Jun 142018

Sen. Grassley Fires Warning Shot Over Evolving Interpretations of FCA Materiality Requirement

Scott D. Stein and Sarah K. Recktenwald
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In a recent floor statement, Senator Chuck Grassley, considered by many to be the chief defender of the FCA in Congress, voiced concerns about how some lower courts are interpreting the FCA’s materiality requirement following the Supreme Court’s Escobar decision.   Senator Grassley’s speech is worth noting because he has led successful efforts to legislatively overrule FCA decisions with which he has disagreed in the past.

In Escobar, the Supreme Court announced that the FCA’s “demanding” materiality standard limits the scope of implied false certification liability.  Specifically, Justice Thomas wrote,

“[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.”

The significance that the government’s continued payment of claims in the face of allegations of fraud should be given has been a hotly contested issue in the lower courts.  The majority of courts to directly consider that question have assigned great significance to the government’s inaction.

In particular, the First, Third, Fifth, Seventh, Tenth, and D.C. Circuits have all issued opinions that have held that the government’s continued payment of claims in the face of allegations of fraud forecloses liability under the materiality inquiry. The Second Circuit has also issued a summary order to the same effect. The Ninth Circuit, by contrast, has held that in order to sufficiently plead materiality, relators need only allege “more than the mere possibility that the government would be entitled to refuse payment if it were aware of the violations.”  The Supreme Court has recently asked the Solicitor General to weigh in on whether the Court should hear an appeal from that decision, and the government’s brief is expected later this year.

In the meantime, however, Senator Grassley is making known his view that the majority of courts are incorrectly applying the Escobar materiality standard.  In 1986, Senator Grassley led the legislative movement to eliminate the so-called “government knowledge bar” from the FCA. This bar prevented whistleblowers from bringing a case if the government already knew about the alleged fraud. By removing this bar, Senator Grassley expected that whistleblowers would be incentivized to assist in exposing fraud. He now fears that the interpretation trending in the lower courts will instead restore the government knowledge bar that he helped to eliminate over thirty years ago.

In his speech, Senator Grassley laid out four reasons why courts should be hesitant to rest the materiality standard solely on government knowledge. First, he explained that Escobar did not alter the standard for materiality. Instead, Justice Thomas simply noted that one factor to consider is the government’s actions after discovering the alleged fraud. Second, Senator Grassley emphasized that Justice Thomas limited the applicability to situations involving actual knowledge of fraud by the government, rather than those involving rumors or speculation. Third, Senator Grassley mentioned that for a variety of reasons, the government may choose to not intervene in a whistleblower case and to continue to pay false claims. For example, denying the claim could deprive patients of life-saving medical services or prescriptions. Lastly, Senator Grassley emphasized that because the government may have continued payments for any number of reasons, focusing on that one aspect alone is not the appropriate way to measure whether the fraud is material.

Senator Grassley’s attention to this issue is important because he has led the charge to legislatively overturn defendant-friendly court rulings involving the FCA in the past. For example, in June 2008 the Supreme Court held in Allison Engine Company, Inc. v. United States ex rel. Sanders that the FCA did not apply to subcontractors who submitted false claims to prime contractors retained by the federal government. In February 2009, Senator Grassley responded by cosponsoring the Fraud Enforcement and Recovery Act (FERA), which passed into law three months later, closing the loophole created by Allison Engine.  Senator Grassley also advocated for changes to the FCA in the Affordable Care Act that narrowed the scope of the public disclosure bar.  Thus, Senator Grassley’s vocal disapproval of lower court interpretations of the materiality standard bears monitoring.

 

Special thanks to summer associate Sarah Recktenwald for authoring this post.

Scott D. Stein

Chicago

sstein@sidley.com

Sarah K. Recktenwald

Chicago

srecktenwald@sidley.com

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