On May 18, 2017, in Petras v. Simparel, Inc., the US Court of Appeals for the Third Circuit, in a case of first impression, held that a government entity acting as a receiver for a private entity is not the "government" for the purpose of asserting a reverse False Claims Act (FCA) claim. The Third Circuit agreed with the reasoning of the Fifth and Ninth Circuits in similar cases that a government entity taking over the day-to-day operations of a private entity steps into the private status of the entity and does not retain government status. ( (3d Cir. May 18, 2017).)

The plaintiff, the former CFO of Simparel, brought a reverse FCA claim against Simparel and two of its chief officers. A reverse false suit arises from fraudulent efforts to reduce or avoid an obligation to pay the government (31 U.S.C. § 3729(a)(1)(G)). The plaintiff claimed that Simparel engaged in fraudulent activity to avoid paying contingent dividends to its initial investor and preferred shareholder, L Capital, a venture capital firm licensed by the Small Business Administration (SBA), a federal agency. The SBA was appointed as receiver of L Capital in 2012 after L Capital failed to comply with its SBA funding agreement. The plaintiff argued that this made the potential dividends payable to the SBA, and therefore to the government, and that Simparel avoided paying the dividends to the government in violation of the FCA.

Simparel moved to dismiss the plaintiff's reverse FCA claim for failure to state a claim under FRCP 12(b)(6).The district court granted the motion, holding that the plaintiff did not state a reverse FCA claim because his allegations that Simparel was obligated to pay dividends to the government were too speculative. The plaintiff appealed.

On appeal, the Third Circuit upheld the District Court’s dismissal. The court explained that the plaintiff could not state a reverse FCA claim without showing that Simparel avoided its obligation to make payments to the "government." The Third Circuit relied on similar decisions by the Fifth and Ninth Circuits holding that a government entity, acting as a receiver for a private entity, is not considered the "government." In this case, the Third Circuit reasoned, the SBA acting as a receiver was not the "government" because, when a government entity takes on the day-to-day operations of a private entity as a receiver, it steps into the private status of the entity and does not retain government status. Therefore, the plaintiff could not state a reverse FCA claim against Simparel, so the Third Circuit affirmed the district court's dismissal of the plaintiff's claims.

For more information on the FCA generally, see Practice Note, Understanding the False Claims Act.