SCOTUS Raises the Bar on Materiality in False Claims Act Lawsuits

The implied false certification theory of liability under the False Claims Act (FCA) is premised on the notion that a person who does business with the federal government, by the very act of submitting a claim for payment, has impliedly certified compliance with the often numerous statutes, regulations, and contract terms that govern the contractual relationship.  Government prosecutors and private whistleblowers have used this theory to assert that any noncompliance is sufficient to trigger FCA liability, regardless of whether the claimant made an express false statement, how minor the noncompliance was, or even whether sufficient goods and services were provided at fair value.  The Circuit courts were split on the viability and scope of the theory.

The United States Supreme Court’s unanimous decision in Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7, 2016 U.S. LEXIS 3920 (June 16, 2016), resolved the Circuit split by recognizing the implied false certification theory, while at the same time seemingly curtailing the FCA’s reach by proclaiming that only material noncompliance with statutory, regulatory or contractual requirements can support such a claim.  In other words, a mere technical violation of an arcane regulation would not trigger FCA liability absent proof that the violation – if known to the government – would have actually influenced its decision to pay the claim.  The Supreme Court characterized this materiality requirement as both “rigorous” and “demanding.”

The Supreme Court’s discussion of what is, is not, or might be, material illustrates that materiality is not subject to a bright-line rule, and must be assessed on a case-by-case basis.  For example:

  • The fact that a regulation or statue identifies a certain requirement as a condition of payment is not dispositive of its materiality, although it is certainly relevant.
  • Minor or purely technical noncompliance is not sufficient to find materiality, because the FCA “is not a means of imposing treble damages and other penalties on insignificant regulatory or contractual violations.”
  • The government’s historical payment of a claim despite its actual knowledge that certain requirements were violated is very strong evidence that those requirements were not material.
  • On the other hand, “proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.”

Despite the Supreme Court’s recognition of the implied certification theory, in light of this newly-defined “demanding” materiality standard, the net impact of Escobar may well be to narrow the theory’s availability.  At the very least, the government can no longer assert that FCA liability turns simply on whether the government could have refused payment if the defect had been known; rather, Escobar makes explicit the government’s “rigorous” burden of proving that the alleged defect, if known, would have actually impacted its decision to pay the submitted claim.  This standard should help businesses defend against “garden-variety breaches of contract or regulatory violations” that – according to the Supreme Court – are not properly within the scope of the FCA.

You can read more detailed analysis of Escobar and its impact on materiality in our recent article for Law360, available here.

Matthew T. Newcomer (LAW ’02) and Barbara Rowland are Principals, and Carolyn H. Kendall is an Associate, in Post & Schell, P.C.’s Internal Investigations & White Collar Defense Practice Group. Collectively, they conduct internal investigations and counsel and defend corporations, officers, and other individuals subject to government investigation and/or facing civil and criminal investigation. This includes False Claims Act and qui tam investigations, and related civil or administrative litigation.

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