Twenty-five years ago, the U.S. Court of Appeals for the Seventh Circuit created a conflict among the circuits by holding, in United States v. First National Bank of Cicero (Cicero),1 that the False Claims Act (FCA) requires a “but-for” causation test, rather than a “proximate causation” test.
The conflict created by this broad but-for causality standard was resolved by the October 2017 decision in United States v. Luce.2
United States v. Luce
The defendant, Robert S. Luce, is an attorney who was employed at various times by the Securities and Exchange Commission and a series of Chicago law firms, and most recently was president and owner of his own mortgage company, MDR Mortgage Corporation. In a matter unrelated to his company, Luce was in 2005 indicted for wire fraud, mail fraud, making false statements, and obstruction of justice.
Alan C. Olson, Marquette 1989, is with Alan Olson Associates in New Berlin, where he focuses on Employment Law, helping wrongfully discharged clients recover lost pay and benefits, and disabled clients recover long-term disability benefits.
Following his indictment, MDR continued to state on its forms filed with the Department of Housing and Urban Development (HUD) and Fair Housing Act (FHA) that its officers were not currently subject to criminal proceedings. During the three-year period of Luce’s misrepresentations, MDR originated 2,500 loans, 250 of which went into default.
The U.S. Justice Department brought an action under the FCA in 2011, alleging that Luce defrauded it by falsely asserting that he had no criminal history so that his company could participate in FHA’s insurance program.
The FCA provides liability for any person who “(A) knowingly presents ... a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”3
The district court held that Luce’s false V-form certifications were a prerequisite to receiving government funds, the but-for cause of the loss, and awarded $10,357,497.69 in damages.
Overruling this decision by the district court, as well as 25 years of precedent under Cicero,4 the Seventh Circuit held on Oct. 23, 2017, that the common-law proximate causation test, rather than the but-for causation test, was applicable in determining liability and damages under the FCA.
Proximate Cause as Appropriate Test
Accepting Universal Health Services Inc. v. United States ex rel. Escobar (Escobar)5 as a catalyst, the Seventh Circuit reviewed the principles of common-law fraud, the FCA’s statutory language, and the rationale of sister circuits to hold that proximate cause is the appropriate test.
In Cicero, the court focused on the language of the statute. The FCA allows the government to recover “3 times the amount of damages which the Government sustains because of the act of that person.”6 The court emphasized that the statute permits recovery of damages that arise “because of” a fraud, not damages “occasioned by the cause of the falsity of the claim.”7
The Cicero court held that, even if the government’s loss was not caused directly by the false application for a guaranteed loan, the FCA claim was valid because the claim for reimbursement would not have been made if the bank had not transmitted, at an earlier date, the false loan application. This reasoning is inconsistent with common law.
Holding Is Inconsistent with Common Law
Generally, under the common law, “[a] fraudulent misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction in reliance upon it if, but only if, the loss might reasonably be expected to result from the reliance.”8 Nonetheless, “[n]ot all losses that in fact result from the reliance are ... legally caused by the representation.”9 Instead, “the misrepresentation is a legal cause only of those pecuniary losses that are within the foreseeable risk of harm that it creates.”10
The Luce court reasoned that the statutory language of the FCA does not suggest Congress sought to depart from the established common-law understanding of causation in fraud cases. The FCA simply allows the government to recover “damages which the Government sustains because of the act of that person.”11 The Luce court further noted that proximate causation comports with the FCA’s statutory purpose by “separat[ing] the wheat from the chaff, allowing FCA claims to proceed against parties who can fairly be said to have caused a claim to be presented to the government, while winnowing out those claims with only attenuated links between the defendants’ specific actions and the presentation of the false claim.”12
Also influencing the Luce decision were the increasing number of circuits, in the years since Cicero, that have adopted expressly proximate causation as a rule more compatible with the statute’s language and purpose. These decisions, along with new guidance by the U.S. Supreme Court instructed the Luce court “on how we ought to interpret congressional enactments dealing with fraud: Absent other direction from Congress, we should assume that Congress did not stray far from the established common law.”13
A Stricter Standard
The holding in Luce raises the proof of causality threshold from a but-for standard to proximate cause. This stricter standard will likely reduce the number of FCA claims brought in the future, and for those FCA claims now pending, render them less likely to succeed.
1 957 F.2d 1362 (7th Cir. 1992).
2 873 F.3d 999 (7th Cir. 2017).
3 31 U.S.C. § 3729(a)(1).
5 ___U.S.___, 136 S. Ct. 1989, 195 L. Ed. 2d 348 (2016).
6 31 U.S.C. § 3729(a)(1) (emphasis added).
7 Cicero, 957 F.2d at 1374.
8 Restatement (Second) of Torts § 548A (Am. Law. Inst. 1977).
11 Id. at 1012 citing 31 U.S.C. § 3729(a)(1) (emphasis added).
12 Id. at 1012-13 (citation omitted).