The Sixth Circuit recently made some interesting findings related to the knowledge standard in the False Claims Act (“FCA”) and whether maximizing profits is evidence of fraud.

The knowledge standard in the FCA may create a disincentive for defendants to litigate cases brought by the government, especially considering the standard for liability can be met by the government demonstrating that the defendant acted with reckless disregard or in deliberate ignorance of the truth or falsity of the claim.   See 31 U.S.C. § 3729.  In light of this fairly low standard, it is no secret that some defendants decide it is less costly to settle a case, rather than engaging in protracted litigation with the government.  However, in one recent case the defendant, Renal Care Group, Inc. and its wholly-owned subsidiary, decided to fight back against allegations it defrauded the government of millions of dollars while providing dialysis treatments to Medicare beneficiaries suffering from end-stage renal disease.  Renal Care lost the first battle when the district court granted summary judgment in favor of the United States and awarded the government $82.6 million in damages and penalties.  On appeal, however, Renal Care secured a major victory when the court of appeals reversed the district court’s judgments on grounds that Renal Care did not act in reckless disregard under the FCA.

Without going into the specific facts alleged by the government, there are two important findings from this Sixth Circuit decision worth noting.  First, the Sixth Circuit determined that Renal Care did not act recklessly.  Per the Sixth Circuit, a defendant can be held liable under the FCA by showing that it acted with actual knowledge or constructive knowledge.  United States v. Renal Care Group, et al., No. 11-5779, slip op. at 17 (6th Cir. Oct. 5, 2012).  Constructive knowledge can be proven by demonstrating that the defendant acted in deliberate ignorance of, or with reckless disregard to, the truth or falsity.  One of the facts relied on by the court in reaching its decision on the knowledge requirement is that Renal Care sought legal counsel, who in turn sought clarification from CMS on what appears to be fairly ambiguous regulations.  The court focused on this fact, in addition to some others, in reaching its conclusion that Renal Care did not act recklessly.