3rd Circuit Reopens FCA Suit Over Pittsburgh’s Use of Federal Funds

A three-judge panel of the U.S. Court of Appeals for the Third Circuit recently decided in a non-precedential opinion that a District Court judge erred in dismissing too quickly a False Claims Act (FCA) case in which fair housing advocacy groups sued the City of Pittsburgh, Pennsylvania for allegedly submitting false claims to HUD to receive federal grants for housing and community development.  The Third Circuit panel remanded the case back to the District Court to determine whether the appellants (here, the advocacy groups) can overcome the public disclosure bar, and if so, to determine whether their allegations meet the new “materiality” standard for false claims, set out by the U.S. Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar.

The advocacy groups initially sued the City claiming that, since at least 2006, the City defrauded HUD by annually submitting false claims to HUD to secure federal grant funding intended for housing and community development that was allegedly used instead on impermissible expenditures like regular governmental responsibilities, such as street repaving and infrastructure repairs.  The advocacy groups asserted that they became aware of the false certifications when the City made statements of its compliance with conditions that were required to obtain such funding, such as (1) taking appropriate actions to address impediments to fair housing, (2) adopting a citizen participation plan to allow comments and public hearings on the proposed use of federal funds, and (3) limiting the funds for use only with respect to eligible activities.

The District Court originally dismissed the case partly because the judge determined that the advocacy groups based their complaint on public knowledge, rather than first-hand knowledge of the City’s alleged false claims, and thus the claims did not survive the FCA’s public disclosure bar.  The District Court also held that even if the allegations were true, the City still would not be liable because the certifications addressed conditions of participation in the programs, rather than conditions for payment by HUD.  At the time of the dismissal, the District Court relied on United States ex rel. Wilkins v. Universal Health Group, Inc., which made such distinctions between conditions of payment and conditions of participation for determining FCA liability.  However, in a subsequent decision by the U.S. Supreme Court, Escobar rejected this distinction and established a new “materiality” standard.

Regarding the public disclosure issue, the Third Circuit panel determined that the case should not have been decided at the motion to dismiss stage of the proceedings because the advocacy groups asserted that they had independent material knowledge of the City’s false claims without reliance on the City’s public disclosures.  Rather, according to the panel, the advocacy groups should have been given an opportunity to develop the facts in discovery to prove that they directly observed the City making false certifications to HUD.

Thus, the panel vacated the order of dismissal and remanded the case to the District Court to reconsider the public disclosure bar on a full record after discovery.  If the case survives that review, then the District Court is to apply the Escobar materiality standard to determine whether the City’s compliance or non-compliance with the conditions would have been material to the government’s decision to make payment.

The case is United States ex rel. Freedom Unlimited, Inc. v. City of Pittsburgh, Case No. 17-1987 (3d Cir. March 28, 2018) and is available here.