What are Reverse False Claims?

The False Claims Act (“FCA”) is typically thought of as concerning fraudulent attempts to obtain money from the Government. This article explores a lesser known area of FCA liability known as a “reverse false claim,” which involves avoiding the payment of money that is owed to the Government.

The History and Basics of Reverse False Claims Liability

The FCA prohibits both traditional false claims and “reverse” false claims. As one court explains:

“Ordinarily under the FCA, the government, or a party suing on its behalf, may recover for false claims made by the defendant to secure a payment by the government. In a reverse false claim action[,] the defendant’s action does not result in improper payment by the government to the defendant, but instead results in no payment to the government when a payment is obligated.”[1]

Put differently, a traditional false claim concerns “payments made by the government,” while a reverse claim “covers claims of money owed to the government.”[2]

Historically, the FCA did not expressly prohibit reverse false claims, and courts reached conflicting decisions as to whether reverse claims were actionable under the FCA.[3] Congress clarified this ambiguity by expressly adding reverse false claims to the FCA through adoption of the False Claims Amendments Act of 1986.[4] The FCA now provides that anyone who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government” violates the FCA.[5]

Purpose and Illustration of Reverse False Claims Act Liability

As one court explains, in adding the reverse claims provision to the FCA in 1986:

“Congress’ purpose . . . was to ensure that one who makes a false statement in order to avoid paying money owed the government would be equally liable under the Act as if he had submitted a false claim to receive money.”[6]

One common example of reverse FCA liability is the failure to return an overpayment to the Government. Many entities receive funding from the Government for a specific purpose and are typically required to return to the Government any of the funds not used for that purpose. If the entity uses a portion of the Government funds but fails to return the remainder, the company would have avoided a payment obligation to the Government and thus be subject to reverse FCA liability.[7]

For example, the Government might provide a $150 million grant to a transportation agency to build a new subway line while requiring the transportation agency to return any unspent funds. If the transportation agency only ends up using $125 million to build the subway line but fails to return the unspent $25 million to the Government, the transportation agency would likely be liable under a reverse FCA theory of liability.

The Requirement of an “Obligation”

A reverse false claims FCA claim has five elements:

“(1) a false record or statement and (2) the defendant’s knowledge of the falsity; (3) that the defendant makes, uses, or causes to be made or used a false statement (4) for the purpose to conceal, avoid, or decrease an obligation to pay money to the government; and (5) materiality of the misrepresentation.”[8]

Most of these elements are the same as a traditional FCA claim, such as falsity, knowledge of falsity, and materiality. The critical distinguishing factor between a traditional FCA claim and a reverse FCA claim is the requirement to establish that a defendant avoided an “obligation” to the Government.

“Obligation” is defined as:

“an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment.”[9]

Courts have focused upon whether a defendant owes an existing payment obligation to the Government, rather than a potential, contingent, or future payment obligation. Generally speaking, a defendant must avoid an existing payment obligation to be subject to reverse FCA liability, and avoidance of a potential, contingent, or future payment obligation is insufficient.[10]

The most common illustration of this concept is that “unassessed regulatory penalties are not obligations under the FCA.”[11] For example, many federal regulations require companies to undertake various responsibilities and authorize the Government to impose a fine or other penalty on a company who fails to perform these responsibilities. This presents the question of whether a company is subject to reverse FCA liability whenever it does not disclose to the Government that it failed to perform a regulatory responsibility because (1) that failure permits the Government to impose a fine and (2) thus, the company is effectively avoiding a financial obligation to the Government by avoiding imposition of a fine.

Courts have generally rejected this theory of reverse FCA liability by reasoning that the Government’s discretion whether or not to impose a fine undermines the conclusion that a defendant avoided an actual obligation. Put differently, “when potential fines depend on intervening discretionary governmental acts, they are not sufficient to create obligations to pay under the False Claims Act.”[12]

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[1] Hoyte v. Am. Nat. Red Cross, 518 F.3d 61, 63 n. 1 (D.C. Cir. 2008) (internal quotation marks omitted).

[2] U.S. ex rel. Capella v. Norden Sys., Inc., 2000 WL 1336487, at *10 (D. Conn. Aug. 24, 2000).

[3] See S. Rep. 99-345, at 18 (July 28, 1986), available at https://www.justice.gov/sites/default/files/jmd/legacy/2013/10/31/senaterept-99-345-1986.pdf (“[S]everal courts have applied the same rationale, with the result that a person’s fraudulent attempt to reduce the amount payable by him to the United States was considered not to constitute a viola­tion of the False Claims Act.”); see also Rabushka ex rel. U.S. v. Crane Co., 122 F.3d 559, 565 (8th Cir. 1997) (finding that reverse false claims were not actionable under the pre-1986 FCA).

[4] False Claims Amendments Act of 1986 Pub. L. 99–562, § 2 (Oct. 27, 1986), available at https://www.congress.gov/bill/99th-congress/senate-bill/1562.

[5] 31 U.S.C. § 3729(a)(1)(G).

[6] U.S. ex rel. Thomas v. Siemens AG, 708 F. Supp. 2d 505, 514 (E.D. Pa. 2010) (internal quotation marks omitted).

[7] See e.g. U.S. ex rel. Dunleavy v. Cty. of Delaware, 1998 WL 151030, at *1 (E.D. Pa. Mar. 31, 1998); Kane ex rel. U.S. v. Healthfirst, Inc., 120 F. Supp. 3d 370 (S.D.N.Y. 2015).

[8] U.S. ex rel. Cullins v. Astra, Inc., No. 09-60696-CIV, 2010 WL 625279, at *5 (S.D. Fla. Feb. 17, 2010)

[9] 31 U.S.C. § 3729(b)(3).

[10] See e.g. United States v. Q Int’l Courier, Inc., 131 F.3d 770, 773 (8th Cir. 1997) (“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 had a present duty to pay money or property that was created by a statute, regulation, contract, judgment, or acknowledgment of indebtedness.”).

[11] United States ex rel. Simoneaux v. E.I. duPont de Nemours & Co., 843 F.3d 1033, 1039 (5th Cir. 2016).

[12] U.S. ex rel. Marcy v. Rowan Companies, Inc., 520 F.3d 384, 391 (5th Cir. 2008).