Courts Continue to Interpret Escobar Favorably for FCA Defendants

One of the most significant developments in FCA litigation in recent years was the Supreme Court’s unanimous 2016 ruling in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). Escobar held that the “implied certification” doctrine can be a basis for FCA liability but that, among other things, any falsity must be “material” to the government’s decision to pay that claim.

The implied certification theory of FCA liability is based on the notion that in submitting a claim for payment, the claimant implicitly certifies compliance with statutory, regulatory or contractual requirements. If the claimant has not complied with such a requirement, so the theory goes, the claim is false. The Supreme Court held in Escobar that for this theory to be viable, several hurdles must be surmounted by a relator or the government: (1) there must be an express representation about the goods or services provided on the claim for payment; (2) compliance with the provision at issue must be “material” to the government’s decision to pay that claim; and (3) the defendant must know it is material. In its decision, the Supreme Court elaborated on the meaning of what it described as a “demanding” and “rigorous” materiality standard. Among other things, the Court stressed that “if 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.” The Court also made clear that materiality is an appropriate issue for consideration at the motion to dismiss stage. Thus, after Escobar, materiality is an important tool that defendants can use at multiple stages of FCA litigation.

Over the course of 2017 and into the first quarter of 2018, we have been watching how the lower courts interpret and apply Escobar’s demanding and rigorous materiality standard. In 2017, there was a remarkable series of district and appeals court decisions demonstrating that the Escobar standard has teeth, and that many courts were not hesitant to dispose of cases where the materiality of the alleged fraud was in doubt.[1]

The first quarter of 2018 indicates that this trend of favorable materiality rulings continues. For instance, in the first few months of the year, several district courts dismissed implied certification FCA complaints because they did not sufficiently allege materiality. [2] These cases demonstrate a willingness by the lower courts to assess materiality on the pleadings and without the benefit of fact discovery, an approach endorsed by the Supreme Court. Historically, FCA plaintiffs typically argued that materiality was too “fact intensive” to resolve on a motion to dismiss, but the Supreme Court rejected this notion in Escobar. [3]

Materiality has also proved to be the death-knell of FCA cases at later stages of litigation. In a highly publicized case early in the quarter, a district court overturned a $350 million jury verdict, finding that the relator did not meet the Escobar materiality standard at trial because the government had long continued payments to the defendant, a nursing home, despite knowing about the nursing home’s alleged record-keeping deficiencies. United States ex rel. Ruckh v. Salus Rehabilitation, LLC, et al., No. 8:11-cv-1303-T-23 (M.D. Fl. Jan. 11, 2018).

Of the many issues to emerge after Escobar, the one tackled by Ruckh has been the source of much litigation. Most courts agree with the proposition, which derives from the Supreme Court’s opinion, that if the government continues to pay a provider’s claims after becoming aware that the provider did not comply with applicable law or contract provisions, the relator (or, as the case may be, the government) simply cannot prove that the noncompliance was material under Escobar.

But not all courts are aligned on the reach of the Supreme Court’s “continued payment” guidance. In United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890 (9th Cir. 2017), the relators alleged that Gilead concealed information regarding its compliance with certain FDA regulations. Gilead argued on a motion to dismiss that because the government continued to pay for the drug after learning of Gilead’s FDA violations, those violations were not material to the government’s payment decision. The district court dismissed the case, citing Escobar. But the Ninth Circuit reversed, holding that the relators had pleaded sufficient factual allegations to support materiality at the early stage of the case, despite continued payment by government payors such as Medicare and continued approval by the FDA. The court observed that “the parties dispute exactly what the government knew and when” and that “the issues raised by the parties are matters of proof, not legal grounds to dismiss relators’ complaint.”

In late December 2017, Gilead filed a cert. petition in the United States Supreme Court. Over the first quarter, the parties briefed this petition, and the case was considered at the Supreme Court’s April 13, 2018 conference—where the Court invited the Solicitor General to express the views of the United States in the case. Without question, Gilead is an important case to watch in 2018, as the Supreme Court may decide to clarify the application of the materiality standard after Escobar.

Practice Note: To date, cases interpreting the Escobar materiality standard have been largely favorable to FCA defendants. The issue of materiality should be considered at the outset of any FCA investigation or qui tam litigation, and every FCA complaint should be assessed to determine whether it adequately pleads this essential element. If the complaint survives a motion to dismiss, discovery should be used to develop the materiality defense for use on summary judgment. In short, whether at the front-end or at later stages of litigation, the materiality standard is a potent weapon in the defense arsenal.