On June 8, 2015, the U.S. Court of Appeals for the Seventh Circuit rejected the doctrine of implied false certification in a False Claims Act (“FCA”) lawsuit, U.S. ex rel. Nelson v. Sanford-Brown Ltd.  No. 14-2506, 2015 WL 3541422.  In a welcome decision for government contractors, the Court held that the FCA is “not the proper mechanism” for Government enforcement of regulations.  Instead, regulatory violations should be handled by the appropriate Government agency–not the courts.

Under the implied false certification doctrine, an invoice submitted to the Government impliedly certifies compliance with applicable laws and regulations.  A number of circuits, including the Fourth, Ninth, Tenth, and D.C. Circuits, have adopted the implied certification theory.  In Sanford-Brown, the Seventh Circuit joins the Fifth Circuit in rejecting the theory and more clearly differentiating a breach of contract from the submission of a false claim.

Qui tam relator Brent Nelson was the previous Director of Education at Sanford-Brown College, a for-profit educational institution in Wisconsin.  He alleged that Sanford-Brown and its corporate parent defrauded the Government by receiving federal subsidies even though it was violating the Higher Education Act and the Program Participation Agreement (“PPA”) it had signed with the U.S. Secretary of Education.  The United States declined to intervene in the case and many of the relator’s claims were dismissed based on the public disclosure bar or the first-to-file rule.  Ultimately, the district court granted defendant’s motion for summary judgment, rejecting the implied false certification theory.

Nelson appealed to the Seventh Circuit, challenging, among other issues, the district court’s rejection of the implied false certification.  The United States, though it had declined to intervene, filed an amicus brief supporting the relator and arguing that a violation of the Program Participation Agreement caused Sanford-Brown to present false claims, because compliance with the agreement was a condition of payment.

The Seventh Circuit found the relator’s and the Government’s position to be “untenable” and lacking a “discerning limiting principle:”

[W]e conclude that it would be…unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the PPA are conditions of payment for purposes of liability under the FCA…The FCA is simply not the proper mechanism for government to enforce violations of conditions of participation contained in—or incorporated by reference into—a PPA.

The Court declined to join the circuits that adopted the doctrine of implied false certification, instead joining the Fifth Circuit, which rejected the theory in U.S. ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 270 (5th Cir. 2010).  The Sanford-Brown court cited the Second Circuit’s decision Mikes v. Straus, 274 F.3d 687, 699 (2d. Cir. 2001), which held “[t]he False Claims Act was not designed for use as a blunt instrument to enforce compliance with all [] regulations.”

The Court’s ruling makes clear that it was the U.S. Department of Education’s role to enforce the PPA through the administrative mechanisms provided by its regulations.  Noncompliance with federal regulations does not trigger FCA liability in the Seventh Circuit, unless there is proof that the original agreement was entered into fraudulently.

By deepening the circuit split on the theory of implied false certification, the Seventh Circuit introduced further complexity into FCA jurisprudence.  Now government contractors have varying degrees of FCA exposure, depending on their location.  Contractors in the Seventh Circuit should take comfort in the fact that they have a narrowed scope of potential FCA liability.  Regulatory compliance is to be evaluated and adjudicated by the appropriate agency and not by the courts.  The Seventh Circuit’s ruling will protect contractors from opportunistic relators who may allege that mere breaches of implied certifications with respect to the myriad statutes and regulations affecting Government contracts amount to false claims.