Materiality

Subscribe to Materiality

On July 26, Senator Chuck Grassley (R-IA) introduced a long-promised bill to amend the False Claims Act (FCA).  Not-so-creatively entitled the False Claims Act Amendments Act of 2021 (S.B. 2428), the proposed legislation is notably co-sponsored by a prominent—and bipartisan—group of senators.  The text of the bill, available here, would most importantly bring changes to the analysis of the FCA’s materiality element while also affecting the process through which defendants may obtain discovery from the government.

According to a press release issued by Senator Grassley, the legislation is mainly intended to “clarif[y] the current law following confusion and misinterpretation of the Supreme Court decision in United Health Services v. United States ex rel. Escobar.”  As we have previously covered at length (in blog posts dated June 23, 2016; March 20, 2020; April 8, 2020; and June 25, 2021) the U.S. Supreme Court’s 2016 decision in Escobar confirmed that the FCA’s materiality element is “rigorous” and “demanding,” and that it cannot be satisfied simply by showing that the government would have had the “option” to decline payment had it known the facts underlying an allegedly fraudulent claim.

Instead, Escobar focuses the materiality inquiry on the government’s actual or likely response to alleged fraud: if the government regularly pays similar claims with knowledge of the facts, that is “strong evidence” that the alleged misrepresentations are not material; on the other hand, if the government often denies payment under similar circumstances, that supports a finding of materiality.

In Senator Grassley’s view, however, Escobar has given way to “confusion” and “misinterpretation” that “has made it all too easy for fraudsters to argue that their obvious fraud was not material simply because the government continued payment.”   Consistent with that view, the proposed legislation appears calculated to make materiality-based dismissals—as well as other kinds of dismissals—more difficult for FCA defendants to obtain.  Whether it would succeed in that aim, however, is open to debate.Continue Reading Changes Coming to the FCA?  Proposed Amendments Would Impact Materiality Analysis, Government Discovery, Among Other Issues

How should a court evaluate the FCA’s materiality requirement when the government’s ability to deny claims is constrained? According to a recent decision from the Eleventh Circuit, the court should “broadly” consider the government’s “pattern of behavior as a whole,” and may find evidence of materiality in administrative actions that might not support materiality in other cases.

Background

The case, U.S. ex rel. Donnell v. Mortgage Investors Corporation, was brought by two mortgage brokers who specialized in originating mortgage loans guaranteed by the United States Department of Veterans Affairs (VA). Under the program at issue, VA regulations limited the fees and costs lenders could collect from veterans and required lenders seeking VA guarantees to certify compliance with the fee-and-cost restrictions. The relators alleged that the defendant, Mortgage Investors Corporation (MIC), defrauded the VA by charging veterans prohibited fees and falsely certifying they had not done so.

After originating loans and obtaining VA guarantees, MIC typically sold its loans on the secondary market to holders in due course. This introduced an “important wrinkle,” the appeals court noted, because the VA is statutorily required to honor its guarantee when borrowers default on loans possessed by holders in due course.Continue Reading Eleventh Circuit Broadens Materiality Analysis for Some Cases

As 2020 draws to a close, we take a look back at a number of the most significant False Claims Act (FCA) cases of the prior 12 months.  Although no blockbuster cases emerged, such as the Supreme Court’s 2016 decision in Escobar, there were a number of noteworthy cases that will have lasting impact on future FCA litigation.  We discuss those cases briefly below.  We expect to cover these cases and much more in our Healthcare Fraud and Abuse Review, which we will release in early 2021.

Materiality

U.S. ex rel. Janssen v. Lawrence Memorial Hospital, 949 F.3d 533 (10th Cir. 2020)

Background.  In 2016, the Supreme Court held in Escobar that whether a defendant can be held liable under the FCA for violating a statute, rule, regulation, or contract provision turns, in part, on the elements of materiality and scienter, which the Court said are “rigorous” and “demanding.”  Post-Escobar, courts have grappled with specific applications of these standards, with some courts appearing to apply them less “rigorously” than others.

Allegations.  In U.S. ex rel. Janssen v. Lawrence Memorial Hospital, the relator primarily alleged that the defendant hospital falsified patient arrival times associated with certain CMS pay-for-reporting and pay-for-performance programs.  The relator introduced proof that the hospital had knowingly falsified arrival times in patient records by recording actual arrival times on patient triage sheets but then entering later times in the medical record or delaying patient registration until after the administration of some tests.Continue Reading Key False Claims Act Cases in 2020

The roller coaster ride of U.S. ex rel. Ruckh v. Genoa Healthcare, LLC continues.  In a previous post, we wrote about the staggering $348 million judgment entered following a jury verdict against a management company and skilled nursing facilities (SNFs) owned by Consulate Health Care.  The jury found the defendants committed False Claims Act (FCA) violations by artificially inflating Resource Utility Group (RUG) levels for Medicare therapy patients and falsely certifying that the SNFs had created timely and adequate patient care plans required by Medicaid.  Following the judgment, defendants filed a motion for judgment as a matter of law under Federal Rule of Civil Procedure 50(b), and as we noted here, the district court judge took the extraordinary step of overturning the judgment on materiality grounds.

In the latest turn, the Eleventh Circuit reversed the district court’s decision in part and reinstated most of the jury verdict.  While the district court, in applying Escobar’s materiality standard, had found “an entire absence of evidence” of materiality, the Eleventh Circuit reached the opposite conclusion, holding that “plain and obvious” evidence of materiality supported a jury verdict of $85 million in single damages.  The appellate court ordered the district court to enter judgment in treble that amount, plus per-claim statutory penalties under the FCA.  That comes to over $255 million.Continue Reading Eleventh Circuit Reinstates Massive FCA Judgment in Ruckh

The Tenth Circuit recently affirmed the dismissal of a declined qui tam False Claims Act lawsuit filed against Lawrence Memorial Hospital (LMH) by a former LMH employee, reasoning that the materiality inquiry focuses on the likely reaction of the Government. In U.S. ex rel. Janssen v. Lawrence Memorial Hospital, 949 F.3d 533 (10th Cir. 2020), the relator alleged that over a period of years LMH engaged in two fraud schemes:

  1. LMH falsified patient arrival times submitted to Medicare under certain programs that tied compensation to quality-of-care metrics; and,
  2. LMH falsely certified compliance with a requirement under the Deficit Reduction Act that it educate employees with detailed information about the False Claims Act.

Continue Reading Tenth Circuit Strictly Enforces Materiality Requirement to Nix FCA Lawsuit

This is the second post of a two-part discussion of recent developments related to the materiality standard set forth by the Supreme Court in Universal Health Services v. U.S. ex rel. Escobar.  Read our previous post, which covered appellate court decisions and key decisions related to government knowledge and payment.

Courts Take Differing Approaches to the Significance of Government Intervention Decisions

In assessing the False Claims Act’s (FCA) materiality element, courts have increasingly taken divergent approaches to analyze the significance of the government’s decision about whether to intervene in a qui tam action.

In several 2019 decisions, district courts held that the government’s decision to intervene in a qui tam action was relevant – even if not dispositive – to the materiality analysis under Escobar.  In U.S. ex rel. Longo v. Wheeling Hospital, Inc., for instance, the U.S. District Court for the Northern District of West Virginia found that the government’s decision to intervene in the very qui tam action before it “strongly militate[d] in favor of materiality.”  And in U.S. ex rel. Arnstein v. Teva Pharmaceuticals USA, Inc., the U.S. District Court for the Southern District of New York explained that the government’s decision to intervene in “a factually similar case” in the same district “provide[d] strong evidence that AKS [Anti-Kickback Statute] violations were material to the Government’s payment decisions,” even though the government had not intervened in the case before the court.Continue Reading Escobar’s “Rigorous” Materiality Standard: Recent Developments – Part Two

This is the first post of a two-part discussion of recent developments related to the materiality standard set forth by the Supreme Court in Universal Health Services, Inc. v. U.S. ex rel. Escobar.  Our second post covers government intervention decisions, the “essence of the bargain” test, and the materiality of Anti-Kickback Statute violations.

The Supreme Court’s 2016 decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar continues to play a significant role in FCA litigation, particularly with respect to courts’ analyses of the FCA’s materiality element.  In Escobar, the Supreme Court described the materiality element as “rigorous” and “demanding” and set forth a number of non-exclusive considerations to guide the materiality inquiry, which primarily focus on the government’s actual conduct and its payment (or non-payment) of purportedly false claims.  In 2019, courts continued to grapple with specific applications of Escobar’s directives, with some courts appearing to apply its materiality guidance less “rigorously” than others.

Some Appellate Courts Appear to Apply Escobar Less Rigorously Than Others

As we have previously discussed, the seemingly irreconcilable decisions issued by the nation’s circuit courts about how Escobar’s non-exclusive factors should apply in particular cases led parties in at least three such cases to seek further clarity from the Supreme Court.  But last year the Supreme Court denied review in each of those three cases, perhaps signaling that – at least for now – it is content to allow the various issues raised in Escobar to continue to percolate in the lower courts.Continue Reading Escobar’s “Rigorous” Materiality Standard: Recent Developments – Part One

The Medicare Advantage program, which allows private insurance companies to offer and administer Medicare benefits, continues to be an area of sharp scrutiny for False Claims Act (FCA) enforcement despite some significant recent setbacks in pursuing FCA liability against Medicare Advantage Plans (MA Plans or Plans).  In 2018, several district court decisions raised obstacles to the pursuit of FCA liability against MA Plans, and those decisions have continued to affect FCA enforcement efforts in the first half of 2019.  Despite those setbacks, however, the prevalence of government enforcement actions involving Medicare Advantage illustrates that it remains an area of focus for the Department of Justice (DOJ).

The Focus on Medicare Advantage

Unlike traditional fee-for-service Medicare, MA Plans are compensated on a monthly basis through a fixed payment for each member.  The amount of the monthly payment – known as a capitation payment – is determined for each payment year through a process called “risk adjustment” and is based on each individual member’s demographic information and data reflecting the member’s medical condition, as documented during the 12 months preceding the payment year.  A member’s condition and medical diagnoses must be supported by a valid medical record.Continue Reading Medicare Advantage: Recent Developments in FCA Enforcement

In 2016, the U.S. Supreme Court handed down its decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar confirming the viability of the implied false certification theory in False Claims Act (FCA) cases and mandating that claims brought pursuant to that theory satisfy “demanding” materiality and scienter requirements.  As discussed in a prior post, since Escobar, the U.S. Courts of Appeals have wrestled with analyzing and applying the materiality and scienter requirements discussed in the Supreme Court’s opinion, resulting in a number of recent petitions for writ of certiorari filed with the Supreme Court seeking clarification of the Escobar mandates.

In one of its first actions of 2019, the Supreme Court recently denied petitions in two closely-watched FCA cases, U.S. ex rel. Harman v. Trinity Industries, Inc., and Gilead Sciences Inc. v. U.S. ex rel. Campie.

$660 Million Reversal Stands in Harman

The plaintiff-relator in Harman sought review from the Supreme Court after the U.S. Court of Appeals for the Fifth Circuit reversed a $660 million jury verdict, holding that the relator failed to prove that the defendant’s alleged misrepresentations were material to government’s payment decisions.  The relator in Harman claimed that the defendant produced and sold defective highway guardrails to various states, causing them to submit fraudulent claims for reimbursement to the federal government.  However, evidence was presented that the Federal Highway Administration was aware of the alleged defects but continued to pay for the guardrails despite their non-compliance.  Relying on Escobar, the Fifth Circuit held that relator failed to overcome such “strong evidence” that the requirements at issue were not material.   The Supreme Court’s recent denial of the relator’s petition leaves intact the Fifth Circuit’s judgment and precedential opinion, providing a potential defense to FCA defendants in cases where the government was aware of certain conduct but continued to pay claims.Continue Reading With Widening Circuit Splits and Mounting Pressure, Will 2019 See a Post-Escobar Decision from the Supreme Court?

From the Bass, Berry & Sims Blog Network
From the Bass, Berry & Sims Blog Network

Thought Leadership by our Attorneys.