Employer not liable for concealing obligation to pay ‘contingent’ FCA penalties

By Joy Waltemath

By Marjorie Johnson, J.D.

Tossing a former duPont employee’s qui tam claim that the company violated the reverse-false-claims provision of the False Claims Act (FCA) by concealing an “obligation” to pay penalties arising from its failure to report toxic substance leaks to the Environmental Protection Agency (EPA), the Fifth Circuit found that amendments to the Act did not alter the widely accepted holding that “contingent” penalties are not obligations. Because the penalties at issue were not mandatory, denial of summary judgment on his reverse false claim was reversed. However, the appeal of his retaliation claim was dismissed for lack of appellate jurisdiction (United States ex rel. Simoneaux v. E.I. DuPont de Nemours & Co., December 13, 2016, Smith, J.).

Toxic leaks not reported to EPA. The employee alleged that duPont violated the FCA’S reverse-false-claims provision by concealing an “obligation” to pay the United States a penalty arising from its failure to report leaks of sulfur dioxide and sulfur trioxide to the EPA as required by the Toxic Substances Control Act (TSCA).

Moving for summary judgment, DuPont argued that even if it had violated the TSCA, it had no “obligation” to pay the United States because the EPA had not assessed a penalty. The company relied on two Fifth Circuit cases, United States ex rel. Bain v. Georgia Gulf Corp. and United States ex rel. Marcy v. Rowan Cos., which held that the reverse-false-claims provision does not encompass “potential or contingent obligations” to pay the government fines or penalties that have not been levied or assessed. It also claimed his retaliation claim failed since he did not establish that he had engaged in protected activity.

Summary judgment denied. The district court denied the motion, concluding that the Fraud Enforcement and Recovery Act of 2009 (FERA), which amended the FCA, overruled Bain and Marcy, and that a reverse false claim could be based on a violation of a statute that “imposes” monetary penalties. It also denied duPont’s initial request to certify an interlocutory appeal, and a jury returned a verdict in duPont’s favor on both claims. The court then ordered a new trial due to discovery issues, but also granted duPont’s renewed motion to certify an interlocutory appeal.

Was there an obligation? The employee claimed that duPont knowingly and improperly avoided an “obligation” to pay the United States since the TSCA allows the EPA to assess civil penalties against chemical manufacturers who violate Section 8(e)’s requirement that they notify the EPA when they have knowledge that a substance or mixture presents a substantial risk of injury to health or the environment. However, the Fifth Circuit rejected his assertion that FERA’s definition of “obligation” covered contingent penalties and thus abrogated Bain and Marcy’s contrary holding.

Notably, FERA amended the FCA to define “obligation” as “an established duty, whether or not fixed, arising from . . . statute or regulation, or from the retention of any overpayment.” While the district court maintained that “unassessed” regulatory penalties were included within the definition, emphasizing the phrase “whether or not fixed,” duPont and the United States as amicus curiae urged that “established” was the key word. Indeed, the United States explained that “A statute enforceable through an unassessed monetary penalty creates an obligation to obey the law, not an obligation to pay money.”

“Established” means duty to pay. The most reasonable interpretation of the FERA was that “established” referred to whether there was any duty to pay, while “fixed” referred to the amount of the duty. Thus, while the new definition resolved uncertainty regarding whether the amount of obligation needed to be fixed, it did not upset the widely accepted holding that contingent penalties are not obligations. Indeed, a close look at the legislative history suggested that Congress did not intend to cover contingent penalties but added the “whether or not fixed” language to resolve the active dispute over whether an obligation could be for an uncertain sum, while “established” confirmed that contingent penalties are not obligations.

In addition, the employee’s “extraordinarily broad” construction of the FCA would allow reverse-FCA liability to attach from the violation of any federal statute or regulation that imposed penalties. Functionally, that meant the FCA permitted blanket trebling of all federal penalties, so long as the violator knowingly concealed his violation of the regulation. It also meant any such violation would lead to a civil FCA penalty for even to the most minor infractions. Accordingly, where a regulatory penalty has not been assessed and the government has initiated no proceeding to assess it, there is no established duty to pay.

TSCA violations not mandatory. Moreover, a plain reading of the TSCA showed that penalties were not mandatory even if duPont violated Section 8(e). Rather, the statute’s plain terms gave the EPA discretion to decide to assess no penalty. For instance, it provided that the administrator “may compromise, modify, or remit, with or without conditions, any civil penalty which may be imposed under this subsection” and violations could also lead to criminal penalties that could be imposed “in addition to or in lieu of any civil penalty” (emphasis added).

FCA retaliation. However, the Fifth Circuit declined to address duPont’s contention that it was entitled to summary judgment on his retaliation since he failed to state a viable claim under the FCA, finding the issue to be outside its appellate jurisdiction since duPont did not raise it in the district court. Rather, it only argued that he didn’t engage in protected activity since his complaints did not relate to a concern that it was defrauding the government. It’s new argument—that he could not have engaged in protected activity because he has not established a viable FCA claim—was a distinct legal theory not “fairly included” in the district court’s order.

Source:: Employment Law Daily Newsfeed