Lessons From a Year of Escobar

This article was published in Law360 on June 20, 2017. © Copyright 2017, Portfolio Media, Inc., publisher of Law360. It is republished here with permission.

It has been one year since the U.S. Supreme Court’s landmark ruling in Universal Health Services v. United States ex rel. Escobar,¹ which resolved a circuit split as to the validity of the implied false certification theory under the False Claims Act. In its highly anticipated decision, the Supreme Court upheld the theory but cautioned that courts should strictly enforce the FCA’s materiality requirement.² Immediately following Escobar, it was unclear how defendants would be able to fend off implied false certification claims based on the Escobar standard. But the past year has shown that the heightened standard has teeth and that courts can, and will, dismiss FCA complaints on materiality grounds, even before discovery.

Escobar’s Focus on Materiality

In Escobar, the Supreme Court said the implied false certification theory can be a basis for FCA liability, at least where two conditions are satisfied: (1) the defendant’s claim for payment makes specific representations about the goods or services provided and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those representations misleading half-truths.³

The Supreme Court allayed concerns of open-ended liability for "garden-variety breaches of contract or regulatory violations" by calling for strict enforcement of the FCA’s "demanding" materiality standard.⁴ The court explained that "a misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable"⁵ and emphasized that the FCA is "not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations."⁶

Rather than providing a bright-line rule, the court identified goalposts for courts to consider when determining whether a statute, regulation or contractual provision is material to the government’s payment decision. First, whether the government labels a provision a "condition of payment" is relevant, but not dispositive.⁷ Second, proof of materiality may include evidence that the government consistently refused to pay claims in the "mine run of cases" based on noncompliance with the particular statutory, regulatory or contractual requirement.⁸ Third, if the government regularly pays a particular type of claim 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."⁹

Materiality and the Motion to Dismiss

Because FCA cases can be expansive and involve costly and burdensome discovery, defendants have a strong incentive to identify "insignificant regulatory or contractual violations" as early as possible. Significantly for FCA litigants, Escobar suggested that courts can dismiss FCA cases based on materiality at the pleadings stage:

We reject Universal Health’s assertion that materiality is too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment. The standard for materiality that we have outlined is a familiar and rigorous one. And False Claims Act plaintiffs must also plead their claims with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b) by, for instance, pleading facts to support allegations of materiality.¹⁰

In the year since Escobar, district courts have taken that guidance to heart and have granted motions to dismiss when FCA complaints fall short of the "demanding" and "rigorous" materiality standard described in Escobar. Below are some examples:

• In United States ex rel. Schimelpfenig v. Dr. Reddy’s Laboratories Ltd.,¹¹ the relators alleged that the defendants dispensed prescription drugs in violation of the Poison Prevention Packaging Act and the Consumer Product Safety Improvement Act.¹² The court dismissed the complaint, in part, because it did little to allege the materiality of the cited provisions to the government’s reimbursement decisions.¹³ For example, the complaint did not allege that compliance with federal packaging requirements was a condition of government payment, did not allege a time when the government refused payment of a claim on the basis of noncompliance with federal packaging requirements, and did not allege an instance when the government initiated an action to recover money paid for goods that were noncompliant with federal packaging requirements.¹⁴
• In Dresser v. Qualium Corp.,¹⁵ the relators alleged that the defendants violated various Medicare regulations by conducting sleep and titration tests in non-Medicare approved locations, employing unqualified personnel to conduct the tests, and dispensing durable medical equipment to Medicare patients based on those tests, from unapproved locations and/or by an unapproved provider.¹⁶ Moreover, the relators alleged that, in their Medicare enrollment forms, the defendants falsely certified that they would abide by Medicare laws, regulations and program instructions and that they understood that payment of a claim was conditioned on the claim being compliant with Medicare laws, regulations and program instructions.¹⁷ The court dismissed the relators’ implied false certification claim because, although the amended complaint alleged that the government would not have paid the defendants had it known of the alleged fraudulent conduct, it did not explain why and thus did not meet Escobar’s "heightened" materiality standard.¹⁸
• In United States ex rel. Scharff v. Camelot Counseling,¹⁹ the court held that the relator failed to allege materiality because, aside from a conclusory assertion that the defendant "failed to comply with material Medicaid regulations that served as conditions precedent for [the defendant] to receive reimbursement through federal funds," the complaint contained no other allegations regarding the materiality of the alleged noncompliance. For example, the complaint did not "cite any express condition for reimbursement applicable to [the defendant], nor [] allege whether the government has refused to reimburse clinics that have engaged in conduct similar to [the defendant’s]."²⁰
• Other cases have been dismissed on similar grounds, including United States ex rel. Southeastern Carpenters Regional Council v. Fulton County ("Relators have not shown that Defendants mispresented matters ‘so central’ to the Contract that the government ‘would not have paid [the defendants’] claims had it known of these violations.’")²¹ and Knudsen v. Spring Communications Co. ("Without further details, such as allegations that the government consistently refuses to pay claims...