Would the 7th Circuit Have Changed Its FCA Standard but for Peer Pressure?

The Seventh Circuit finally abandoned its “but-for” causation standard for False Claims Act (FCA) damages. The decision comes 25 years after the Seventh Circuit first adopted its controversial standard requiring only a showing that an injury would not have occurred if not for the conduct. The Seventh Circuit has long been the lone outlier among circuits which have weighed the question, the consensus being that the government is required to demonstrate a “proximate cause” nexus between defendants’ conduct and requested damages—specifically, showing proof that the conduct was a material element and substantial factor in bringing about the injury and that the injury is of the type a reasonable person would see as a likely result of the conduct. Although the Seventh Circuit declined to acknowledge any direct impact by the Supreme Court’s recent FCA ruling in Universal Health Services, Inc. v. United States ex rel. Escobar on the circuit’s decision to overrule its precedent, the decision is nonetheless “cause” for optimism that FCA defendants will now be able to lower the severity of damages assessed for relatively minor misstatements.

In United States v. Luce, the government pursued FCA and Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) causes of action against the owner and president of a now-defunct mortgage company for submitting false certification forms to the Department of Housing and Urban Development (HUD) between 2005 and 2008. To continue to benefit from Fair Housing Act (FHA) protection, mortgagees must certify that their officers are not currently involved in criminal proceedings. Although the owner of the mortgage company was indicted for fraud in April 2005, the company failed to notify HUD until February 2008 and failed to amend its certifications until August 2008, after the owner pleaded guilty to lesser charges. The government sought damages to compensate for losses associated with 237 FHA-covered loans originated during the three-year period, which ultimately went into default. Applying Escobar, the district court found the false certifications material to the government’s decision to allow the company’s participation in the program, and adjudicated the mortgage company owner liable for FCA and FIRREA violations. The Seventh Circuit affirmed the district court’s materiality and liability determinations.

On the issue of FCA damages, the district court found that “but-for” causation was still the law of the land in the Seventh Circuit and declined to hold that Escobar altered the jurisdiction’s precedent. Having long taken the approach that the government’s loss need not be directly attributed to a false statement, the Seventh Circuit uncomfortably grappled with the ghosts of precedent. Although the court emphasized that “nothing in [Escobar] directly addresses the question of FCA causation or the circuit split,” the Seventh Circuit conceded that Escobar “does give us pause.” Rather than acknowledging Escobar as overruling Seventh Circuit precedent, the circuit purported to voluntarily engage in a “careful reevaluation” of the issue based on the common-law meaning of fraud, FCA text, and the decisions of other circuits.  Ultimately, the court determined that its “but-for” precedent simply cannot “live in peace” with the opinions of the Third, Fifth, Tenth, and D.C. Circuits adopting a proximate cause standard. The court accordingly remanded the matter to the district court to weigh the evidence and assess damages anew.

Regardless of why the Seventh Circuit decided to revisit causation, the impact is clear—proximate cause is the reigning standard for FCA causation and defendants may be cautiously optimistic that the risk of “but-for” FCA causation has abated.