In 2016, the U.S. Supreme Court handed down its decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar confirming the viability of the implied false certification theory in False Claims Act (FCA) cases and mandating that claims brought pursuant to that theory satisfy “demanding” materiality and scienter requirements. As discussed in a prior post, since Escobar, the U.S. Courts of Appeals have wrestled with analyzing and applying the materiality and scienter requirements discussed in the Supreme Court’s opinion, resulting in a number of recent petitions for writ of certiorari filed with the Supreme Court seeking clarification of the Escobar mandates.
In one of its first actions of 2019, the Supreme Court recently denied petitions in two closely-watched FCA cases, U.S. ex rel. Harman v. Trinity Industries, Inc., and Gilead Sciences Inc. v. U.S. ex rel. Campie.
$660 Million Reversal Stands in Harman
The plaintiff-relator in Harman sought review from the Supreme Court after the U.S. Court of Appeals for the Fifth Circuit reversed a $660 million jury verdict, holding that the relator failed to prove that the defendant’s alleged misrepresentations were material to government’s payment decisions. The relator in Harman claimed that the defendant produced and sold defective highway guardrails to various states, causing them to submit fraudulent claims for reimbursement to the federal government. However, evidence was presented that the Federal Highway Administration was aware of the alleged defects but continued to pay for the guardrails despite their non-compliance. Relying on Escobar, the Fifth Circuit held that relator failed to overcome such “strong evidence” that the requirements at issue were not material. The Supreme Court’s recent denial of the relator’s petition leaves intact the Fifth Circuit’s judgment and precedential opinion, providing a potential defense to FCA defendants in cases where the government was aware of certain conduct but continued to pay claims.
Campie Petition Denied after United States Signals Preference for Dismissal
The defendants in Campie sought Supreme Court review after the U.S. Court of Appeals for the Ninth Circuit revived a whistleblower lawsuit against Gilead in 2017. The lawsuit alleged that Gilead bought a key ingredient for three of its HIV drugs from an unapproved Chinese supplier but told the FDA that the substance came from an approved South Korean manufacturer. Gilead argued that because the government continued paying for the drugs even after learning of the company’s use of the Chinese ingredients, the relators’ complaint failed to offer any basis for overcoming the “strong inference” that the alleged violations were not “material” to the government’s decision to pay the claims. The Ninth Circuit held that, notwithstanding the FDA’s continued approval of the drug after learning of the Chinese ingredients, the relators had raised “more than a mere possibility” that the government would be entitled to refuse payment if it were aware of Gilead’s alleged violations.
Following the Ninth Circuit’s ruling, Gilead filed a petition seeking review from the Supreme Court. The Supreme Court asked the Solicitor General to weigh in with its view on the petition, suggesting that the Supreme Court may have some interest in the issue presented. On November 30, 2018, however, the Solicitor General informed the Supreme Court that the United States would seek to dismiss the case if it was remanded to the district court. As discussed in a prior post, that surprising move signaled to many that the Department of Justice’s (DOJ) “Granston Memo” had teeth, and it offered a preview of how the DOJ might attempt to use its dismissal authority as a means to avoid adverse rulings or the development of unfavorable precedent. Five weeks after the Solicitor General informed the Supreme Court of the United States’ intent to seek dismissal of the case with the district court, the Supreme Court denied Gilead’s petition for writ of certiorari.
Pending Brookdale Petition Looks to be Next Best Shot at a Post-Escobar Decision from the Court in 2019
With the Campie and Harman petitions denied, attention now turns to the pending petition for writ of certiorari in Brookdale Senior Living Communities, Inc. v. U.S. ex rel. Prather to determine whether the Supreme Court will provide clarification on Escobar’s holdings.
The Prather case was brought by a former employee who alleges that the senior-living company violated certain Medicare regulations by failing to obtain physician signatures on home health certifications as soon as possible after the physician established a plan of care. Like Campie, the Prather suit was dismissed by the district court in part because the relator failed to plead any facts related to the government’s past payment practices and enforcement efforts with respect to the alleged non-compliance. On appeal, the U.S. Court of Appeals for the Sixth Circuit revived the case, holding that the relator’s failure to include allegations related to past government action did not affect the materiality analysis at the pleading stage. The split decision included a strongly-worded dissent, which argued that the relator should have been required to explain with particularity how or why the alleged violation would have influenced the government’s payment decision, and, similarly, to allege that Brookdale knew that – or recklessly disregarded the possibility that – the late certifications would have influenced the government’s payment decisions. Brookdale’s petition asserts that the Sixth Circuit’s decision conflicts with decisions from at least three other circuits that have recognized that facts related to past government payment practices and enforcement efforts are critical to FCA pleadings.
A New Petition from Another Ninth Circuit Split Decision
The newest petition for a writ of certiorari on Escobar’s materiality standard may come in United States ex rel. Rose v. Stephens Institute, another closely-watched case out of the Ninth Circuit. The relators in Rose alleged that the defendant school system violated an incentive-compensation ban included in its program participation agreement with the Department of Education to receive funds under Title IV of the Higher Education Act. The defendant argued that its violations were not material, pointing to a number of Government Accountability Office reports of similar violations and the Department of Education’s responses, none of which included termination or limitation of access to Title IV funds. In a split-decision, the Ninth Circuit upheld the district court’s denial of the defendant’s motion for summary judgment, holding that Escobar did not overrule a prior Ninth Circuit opinion holding that the question relevant to materiality is whether the false certification was “relevant” to the government’s decision to confer a benefit. The majority held that Escobar merely provided “a gloss” on the materiality analysis. The dissent, however, sharply criticized the majority opinion, finding its materiality standard completely incompatible with Escobar. On December 6, 2018, the Ninth Circuit granted a motion to stay the case pending a decision by the Supreme Court on the defendant’s petition for a writ of certiorari.
While it is unclear whether the Supreme Court will take up either Prather or Rose, the four recent petitions focusing on the role of the government’s behavior in determining the materiality of alleged regulatory violations has made it increasingly clear that further guidance from the Supreme Court on that issue is warranted.