Since the 2016 Supreme Court decision in Universal Services Inc. v. United States ex rel. Escobar, courts have wrestled with exactly how to apply the unanimous decision. This post highlights developments across the country in numerous substantive areas addressed in the Escobar decision. If you need a refresher on the Escobar decision, see our previous post explaining the major elements of the case.
Moving Toward a Uniform Standard on Implied Certification
The Supreme Court decided in Escobar that implied false certification is a viable theory of liability — where “a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant’s representations misleading with respect to the goods or services provided.” A growing number of courts have determined that liability under this theory may attach only when the two prerequisites are found: (1) specific representations about the goods or services provided, and (2) the failure to disclose noncompliance with material statutory, regulatory or contractual requirements that renders those specific representations misleading or false. For example:
- United States ex rel. Rose v. Stephens Institute, 901 F.3d 1124 (9th Cir. 2018) (adopting the two-part test and requiring both prongs to be established by the plaintiff in a case involving the incentive compensation ban in educational entities)
- United States ex rel. Kolchinsky v. Moody’s Corp., 2017 WL 825478 (S.D.N.Y. Mar. 2, 2017) (stating that “an FCA complaint premised on implied certification must satisfy ‘two conditions’….”)
- United States ex rel. Schimelpfing v. Dr. Reddy’s labs Ltd., 2017 WL 1133956 (E.D. Pa. Mar. 27, 2017) (noting the Third Circuit “appears to interpret Escobar as requiring specific representations that, in conjunction with the claimant’s purposeful omissions, renders the ensuing claims legally false”)
Deepening Divides Regarding Pleading and Proving Materiality
Conversely, there appears to be a deepening circuit split developing regarding how plaintiffs must plead and prove materiality after Escobar. In its decision, the Supreme Court noted that the materiality standard is “rigorous,” “demanding,” and is focused on the actual behavior of the government in evaluating claims, as opposed to whether the government would be “entitled to refuse payment were it aware of the violation.” Less than two years later, more than $1 billion in jury verdicts obtained by relators in FCA actions have been set aside as a result of a failure to meet this standard:
- United States ex rel. Harman v. Trinity Industries, Inc., 872 F.3d 645 (5th Cir. 2017) (vacating $663 million judgment and noting “the jury’s findings of liability [could not] stand for want of materiality” because the relator failed to meet the “substantially” increased burden set by Escobar to prove materiality where the government continued making payments after learning of the alleged fraud)
- United States ex rel. Ruckh v. Salus Rehabilitation, LLC, 2018 WL 375720 (M.D. Fla. Jan. 11, 2018) (vacating the jury’s $348 million judgment against the defendants after reviewing the evidence on the question of materiality in light of Escobar)
Circuit courts also have split regarding how to apply the standard both at the pleadings stage and at summary judgment:
- United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822, 826 (6th Cir. 2018) (reversing dismissal where the court determined that the regulation at issue was material where it was labeled a condition of payment and could be a “mechanism for fraud prevention” and holding that the relator’s failure to plead facts regarding past government payment practices “has no bearing on the materiality analysis”)
- United States ex rel. Petratos v. Genentech Inc., 855 F.3d 481, 485 (3rd Cir. 2017) (affirming dismissal of an FCA claim where relator failed to plead that knowledge of a violation could influence the government’s decision to pay and where the government failed to take remedial action or intervene in the case)
- United States v. Sanford-Brown, Ltd., 840 F.3d 445, 447 (7th Cir. 2016) (affirming dismissal of an FCA claim at summary judgment for failure to establish materiality where contracting agency continued to do business with defendant after discovering the alleged regulatory noncompliance and relator could not show evidence that the government’s payment decision would have been different had it actually known of the alleged noncompliance beforehand)
- United States ex rel. Nargol v. DePuy Orthopaedics, Inc., 865 F.3d 29, 36 (1st Cir. 2017) (affirming dismissal of FCA allegations regarding misstatements to the FDA and finding “very strong evidence that those requirements are not material” where the FDA took no actions against the manufacturer after becoming aware of the allegations)
- United States v. Triple Canopy, Inc., 857 F.3d 174, 175 (4th Cir. 2017) (finding omissions regarding marksmanship for security forces material due to “common sense,” defendants’ own actions in covering up the misrepresentations, the government’s refusal to renew the contract and decision to immediately intervene in the underlying action)
- United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890, 895 (9th Cir. 2017) (reversing dismissal on materiality grounds where evidence regarding past government payment practices was not before the court and where relators pleaded that there would be “more than the mere possibility that the government would be entitled to refuse payment if it were aware of the violations.”)
Although a majority of courts appear to view Escobar as setting a more stringent standard for establishing materiality, that view is not universal, and the stringency of the standard that is applied may depend on the circuit in which allegations are raised and addressed. While circuit courts appear to be coalescing around the two-part test discussed in Escobar, it remains to be seen whether similar consensus will develop regarding pleading and proving materiality. At least at the moment, government contractors and healthcare providers will need to continue to engage in a thorough analysis regarding whether statutory, regulatory or contractual obligations are material to the government’s decision to pay a particular claim and have the potential result in liability under the FCA.
To stay updated on continuing developments related to courts’ interpretation and application of the Escobar opinion, subscribe to this blog and/or contact a member of the Bass, Berry & Sims Healthcare Fraud Task Force.