On July 15, the U.S. Court of Appeals for the 9th Circuit reversed a district court’s dismissal of a qui tam action alleging that a mortgage lender and its founder and chief executive made false statements in a PPP loan application in violation of the False Claims Act (FCA), holding that the relator’s claim was not barred by the FCA’s public disclosure bar and that the district court abused its discretion in denying the relator leave to amend its complaint.

The lender had received and had forgiven a PPP loan of nearly $5 million, and the relator alleged that the lender misrepresented its eligibility for those funds because it was a mortgage lender categorically excluded from the program, that its use of loan proceeds, given that ineligibility, necessarily violated the program’s purpose, that it falsely certified the loan was necessary because its revenue and profits had not declined during the pandemic, and that it falsified its employee headcount to inflate the size of the loan it received. The district court had dismissed the suit after concluding that the FCA’s public disclosure bar applied because a public-facing government website that provides information on PPP loans had already disclosed the lender’s use of a North American Industry Classification System (NAICS) code indicating it was a lending company, which the district court found revealed the lender’s categorical ineligibility for PPP funds.

The 9th Circuit disagreed, holding that the district court had impermissibly assessed the relator’s eligibility theory “at the highest level of generality” because the NAICS code alone did not reveal the lender’s ineligibility, given that federal guidance created exceptions to the general exclusion of lending businesses from the program. Additionally, the district court had not addressed whether information supporting the relator’s allegations that those exceptions did not apply, including that certain of the lender’s loan products could not be disbursed within the timeframe required for an exception, had itself been publicly disclosed. The court also rejected the defendants’ argument that the lender’s own website qualified as “news media” under the public disclosure bar, reasoning that the amended complaint did not allege the website’s primary purpose was disseminating news, that it exercised editorial judgment over third-party information, or that the public would describe it as “news media” in everyday speech.

The court agreed with the district court that the relator’s employee headcount theory rested on speculative inferences from the square footage of a single office, but held that the district court abused its discretion in denying leave to amend that claim, since the relator had amended as a matter of course before any court order identified the deficiency, and futility requires repeated failure to cure deficiencies after a court specifically identifies them, not a single voluntary amendment. The court reversed and remanded for further proceedings, leaving for the district court to resolve in the first instance whether the relator’s other theories of misrepresentation are barred by public disclosure.