The Seventh Circuit affirmed summary judgment for defendants in
United States ex rel. Sheet Metal Workers Int'l Assoc. v.
Horning Investments, LLC, 2016 WL 3632616 (7th Cir. July 7,
2016), indicating that there is a high bar for establishing
"knowing conduct" when defendants are accused of falsely certifying
compliance with an ambiguous law.
The case alleged violations of the Davis-Bacon Act, which sets
minimum rates of pay and fringe benefits for employees working on
federal construction projects. The employer, Horning,
deducted a flat $5 per hour contribution from union members'
paychecks, which was paid into an insurance benefit trust.
The Union, acting as a Relator under the
False Claims Act, alleged that this deduction from each
employees' paycheck-regardless of whether the employee was eligible
for benefits and without tying the deduction to an actual
benefit received by employees - meant that Horning was paying its
employees less in fringe benefits than was required under
Davis-Bacon. The Union brought this action, in which it
alleged that Horning's Certified Payroll Reports and its eight
applications for payment (along with the certifications of
Davis-Bacon compliance appearing in both types of documents),
violated the False Claims Act. Id. at *2. The district court
granted summary judgement for the defendants.
The panel split. Chief Judge Diane Wood, together
with Judge Easterbrook, held that the claims did not survive
summary judgment because there was a lack of evidence to show that
the employer acted with knowledge that its claims were false.
After a fairly lengthy discussion of the nitty-gritty details of
the Davis-Bacon Act provisions applicable to fringe benefits, the
court determined that the Union had easily established that the
employer made statements to receive money from the government, id.
at 3, and that the case might fall within
that category where " 'liability can attach when the defendant
submits a claim for payment that makes specific representations
about the goods or services provided, but knowingly fails to
disclose the defendant's noncompliance with a statutory,
regulatory, or contractual requirement. In these circumstances,
liability may attach if the omission renders those representations
misleading.' Universal Health Servs., 136
S.Ct. at 1995." Horning Investments, LLC,
2016 WL 3632616 at *3-4. Ultimately,
though, the majority concluded that it could not and would not
decide whether there was any violation of the Davis-Bacon Act
because the only issue it needed to address was the FCA issue
whether "there is enough ambiguity about this matter that we cannot
infer that Horning either knew or must have known that it was
violating the Davis-Bacon Act." Id. at *4.
In an interesting side note, the court discussed whether a
defendant's claimed reliance on its accountant in dealing with its
legal requirements would necessarily establish that the defendant
could not have acted knowingly when it submitted the claims, even
if an agency or court subsequently determined that the claims were
false. Although the court acknowledged that such reliance
could sometimes defeat scienter, the notion that such reliance was
a virtual bar was rejected:
A defendant may not rely on this
type of advice, however, unless she establishes that (1) before
taking action (2) she "in good faith sought the advice of [the
professional] whom [she] considered competent," (3) about the
lawfulness of her future conduct, (4) she made a "full and accurate
report" of all relevant facts to the professional, and (5) she
acted in strict accordance with the advice. United States v.
Cheek, 3 F.3d 1057, 1061 (7th Cir. 1993) (on remand from
Supreme Court, internal quotation marks omitted) (quoting
Liss v. United States, 915 F.2d 287, 291 (7th Cir.
1990)). Horning did not develop the facts that were needed to
provide a basis for an "advice-of-accountant" defense. We do not
know precisely what it told its accountants, whether they provided
all necessary details, or what exactly the accountants
Horning Investments, LLC, 2016 WL 3632616 at
Judge Richard Posner dissented, finding that an employer
experienced with federal projects like Horning must have known or
been charged with knowing about the requirements of the
Act. According to Judge Posner, if defendants did not know,
"it must have been because they closed their eyes to those
requirements-a good example of ostrich behavior, itself a good
example of deliberate indifference within the meaning of the
False Claims Act." Id. at *7 (Posner, J.,
dissenting). In part because the Union alleged that some of
the so-called deductions actually went to the company's owner and
cronies, and that the company falsely claimed the $5 of "fringe
benefits" it took out of each worker's hourly salary went to
"appropriate programs for the benefit of such employees," there was
at least a factual question as to whether defendants had acted
knowingly for purposes of the FCA. As he explained, if a
defendant " 'makes representations in submitting a claim but omits
its violations of statutory, regulatory, or contractual
requirements, those omissions can be a basis for liability if they
render the defendant's representations misleading with respect to
the goods or services provided.'
Universal Health Services, Inc. v. United States,
supra, 136 S.Ct. at 1999. That's this case."
Horning Investments, 2016 WL 3632616, at *7 (Posner,
whistleblowers going forward, this case demonstrates the
importance of inside information about how a company came to
make the decision it made, as well as specific evidence about the
conduct and consequences of the company's decision. The
opinion should also help counsel obtain full discovery about any
legal or accounting advice that a company claims it received,
including exactly what was - or was not - disclosed to the
accountant or attorney.