In United States v. Luce, the Seventh Circuit overturned a two-decade precedent by holding that proximate causation, and not “but for” causation, was the proper standard to employ in FCA cases. In so holding, the Seventh Circuit undid the 25-year circuit split it had created through use of “but for” causation in FCA cases.
In Luce, the defendant was the founder and president of MDR Mortgage Corp., a mortgage lending business. MDR sought to participate in the Fair Housing Act (FHA)’s insurance program, which requires mortgagees annually certify that that none of its owners, officers, and/or employees were currently, or had previously been, involved “in a proceeding and/or investigation that could result, or has resulted in a criminal conviction, debarment, limited denial of participation, suspension, or civil money penalty by a federal, state, or local government.” Luce had been indicted in 2005 for fraud and obstruction of justice, but nevertheless certified on behalf of MDR that it was in compliance with the FHA program requirements. In 2008, MDR notified the federal government of Luce’s prior indictment.
Pursuant to this finding, the United States brought an FCA action against Luce alleging that he defrauded the federal government by falsely certifying that he had no criminal history so that MDR could participate in the FHA’s insurance program. As part of his defense to these allegations, Luce argued that the Seventh Circuit should adopt a more rigorous causation standard in accordance with the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar and other federal circuit case law.
The Seventh Circuit first adopted the “but for” causation standard for FCA cases in United States v. First National Bank of Cicero, 957 F.2d 1362 (7th Cir. 1992). In Cicero, the court reasoned that 31 U.S.C. § 3729(a)(1)’s language that the government could recover treble the damages it sustained “because of” the defendant’s fraudulent acts justified a broad and inclusive “but-for” causation test. Luce argued that the court should overrule Cicero and apply common-law fraud principles’ more stringent causation standard to assess a defendant’s liability.
Though the 2016 Escobar opinion does not directly address causation, the opinion does emphasize the importance of applying common-law fraud principles to FCA cases (i.e., the application of the proximate causation test). The Luce court followed this direction and overruled Cicero.
For 25 years, the Seventh Circuit acted as an outlier in its use of the but-for causation standard for FCA cases. In overruling this precedent and employing the proximate causation standard for FCA cases, the Seventh Circuit stated: “The proximate causation standard ‘separates 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.”
As new and expansive FCA theories continue to appear, the Luce opinion demonstrates an attempt to keep claims within the FCA’s intended parameters. Prior to the Luce decision, the Seventh Circuit was an attractive venue for FCA relators given its lenient and broad but-for causation standard. But now, FCA relators will have to allege and set forth enough facts to prove the more stringent proximate causation standard to survive motion practice. FCA defendants will undoubtedly rely heavily upon Luce to curtail the ever-expanding and novel theories of liability under the FCA.