As our readers may recall, there is a circuit split about whether reverse False Claims Act (FCA) liability may be triggered based on discretionary government penalties that have not yet been invoked against a defendant. In United States ex rel. Chiles v. Cooke Inc., 185 F.4th 12 (2d Cir. 2026), the Second Circuit weighed in and held that unassessed civil penalties for statutory violations do not constitute an “obligation to pay” sufficient to support reverse FCA liability.
Background
Relators W. Benson Chiles and Chris Manthey (collectively the Relators) initially filed this qui tam action in 2021 against Cooke Inc., Cooke Aquaculture Inc., Cooke Omega Investments Inc., Cooke Seafood USA Inc., Omega Protein Corporation, Omega Protein, Inc., and several individual officers and employees, as well as BMO Capital Markets Corp. and Alpha VesselCo entities (collectively the Defendants). Relators allege that Cooke, a private Canadian conglomerate, structured its acquisition of Omega Protein to give “the illusion of independent ownership” and conceal noncompliance with the American Fisheries Act’s (AFA) citizenship requirement for fishery endorsements. In the amended complaint, Relators asserted four FCA causes of action including presenting false or fraudulent claims, making false statements material to a false claim, conspiracy to violate the FCA, and a reverse false claim theory.
After the government declined to intervene in March 2024, Defendants moved to dismiss the amended complaint arguing that Relators failed to state a claim. The district court granted the Defendants’ motion on all claims, and Relators appealed.
The Second Circuit’s Opinion
Before reaching the reverse false claim theory, the Second Circuit addressed Relators’ first three FCA theories, which all required a showing that Defendants made a claim for “property” under the FCA. Relators argued that the wild menhaden fish harvested in U.S. waters constituted “property” within the meaning of the statute. The court disagreed, holding that under well-settled Supreme Court precedent, including Hughes v. Oklahoma, 441 U.S. 322 (1979), “no one owns or has a property interest in wild fish within state or federal waters.” Although the court recognized that governments retain broad regulatory power over wild fish, it emphasized that regulatory authority does not create a cognizable property right sufficient to support an FCA claim.
The Second Circuit then considered Relators’ reverse FCA theory. The FCA’s reverse false claim provision imposes liability on any person who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the [g]overnment.” 31 U.S.C. § 3729(a)(1)(G). The FCA defines “obligation” as “an established duty, whether or not fixed,” arising from enumerated sources such as a statute or regulation. Id. § 3729(b)(3).
The Second Circuit recognized that for a reverse FCA claim to lie, the AFA’s civil penalties needed to be self-executing and mandatory. To determine whether that was the case, the Second Circuit examined the AFA’s statutory language and found several indicators of discretion within the statutory scheme. For example, the AFA provides that the Maritime Administration “may conduct investigations and inspections regarding compliance,” and the relevant Maritime Administration regulation notes that certain penalties “may apply” if an entity violates the citizenship requirement. The court determined that the AFA’s use of “may” necessarily implies discretion and undercuts any argument that the civil penalties are mandatory and non-discretionary.
The court also noted that the AFA’s enforcement mechanism, which allows the Secretary of Transportation to impose a civil penalty, indicates that affirmative steps must be taken by the government to communicate, confirm, and collect the penalties. This language also undermined the Relators’ argument that the AFA’s penalties are self-executing and non-discretionary. Based on this reasoning, the Second Circuit affirmed the dismissal of Relators’ reverse FCA theory.
Takeaways
Chiles reinforces the growing consensus among the circuits that unassessed, discretionary penalties cannot give rise to a reverse false claim under the FCA. Chiles confirms that the mere existence of a statutory violation, without more, does not create an “obligation” that can form the basis of FCA liability.
As always, we at Qui Notes will continue to monitor ongoing developments in reverse FCA jurisprudence that may be of interest to our readers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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