Guest Commentary

Robert T. Rhoad and Jonathan R. Cone, Crowell & Moring

Did you hear that?  It was a collective sigh of relief from companies contracting with the federal government thanks to the U.S. Court of Appeals for the Fifth Circuit’s decision in United States ex rel. Steury v. Cardinal Health, Inc. In Steury, the Fifth Circuit found that a company that contracts with the government cannot be punished under the False Claims Act – the government’s primary anti-fraud statute, and a potent one at that – by merely violating a contractual provision or federal statute or regulation. (N1)  To be liable under the FCA, the court wrote, a company must falsely certify compliance with a contractual provision, statute, or regulation that is a prerequisite to payment.  Unless the government’s payment was conditioned on adherence to a specific provision, statute or regulation, the “crucial distinction” between punitive FCA liability and ordinary breaches of contract would be lost.

Steury’s Allegations.  Steury worked for Cardinal Health (“Cardinal”) where she marketed Cardinal’s medical products to hospitals operated by the Veterans Administration, including an electronic device that regulated the rate at which intravenous fluids were pumped into patients.  According to Steury, however, this electronic pump had a dangerous defect: air bubbles would accumulate in the device and then be released into the patient’s intravenous lines, potentially causing serious injury or death.  Steury filed a qui tam complaint against Cardinal in which she alleged that Cardinal’s claims for payment were rendered false because, under its contract with the government, Cardinal was obligated to provide “safe, reliable, and quality-tested products,” which it failed to do when it sold defective pumps to the Veterans Administration.  Although Cardinal did not expressly certify that the pump complied with the terms of its contract, Steury argued that Cardinal impliedly certified such compliance simply by requesting payment.  This implied certification rendered its claims false.

The Fifth Circuit’s Decision.  The Fifth Circuit noted that the implied-certification theory of liability rests on the notion that the act of submitting a claim for payment implies compliance with governing federal rules that are a precondition of payment.  While declining to say whether the implied-certification theory was even cognizable under the FCA, the Fifth Circuit found that Steury had not stated a claim for relief because the contractual provision that Cardinal allegedly violated (i.e., warranty of merchantability) was not a precondition of payment.  Even if Cardinal had breached its contract, it would not have been “fair” to impose FCA liability for the breach of a contractual provision that was not a condition of payment, regardless of whether such a breach would have been material to the government’s payment decision.

Steury’s Importance.  For a company contracting with the federal government, there are important takeaways from Steury:

  1. The court expressly declined to hold that a qui tam relator or the government can base an FCA action on an implied (rather than express) certification.  In light of this reticence, it remains doubtful whether an implied-certification theory of liability is valid.
  2. Steury reaffirmed the principle that the FCA was not intended – and cannot be (mis)used – to police every violation of federal statute, regulation or contractual provision.  Although the government might pursue a breach of action in such a situation, the FCA is not “a blunt instrument to enforce compliance” with every contractual provision.
  3. The court drew a clear distinction between the elements of “materiality” and “falsity.”  Although a certification might be material to the government’s decision to pay a claim, a claim is not rendered false by a contractor’s mere non-compliance with a statute, regulation or contractual provision, unless it is a prerequisite for payment.  (N2)

Notes

N1 False Claims Act, 31 U.S.C. § 3729 et seq. (2010).

N2 In a footnote, the Fifth Circuit concluded – without much discussion – that the Fraud Enforcement And Recovery Act of 2009 (“FERA”), Pub. L. No. 111-21, 123 Stat. 1617, 1621 (2009), which amended 31 U.S.C. § 3729(a)(2) of the FCA, applies retrospectively to any case that was pending on June 7, 2008.  Congress, however, expressly limited the retrospective application of FERA such that the amendments to § 3729(a)(2) would take effect “as if enacted on June 7, 2008” and would apply to any “claims” pending on or after that date.  See FERA § 4(f)(1). Curiously, the Steury court interpreted “claims” to mean “cases,” even though “claim” is a defined term in the False Claims Act.  This decision puts the Fifth Circuit in the minority of courts that have examined FERA’s retrospective application, as courts have “almost uniformly” concluded that FERA applies retrospectively to claims for payment, not cases.  United States ex rel. Carpenter v. Abbott Labs., Inc., — F. Supp. 2d –, C.A. No. 07-10918, 2010 WL 2802686, at *5 (D. Mass. July 16, 2010).  See, e.g., Hopper v. Solvay Pharms., Inc., 588 F.3d 1318, 1327 n.3 (11th Cir. 2009); United States v. Sci. Applications Int’l Corp., 653 F. Supp. 2d 87, 106-107 (D.D.C. 2009).