On August 6, the U.S. Court of Appeals for the Second Circuit issued a significant opinion that clarifies the requirements for pleading a reverse false claim under the False Claims Act (FCA).

• The Second Circuit joined the Third, Fifth, Tenth, and D.C. Circuits to hold that “the mere fact of a violation” that could give rise to a civil penalty at the government’s discretion does not create an obligation under the FCA’s reverse false claim provision. Instead, “a duty to pay is ‘established’ only when it triggers an immediate and self-executing duty to pay.”

• The Second Circuit rejected the relator’s argument that Citibank had an obligation to pay based on consent orders stemming from Federal Deposit Insurance Act (FDIA) claims from 2015 because the relevant penalties under the FDIA were discretionary.

Background

In Miller v. U.S. ex rel. Miller & Citibank, N.A., a vice president at Citibank alleged that Citibank violated the FCA’s reverse false claim provision by creating an auditing procedure for third-party vendors and suppliers designed to minimize compliance violations and thereby avoid mandatory reporting to the government. The relator reported her concerns to the Office of the Comptroller of the Currency (OCC). In 2020, a little over a year after the relator contacted the OCC, Citibank entered into a consent order related to data governance, risk management, and internal controls that required Citibank to pay a $400 million fine. The 2020 consent order did not refer to the subject underlying the relator’s qui tam complaint.

The relator argued that Citibank’s purported alterations to audit reports allowed it to avoid an “obligation” to pay civil penalties based on previous consent orders related to FDIA claims. The Second Circuit reasoned that because any civil penalties would have been subject to the government’s discretion, the relator did not plausibly allege any reverse false claim under the FCA.

Federal Rule of Procedure Rule 9(b)’s Particularity Requirement

In addition to holding that the relator did not allege any “obligation” by Citibank to the government under the FCA, the Second Circuit held that the relator failed to plead Citibank’s alleged fraud scheme with particularity under Federal Rule of Civil Procedure 9(b). Although the court agreed that allegations of a reverse false claim do “not require an affirmative misrepresentation in the form of a false statement,” the core of the relator’s complaint was that Citibank transformed third-party compliance reports into false statements. Because the relator neither identified a specific fraudulent statement nor described the alleged third-party compliance failures, her allegations did not pass muster under Rule 9(b).

The FCA’s “Alternate Remedy” Provision

The Second Circuit also affirmed the district court’s determination that the relator was not entitled to any share of the $400 million penalty Citibank paid to the OCC in 2020. The court joined the Third, Sixth, Eighth, and Ninth Circuits to hold that under 31 U.S.C. § 3730(c)(5), a relator could be eligible for a share of the government’s recovery from an “alternate remedy” only by pleading a valid cause of action under the FCA.

Takeaways

The Second Circuit’s holding narrows the landscape of potential obligations that could provide fodder for an FCA action based on reverse false claims. After Miller, five circuit courts of appeals have held that a reverse false claim cannot be based on the mere possibility of civil penalty, subject to the government’s discretion.