Two recent decisions by district courts in the Third Circuit illustrate the continued divide among courts regarding the extent to which the government’s declination decision bears on the materiality analysis set forth in Escobar and also underscore the challenges defendants can face in defeating materiality at the motion to dismiss stage.
Two recent court decisions ruled in favor of relators on the issue of materiality under the standard set forth in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2001 (2016). On May 7, 2019, the Fifth Circuit reversed a decision by the Southern District of Texas, which had held that relators had failed to sufficiently plead materiality. And on May 8, 2019, the Eastern District of California denied a motion to dismiss premised on failure to adequately plead materiality.
In Escobar, the Supreme Court held that the implied false certification theory of liability is viable under the False Claims Act when “at least two conditions” are satisfied: “[F]irst, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.” As we have previously discussed here, courts are split as to whether Escobar’s two-part test is a mandatory baseline to demonstrate an implied false certification or merely one way to plead such a claim, leaving open the door for other variants of implied certification claims not explicitly identified by the Supreme Court. Recently, in United States ex rel. Scott Rose, et al. v. Stephens Institute, No. 17-15111 (9th Cir. Aug. 24, 2018), the Ninth Circuit held that Escobar’s two-part test was mandatory—effectively overruling its pre-Escobar test for establishing implied certification claims outlined in Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993 (9th Cir. 2010). (more…)
Last week, the Sixth Circuit again resurrected the relator’s case in United States ex rel. Marjorie Prather v. Brookdale Senior Living Communities, Inc. (a discussion of the Sixth Circuit’s previous opinion is available here. In a 2-1 decision, the majority held that the relator’s materiality and scienter allegations sufficed under Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). The majority issued the decision over a vigorous dissent by Judge McKeague. The gulf between the majority and the dissent reflects persistent questions about how Escobar applies at the pleading stage (see discussion here). (more…)
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. (more…)
As discussed here and here, courts continue to grapple with how to resolve qui tam cases where the government continued purchasing from the defendant even after being made aware of the relator’s allegations of fraud. One judge recently vacated an “unwarranted, unjustified, unconscionable, and probably unconstitutional” $350 million jury verdict for the relator, finding the government’s continued payment of the defendants’ claims dispositive on the issue of materiality. United States ex rel. Ruckh v. Salus Rehabilitation LLC, No. 11-cv-1303 (M.D. Fla. Jan. 11, 2018). The case reinforces the important role that government purchasing histories play post-Escobar.
The Supreme Court emphasized in Escobar that questions of materiality are not “too fact intensive for courts” to decide through a motion to dismiss. Nonetheless, what facts a plaintiff must allege adequately to plead materiality consistent with Escobar’s “demanding” standard remains a hotly contested question. In a recent decision, the Second Circuit held that the relator’s failure to allege that CMS, the agency allegedly defrauded, changed its reimbursement practices after becoming aware of information supposedly withheld by the defendant, doomed the complaint on materiality grounds. See United States ex rel. Coyne v. Amgen, Inc., No. 17-1522 (2d Cir. Dec. 18, 2017). The decision underscores the significance of the materiality requirement at the motion to dismiss stage. (more…)
Last week’s oral argument in U.S. ex rel. Rose et al. v. Stephens Institute highlighted the Ninth Circuit’s continuing struggle with the Supreme Court’s decision in Escobar.
Stephens Institute involves allegations that the Academy of Art University (AAU) paid bonuses to recruiters in violation of an incentive compensation ban in Title IV of the Higher Education Act. According to the relator, AAU violated the False Claims Act because it implicitly and falsely certified compliance with the ban when it requested federal funds for its students under Title IV.
The Ninth Circuit took up the case on interlocutory appeal after the district court denied summary judgment to the defendants. Oral argument focused on two fundamental questions of law:
- Did Escobar establish a mandatory two-part test for claims brought under an implied false certification theory of FCA liability?
- Does a government’s practice of paying claims despite its knowledge of noncompliance render a defendant’s noncompliance immaterial as a matter of law?
If the government “repeatedly concludes that it has not been defrauded,” could fraud have nonetheless occurred? The Fifth Circuit grappled with this question when reviewing an appeal from a $663 million jury verdict against Trinity Industries, a manufacturer of highway guardrails. See United States ex rel. Harman v. Trinity Indus., No. 15-41172 (5th Cir. Sept. 29, 2017). In finding the relator’s allegations of materiality wanting, the Fifth Circuit’s grant of judgment as a matter of law for Trinity Industries reiterated that the Supreme Court’s Escobar decision “heightened” the materiality standard to “adjust tensions between singular private interests and those of government and cabin the greed that fuels” False Claims Act litigation.
In Escobar, the Supreme Court upheld implied certification claims “at least where two conditions are satisfied,” namely specific misrepresentations and noncompliance with a material requirement. Some courts have interpreted this phrase as defining two necessary conditions to establish implied certification liability under the FCA. Other courts view the phrase as introducing one potential path to liability, where the first condition, specific misrepresentations, is not required. Citing what has emerged as a “majority view” among district courts in the Second Circuit that the two conditions are mandatory, the Southern District of New York recently deepened the divide. See United States ex rel. Forcier v. Computer Scis. Corp., No. 12-cv-1750 (S.D.N.Y. Aug. 10, 2017). (more…)