16 February 2021

Courts Continue to Diverge on How Post-Complaint Government Conduct Affects Materiality Analysis Under Escobar

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.

In United States v. Andover Subacute & Rehabilitation Center Services One, Inc., a court in the District of New Jersey held that the government’s decision not to intervene and its continued payment of claims weighed against a finding of materiality. See No. 12-cv-123319 (D.N.J. Dec. 22, 2020). In that case, the relator claimed defendants falsely certified compliance with regulatory requirements relating to nursing home visitations. After the complaint in Andover was filed, the government declined to intervene and continued to pay claims for a three-year period. At the motion to dismiss stage, the court found that these payments did not negate materiality, because the complaint did not allege that the government continued to pay while knowing of defendants’ alleged noncompliance. Further, the court viewed the government’s knowledge and post-complaint actions as an issue better resolved on summary judgment. Now at the summary judgment stage, the court concluded that the government’s declination and its continued payments indicated that the regulatory violations were not material to the government. Other courts, as discussed here and here, have reached similar conclusions.

In contrast, a court in the Eastern District of Pennsylvania recently decided, at least at the motion to dismiss stage, that a relator adequately pled materiality where he alleged that CMS has twice in the past denied payments to providers “found to have significant and pervasive staffing violations of the kind” described in the relator’s complaint, without actually identifying whether those past violations were in fact the same or sufficiently similar to the conduct alleged in this case. See United States ex rel. Sirls v. Kindred Healthcare, Inc., No. 16-cv-00683 (E.D. Pa. Feb. 5 2021). The relator claimed Kindred Healthcare violated applicable regulations by understaffing its Skilled Nursing Facilities (SNFs). In assessing whether compliance with those staffing requirements was material to the government’s payment decision, the court concluded that the relator had “properly alleged that the Government refuses to pay claims ‘based on noncompliance with the particular’” regulatory requirement at issue, even though the relator never identified an example of CMS denying payment based on the specific regulatory requirement allegedly violated by defendant, nor was the relator able to allege that the government had ceased payment to defendants.

The Kindred court also refused to consider the significance of the government’s decision not to intervene. As discussed here, DOJ frequently files statements of interest encouraging courts not to infer anything from the government’s decision not to intervene. The court cited the government’s statement of interest, which explained, “there are a myriad of reasons why the government may decline to intervene in an FCA action” and that interpreting a decision not to intervene as meaning the falsity was immaterial is “antithetical to the text and purpose of the qui tam provision of the FCA.”

Copies of the opinions are available here and here.

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