On Remand, First Circuit in Escobar Minimizes Importance of Government Payment Practices In Assessing Materiality

As we reported here, in its ruling in Universal Health Services, Inc. v. United States ex rel. Escobar last June, the Supreme Court affirmed the viability of the implied certification theory of liability under the FCA, but remanded the case to the First Circuit to apply the Court’s newly-articulated framework for analysis of such claims.  Last week, the First Circuit ruled that even under the Supreme Court’s demanding test for liability, the relators still stated a cognizable implied certification claim, and therefore reversed the district court’s dismissal of the relators’ complaint.  Critical to the First Circuit’s ruling was its view that evidence of the government’s payment practices when faced with similar alleged violations are less important to the analysis than the court’s assessment of the centrality of a regulation to the contractual relationship between the government and the defendant.

The core allegations in the underlying case are that the daughter of the relators received mental health services from providers who allegedly did not meet state licensing and supervision regulations.  The relators allege that the mental health treatment center submitted claims for reimbursement, which impliedly certified that its providers complied with these regulations.  Following the Supreme Court’s shift away from the dichotomy between conditions of payment versus participation, the First Circuit focused on whether compliance with the regulations was material to payment.  The First Circuit had “little difficulty” in concluding that this “holistic” test pointed to materiality.  First, the court emphasized that the state’s regulations characterized the licensing and supervision requirements as conditions of payment.  Second, the court determined that the licensing and supervision regulations were “central[]” to the state’s contractual relationships with providers.  The court apparently reached this conclusion by applying its own view that the regulations “seem” to be “central to the bargain.”  This type of subjective, intuitive approach to assessing materiality places primacy on a judge’s perception as to the importance of a provision within a larger regulatory framework.

Finally, the court rejected the defendant’s argument that the State’s ongoing payments in the face of actual knowledge of regulatory noncompliance undercut materiality.  The Supreme Court had characterized such payment practices as “strong evidence” of non-materiality.  However, the First Circuit concluded that until the filing of the qui tam complaint, the State at most “had some notice of complaints” against the defendant, and “mere awareness of allegations concerning noncompliance with regulations is different from knowledge of actual noncompliance.”  Critically, the court noted it was reserving judgment as to whether even actual knowledge would suffice to defeat materiality.  This approach downplays the importance of actual knowledge as a critical safeguard that would otherwise allow defendants an opportunity to overcome sweeping subjective allegations of materiality.  Whether the First Circuit would weigh these factors the same way in a case in which the violations alleged are less “central to the bargain” remains to be seen.

A copy of the First Circuit’s decision on remand can be found here.