DOJ Weighs in on Materiality Standard Post-Escobar

In a May 8, 2017 statement of interest, DOJ made a bold attempt to strip the heightened materiality standard articulated in Escobar (previously reported here) of all of its meaning.  DOJ’s statement was filed in support of relator’s Rule 59(e) motion to alter or amend the judgment dismissing the underlying declined qui tam case, which took exception to the court’s determination that the government’s continued payment of defendant’s claims “despite its actual knowledge that certain requirements were violated” was “very strong evidence that those requirements are not material.” United States ex rel. Kolchinksy v. Moody’s Corp., – F.Supp.3d –, 2017 WL 825478, at *6 (S.D.N.Y. March 2, 2017) (citing Escobar).  DOJ took aim at the court’s conclusion, arguing that “an agency’s continued payment of claims to a potential FCA defendant who faces public allegations of fraud is insufficient – by itself – to establish that the alleged fraud is immaterial.”

In the underlying case, relator alleged that the defendant violated the FCA by submitting claims for products containing inaccurate credit ratings to the government.  In dismissing the case, the court noted that the government clearly knew about and had investigated the defendant’s allegedly inaccurate crediting ratings, and that an appendix to relator’s second amended complaint established that the “the Government has nonetheless continued to pay…[the defendant] for its credit-ratings products each year.”

DOJ’s position, as articulated, is that whether the government continued to pay claims in light of allegations of fraud is a factor relevant to materiality, but not dispositive.  Instead, DOJ urged the court to take a “holistic approach” when making a materiality determination, taking into account other factors articulated in Escobar, such as “whether the defendant’s misrepresentation or omission goes to the ‘very essence of the bargain,’ or is instead ‘minor or insubstantial,’” and to consider “how the Government has reacted to the same or similar types of misconduct when it had ‘actual knowledge’ of them.”  DOJ argued that whether the government continues to pay a defendant is only relevant where it had “actual knowledge” of the misconduct, particularly “when the defendant actively denies or disputes the allegations.”  (Interestingly, DOJ also noted that a defendant’s attempt to falsely deny allegations could itself constitute evidence of materiality, because “one can infer that defendant believes its misrepresentation is significant to the recipient”).

DOJ also argued that materiality could be found even where the government actively decides not to terminate payment, emphasizing that “there may be sound policy reasons” for this decision, and that “whether or how quickly an agency responds to a particular instance of misconduct may reflect more on the agency’s resources and resourcefulness than on the significance of the misconduct.”

A copy of DOJ’s Statement of Interest can be found here.