District of New Mexico: Government-Knowledge Defense Survives Summary Judgment, But Not the Good-Faith Reliance Defense

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United States ex rel. Baker v. Community Health Systems, Inc. (D.N.M. January 3, 2014) is a False Claims Act case in which the government has intervened against defendant hospitals accused of making donations to New Mexico counties in order to obtain additional Medicaid funding. A key fact is that the operative Medicaid reimbursement claims were actually made by the state of New Mexico to the Medicaid program, not by the hospitals themselves.

 As an affirmative defense, the defendant hospitals contended that the state was aware of the donations and nevertheless made the claims to the federal government. The defendants argued that the relevant government officials thus knew all of the material facts at the time the claims were made. The defendants contended that government’s knowledge precluded their own liability.

 Additionally, the defendants argued that they took their actions in good-faith reliance upon the statements and assurances of various government officials. They asserted that such good-faith reliance constituted an affirmative defense to liability under the False Claims Act.

 On plaintiffs’ summary judgment motion on the two affirmative defenses, the district court ruled that the government-knowledge defense survived, while the reliance defense did not.

 Though the government’s knowledge of the material facts can absolve a defendant of liability under the False Claims Act by negating the intent element, the government’s knowledge of the relevant facts must be “so extensive that the contractor could not as a matter of law possess the requisite state of mind to be liable under the FCA.” Shaw v. AAA Engineering & Drafting, Inc., 213 F.3d 519, 534 (10th Cir. 2000).

 In Baker, the court found that the evidence created a genuine dispute of material fact about the extent of the government’s prior knowledge of the hospitals’ donations at the time the state submitted its Medicaid claims. Thus, the court denied the summary judgment motion on this affirmative defense.

 As for the second defense, the district court observed that “[t]o invoke a defense of good faith reliance, a defendant must establish two elements: (a) full disclosure of all pertinent facts to an expert, and (b) good faith reliance on the expert’s advice” (internal quotation marks omitted). Under this standard, the defendants argued that they made the donations in reliance upon the advice of the New Mexico state employee responsible for the administration of the relevant program. The government and relators countered that the state employee was not told about the purpose of the donations, particularly that the donations were intended to increase the amount of money paid to the hospitals.

 Notwithstanding some evidence that the defendants did in fact seek the advice of the state employee in question, the court ruled that the evidence established beyond dispute that the defendants “did not act in complete good faith in asserting reliance” on the employee’s advice. That evidence included internal communications among the defendants’ key decision-makers discussing the correct interpretation of the applicable regulations and a warning from one of the relators to key personnel that the defendants’ actions were fraudulent. Moreover, advice that defendants received from other relevant state representatives contradicted the advice they purported to rely upon.

 While the court permitted the defendants to use the advice they received at trial to negate the elements of falsity and intent, the court ruled that such advice did not constitute an absolute defense.