A federal appeals court gave whistleblower cases an important boost this month when it revived a False Claims Act case against Wells Fargo and its affiliates, reversing its own decision to kill the case less than a year ago.
The Second Circuit Court of Appeals had agreed to dismiss the “qui tam” case – Bishop v. Wells Fargo & Co., No. 15-2449 (2d Cir. 2016) – back in May, but in light of the Supreme Court’s ruling in United Health Services v. United States ex rel. Escobar, the plaintiffs asked the appeals court to revisit that decision.
In Escobar, the Supreme Court made clear that whistleblower suits could be successful even if the plaintiff does not show an expressly stated condition of payment was violated, a theory known as “implied certification.” Before Escobar, courts were split on whether a company could be held liable for False Claims Act violations when the government pays for goods or services that the company says meet contract requirements, while the company violated a regulatory or statutory requirement that was material to the government even if it wasn’t expressly stated in the contract.
Defendants, including those in the Wells Fargo case, complained that allowing liability to rest on this “implied certification” theory led to claims that were too broad, because there could be numerous important statutory or regulatory requirements that were not explicitly singled out as necessary for payment.
Two former employees of Wachovia Bank and World Savings Bank, which merged with Wells Fargo in 2008, brought the case. The complaint alleged that the defendants falsely represented compliance with banking laws in order to obtain favorable loan rates from the Federal Reserve.
The Second Circuit and federal district courts initially agreed with the defendants that the representations the banks made to the Federal Reserve were too broad to support a False Claims Act lawsuit. The courts agreed that compliance with these various laws and regulations was not necessary for the defendants to receive loans.
But a little over a month after the Second Circuit dismissed the case, the Supreme Court handed down its Escobar decision.
Because Escobar had clarified that making representations – like the one in the Federal Reserve loan application – while failing to disclose noncompliance could be misleading if those failures were material, the plaintiffs were able to successfully petition the Second Circuit for reconsideration.
The Second Circuit’s decision confirms that contractors and other companies cannot falsely claim (implicitly or explicitly) that they have complied with important requirements in order to obtain government funds. The decision also reinforces that a government contract need not spell out every applicable requirement before failure to comply can give rise to an FCA violation.