases, proof of this false statement consists of nothing more than the relator's assertion that the contractor did not comply with a contractual or statutory provision.
In these cases, a contractor may negate the falsity element and avoid FCA liability if its interpretation of an ambiguous contract or statutory provision was not unreasonable. In other words, vague or imprecise contractual or statutory provisions do not provide a basis for establishing falsity under the FCA.
For example, in U.S. v. Kellogg Brown & Root Inc., a maintenance contract required the contractor to:
The relators alleged that defendants neglected to perform several routine maintenance procedures, such as changing the oil or replacing the fuel features on the trucks in their convoy, and therefore made a false statement when they agreed to comply with the general maintenance requirements.
ensure the safety and health of personnel, equipment and supplies that the contractor has direct control over ... [and that all] contractor owned motor vehicles ... shall be properly equipped and designed to ensure protection of [Government] property.
The U.S. District Court for the Eastern District of Virginia dismissed the relators' complaint. The U.S. Court of Appeals for the Fourth Circuit affirmed, reasoning that the maintenance provisions were general and imprecise. Accordingly, the court said, it was not clear "what would qualify as adequate (or inadequate) maintenance" under the provisions and not possible to establish that representations regarding performance under the provisions were false.
Recently, in U.S. v. McKesson, the U.S. District Court for the Northern District of California — after citing to the Kellogg Brown & Root case — dismissed a FCA case for failing to adequately plead falsity.
In McKesson, the relator alleged that the defendant submitted claims for payment under various federal programs but failed to disclose that it had violated the Comprehensive Drug Abuse Prevention and Control Act of 1970 by, among other things, failing "provide effective controls and procedures to guard against theft and diversion of controlled substances."
In dismissing the complaint, the court noted:
In support of its ruling, the district court cited to several cases, including U.S. v. City of Green Bay — "[I]mprecise statements or differences in interpretation growing out of a disputed legal question are ... not false under the FCA" — and U.S. v. Kellogg Brown & Root — "An FCA relator cannot base a fraud claim on nothing more than his own interpretation of an imprecise contractual provision." 
[W]hen the statutory or contractual requirement underlying an FCA claim contains imprecise and discretionary language, there is only a disputed legal issue rather than an objective statement of fact that can be deemed false under the FCA.
In addition to falsity, there must be proof of scienter or knowledge before a contractor may be subject to FCA liability. Under the FCA, a contractor must knowingly present or cause presentation of a false or fraudulent claim. "Knowingly" is defined as having actual knowledge, acting in deliberate ignorance of the truth or falsity of the information, or, at minimum, acting in reckless disregard of the truth or falsity of the information.
Significantly, a contractor's reasonable interpretation of an ambiguous contract or statute will generally preclude a finding of knowing or reckless conduct necessary to impose FCA liability. In other words, vague or imprecise contractual or statutory provisions do not provide a basis for establishing scienter under the FCA.
For example, in Safeco Insurance Co. of America v. Burr, the U.S. Supreme Court considered whether a reasonable — but incorrect — interpretation of a statute could constitute reckless disregard. The court's 2007 decision held that in order to establish reckless disregard, a statutory interpretation must be so objectively unreasonable as to create "a risk of violating the law substantially greater than the risk associated" with a merely negligent reading.
Significantly, the court stated that Congress could not have intended liability for an "interpretation that could reasonably have found support in the courts, whatever [the defendants'] subjective intent may have been."
Recently, the U.S. District Court for the Central District of Illinois applied similar principles in granting summary judgment in a FCA case. Relying on the Supreme Court decision in Safeco, the court held that the same objective scienter standard applies to the FCA.
The court found that for the contractor's interpretation to be objectively unreasonable, an authoritative interpretation must exist that would warn the contractor away from the position that it took. The court found that the absence of judicial decisions on the issue, and a dearth of authoritative and binding guidance from the relevant government agencies, created ambiguity that allowed for the contractor's interpretation to be considered objectively reasonable even though a court subsequently determined that Safeway's interpretation was incorrect.
To mitigate FCA risk based on ambiguous language, contractors should do three things during contract performance. First, the contractor should keep up with the latest case law and authoritative guidance on applicable rules and regulations. If such authoritative guidance exists, the contractor cannot be objectively reasonable in taking a contrary approach.
Second, where such authoritative guidance is absent, the contractor should flag the ambiguous provisions and memorialized for the file an explanation in support of the contractor's interpretation. In the event of a FCA suit, the relator will likely contend that the contractor's reasonable interpretation was contrived "after the fact" during the litigation. The existence of contemporaneous records will inoculate the contractor from this accusation.
Third, where possible, the contractor should notify the contracting officer of the ambiguous language and of the contractor's interpretation of it. By taking these three steps, the contractor will be in a strong position to defeat FCA claims based on ambiguous language.
Marc Van Allen is a partner at Jenner & Block LLP and co-chairs the firm's government contracts practice.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 See, e.g., U.S. ex rel. K&R Ltd. P'ship v. Mass. Housing Fin. Agency , 530 F.3d 980, 983-84 (D.C. Cir. 2008) (falsity lacking where defendant's interpretation of ambiguous terms was not unreasonable).
 See Harrison v. Westinghouse Savannah River Co. , 176 F.3d 776, 789 (4th Cir. 1999) (allegations of poor and inefficient management of contract duties, without more, insufficient to establish falsity)
 U.S. ex rel. Wilson v. Kellogg Brown & Root Inc. , 525 F.3d 370, 374-77 (4th Cir. 2008).
 Id. at 374-75.
 Id. at 377.
 See U.S. v. McKesson , No. 19-cv-02233-DMR, 2020 U.S. Dist. LEXIS 149288 (N.D. Cal. Aug. 18, 2020).
 Id (quotations omitted).
 U.S. ex rel. Lamers v. City of Green Bay , 168 F.3d 1013, 1018 (7th Cir. 1999)
 U.S. ex rel. Wilson v. Kellogg Brown & Root Inc., 525 F.3d 370, 378 (4th Cir. 2008)
 Safeco Ins. Co. of Am. v. Burr , 551 U.S. 47, 127 S. Ct. 2201 (2007); 31 U.S.C. § 3729.
 551 U.S. 47 (2007)
 U.S. ex rel. Proctor v. Safeway Inc. , No. 11-cv-3406, 2020 U.S. Dist. LEXIS 103094 (C.D. Ill. June 12, 2020)
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