The False Claim Act’s “Demanding” Materiality Requirement

By James Melendres and Seth Goertz

“The materiality standard is demanding.”  So said the Supreme Court on June 16, 2016, in Universal Health Services, Inc. v. United States ex rel. Escobar (“Escobar”), a decision that potentially limits liability under the False Claims Act (“FCA”).  Notably, the Court reemphasized that in order for a claim to be actionable under the FCA, the misrepresentation at issue must be material to the Government’s payment decision, and it also made clear that “[t]he materiality standard is demanding.”

At issue in Escobar was a qui tam suit relating to treatment Yarushka Rivera, a teenage beneficiary of Medicaid, received while at a Massachusetts mental health facility.  While undergoing counseling services, Rivera was proscribed medication by a purported doctor.  Unfortunately, Rivera had an adverse reaction to the medication and eventually died of a seizure.  It was later discovered that only a few of the employees at the facility were actually licensed.  In fact, the “doctor” who proscribed Rivera’s medication received her Ph.D. from an unaccredited internet college, and Massachusetts had rejected her application to be licensed as a psychologist.

The plaintiffs’ FCA claim was based upon the “implied false certification theory of liability,” which treats any request for Government payment/reimbursement as an implied certification of compliance with the relevant statutes, regulations, or contract requirements that are material conditions of payment, and treats a failure to disclose any violations thereof as a misrepresentation that renders the claim “false or fraudulent.”   Thus, the plaintiffs alleged that the health care facility (“United Health”) violated the FCA by submitting Medicaid reimbursement claims that misrepresented the medical services provided because they failed to disclose that much of the staff was unlicensed.

The Court agreed that United Health made misrepresentations under the FCA and remanded to the First Circuit Court of Appeals for further argument regarding the materiality of the misrepresentations.

The most striking portion of the Escobar decision was its articulation of the standard lower courts should apply when assessing materiality. Escobar makes clear that the FCA is not “an all-purpose antifraud statute, or a vehicle for punishing garden variety breaches of contract or regulatory violations.”  Under Escobar, it is “not sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance” with particular statutory, regulatory, or contractual requirements.  Materiality “cannot be found where noncompliance is minor or insubstantial.”  Instead, “under any understanding of the concept, materiality look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.”

The Escobar decision also discussed the importance of the Government’s actual knowledge of a contractor’s alleged non-compliance with statutory, regulatory, or contractual requirements. “[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.”  Similarly, “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 implications of Escobar are broad and apply especially to those involved in government contracting and procurement.  In these contexts, it is critical to remain apprised of conditions of payment that federal agencies consistently choose to enforce and, likewise, those they tend to overlook, because these decisions may bear on the materiality of alleged misrepresentations in FCA actions regarding similar conditions of payment.

Stay tuned for future analysis concerning how lower courts apply Escobar to FCA matters.

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