U.S. ex rel. Kasowitz Benson Torres LLP v. BASF Corp.,___F.3d___, Case No. 18-7123 (D.C. Cir. July 5, 2019).
The District of Columbia Circuit Court has refused to recognize liability under the federal False Claims Act for failure to meet federal Toxic Substances Control Act (TSCA) reporting requirements and failure to pay unassessed TSCA penalties.
Factual and Procedural Background
The Toxic Substances Control Act requires a chemical manufacturer, among other things, to inform the U.S. Environmental Protection Agency (EPA) of information that reasonably supports a conclusion that a substance or mixture presents a substantial risk of injury to health or the environment. Administrative actions and civil penalties may be imposed on any individual or entity that violates this duty to disclose. Between 1991 and 1996, the EPA offered a reduced civil penalty for late disclosure as part of a Compliance Audit Program.
The law firm Kasowitz Benson Torres LLP (Kasowitz) sued BASF Corporation, Covestro LLC, Down Chemical Company, and Huntsman International LLC for violations of the False Claims Act. Kasowitz alleged the chemical companies manufacture isocyanate chemicals and that, beginning in the late 1970s through the early 2000s, the chemical companies failed to disclose required information to EPA about adverse health effect of the chemicals. The complaint alleged violations of the reverse false claims and conversion provisions of the FCA. The reverse false claim provision specifies that any person who knowingly makes a false record or statement material to an obligation to pay or transmit money or property to the federal government, or knowingly conceals or avoids an obligation to pay or transit money or property to the Government is liable.
The U.S. District Court rejected Kasowitz’s legal theories and granted defendants’ motion to dismiss for failure to state a claim. Kasowitz appealed the dismissal.
The D.C. Circuit’s Decision
FCA Reverse False Claim Counts—Failure to Pay
Kasowitz first argued that the chemical companies’ failure to pay civil penalties under TSCA and the Compliance Audit Program constituted knowing concealment or improper avoidance of an obligation to pay money. The court rejected this claim as to both the civil penalty and the Compliance Audit Program.
First, the court noted that EPA did not assess TSCA penalties against the defendants for failing to report substantial risk information regarding isocyanate chemicals. There was no FCA “obligation” for the defendants to avoid or conceal. Kasowitz insisted that TSCA automatically imposed an obligation to pay a civil penalty at the moment of a violation. The court rejected this argument, noting that TSCA gives EPA discretion to impose an appropriate civil penalty or no penalty at all for violations. Further, the court noted, TSCA recognizes that not every violation results in a civil penalty.
Second, the court noted that the Compliance Audit Program offered a reduced civil penalty in exchange for submitting overdue substantial risk information, but it did not create any additional penalty for a participating company that failed to submit information. A manufacturer that withheld substantial risk information was in the same position it would have been in had it not participated in the Compliance Audit Program at all.
FCA Reverse False Claim Counts—Failure to Transmit Property
Kasowitz next argued that the chemical companies violated the reverse false claim act provisions of the FCA by knowingly concealing or improperly avoiding an obligation to pay or transmit property in the form of substantial risk information. The D.C. Circuit assumed, without deciding, that substantial risk information constituted “property” for purposes of the FCA, and reframed the issue as whether the TSCA obligation to inform EPA of substantial risk information qualifies as an obligation to transmit property.
The court rejected this second argument, reasoning that TSCA gives EPA only one interest in substantial risk information: the right to be informed of it. The statutory right to be informed does not constitute a traditional property right. Thus, the court concluded, TSCA’s command to inform the EPA of substantial risk information is not an obligation to “transmit” an interest in “property” under the FCA. Further, the court concluded that the FCA is not a vehicle for punishing “garden-variety” regulatory violations, such as a reporting or disclosure obligation.
FCA Conversion Claim
Kasowitz’s next alleged that the chemical companies violated the FCA’s conversion provision by failing to deliver money (TSCA civil penalties) or property (substantial risk information) to EPA. The court rejected this claim.
To be liable under the conversion provision, a defendant must possess property or money used or to be used by the government. The court reasoned that the chemical companies did not possess any such money or property because EPA never assessed civil penalties and an obligation to pay does not automatically arise based on defendants’ alleged violations of the TSCA.
Conclusion and Implications
This case demonstrates that although information can be legally deemed “property” in some circumstances, under TSCA, an alleged failure to provide substantial risk information does not give rise to liability under the False Claims Act. Further, unassessed civil penalties do not give rise to any obligation to pay the government under the False Claims Act.
https://www.cadc.uscourts.gov/internet/opinions.nsf/E61F49F2119EAF2B8525842E004EF863/$file/18-7123-1795866.pdf
(Rebecca Andrews)
