At the end of last month, the Seventh Circuit issued its opinion on remand in United States v. Sanford-Brown, Ltd., No. 14-2506, — F.3d —-, 2016 WL 6205746 (7th Cir. Oct. 24, 2016) (“Sanford II”). The court once again granted summary judgment for the defendants, holding that the relator’s FCA action failed under the implied certification theory of liability articulated by the Supreme Court last term in Universal Health Services v. United States ex rel. Escobar, 136 S.Ct. 1989 (2016).
In Sanford, the defendant was a for-profit college located in Milwaukee and the relator was a former employee. To receive federal funding, the defendant was required to enter into a government contract pursuant to which it agreed to comply with a “panoply of statutory, regulatory, and contractual requirements.” United States v. Sanford-Brown, Ltd., 788 F.3d 696, 701 (7th Cir. 2015) (“Sanford I”). The relator filed a qui tam action alleging that the defendants violated a number of federal regulations concerning the payment of bonuses to employees involved in recruiting and complying with certain educational standards. Id.
Sanford I generated a considerable amount of attention as the Seventh Circuit became the first appellate court to outright reject the implied certification theory. The opinion created a circuit split, which was resolved by Escobar where the Supreme Court ruled that the implied certification theory of liability is actionable under the FCA provided two conditions are satisfied: (1) “the claim does not merely request payment, but also 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.” Escobar, 136 S.Ct. at 2001. Shortly after Escobar was handed down, the Supreme Court granted cert in Sanford, vacated the judgment and remanded for further consideration in light of Escobar.
On remand, the Seventh Circuit found that the relator could not satisfy either of the conditions set forth in Escobar. First, the court found that the relator had failed to provide any evidence that the defendant made false or misleading representations in connection with its claims for payment. Second, the court found that the relator could not establish that the defendant’s purported regulatory violations were material to the government’s decision to issue payment. Building on this latter point, the court quoted from Escobar in explaining that the materiality standard is “rigorous” and “demanding” and that the relator’s claim failed because, at best, he had simply shown that the defendant’s noncompliance would have entitled the government to decline payment.
As we wrote when Escobar was first handed down, the Supreme Court’s focus on the materiality standard constituted a marked turn away from years of FCA case law and left the courts with significant discretion in determining the standard’s contours. Sanford is helpful in that it cleanly applies the exacting standard for addressing implied certification claims post-Escobar and illustrates the principle that FCA liability will not be found where the violation merely provides the government with the option to decline payment.