On January 11, 2018, a Florida district court vacated a $350 million FCA jury verdict against defendants in U.S. ex rel. Angela Ruckh v. Salus Rehabilitation, LLC, No. 8:11-cv-1303 (M.D. Fla. Jan. 11, 2018). At trial in February 2017, relator claimed that the defendants, owners and operators of 53 specialized nursing facilities fraudulently inflated the amount of resources needed by their patients by upcoding Resource Utilization Group (“RUG”) levels to increase the amount they were able to bill Medicare and Medicaid. The jury agreed and found the defendants liable for $109.8 million in damages, which the judge then trebled to $347 million. The government had declined to intervene, but stood to reap the benefits of relator’s perseverance, but the court had other ideas.

Ruling on defendants’ post-trial motion for judgment as a matter of law and applying Escobar, the court found that relator had failed to provide sufficient evidence that: (1) the disputed practices were material to the government’s decision to pay or (2) the defendants submitted claims despite knowing that the government would find the practices material to payment. In vacating the award, the court interpreted Escobar as rejecting “a system of government traps, zaps, and zingers that permits the government to retain the benefit of a substantially conforming good or service but to recover the price entirely — multiplied by three — because of some immaterial contractual or regulatory non-compliance.” Id. at 8.

The procedural history of the case is interesting since the court had denied defendants’ motion for summary judgment filed before Escobar was decided, as well as their motion for leave to file a supplemental brief to address the impact of Escobar after it was decided. But when the defendants moved for judgment as a matter of law to vacate the jury award, the same judge found the relator’s claims trivial in light of the fact that the federal and state governments were aware of the defendants’ practices, yet had never stopped or threatened to stop paying the defendants. Rather, the court found that the government regarded such practices “with leniency or tolerance or indifference or perhaps with resignation to the colossal difficulty of precise, pervasive, ponderous, and permanent record-keeping in the pertinent clinical environment.” Id. at 3. Citing Escobar, the court ruled that this was “strong evidence” that the alleged violations were not material. The court noted that relator failed to counter this “strong evidence” with any evidence “of the kind a disinterested observer, fully informed and fairly guided by Escobar, would confidently expect on the question of materiality: evidence of how government has behaved in comparable circumstances.” Id. at 10. Instead, the “dearth of evidence” left the jury and judge only able to guess how the government might have addressed the disputed practices. Id. at 13. Interestingly, the court rejected the government’s request to file a statement of interest to address defendants’ Escobar arguments, noting that the government had declined to intervene and there was no reason to think that relators, “represented by counsel expert in qui tam litigation,” could not adequately protect the government’s interests.

The court went on to reason that since relator failed to provide evidence that the government regarded the practices as material to payment, relator subsequently could not establish that the defendants submitted claims for payment knowing that the government would refuse to pay if aware of the disputed practices. The court distinguished the case from the now well-known hypothetical in Escobar where the Court said that knowledge of materiality would be imputed to a gun vendor who knowingly sold guns to the government that did not shoot. There, the defect completely defeats the purpose of the gun, and common sense dictates that the government would not pay for such goods. But that kind of common sense logic was not applicable to this case where the disputed practices were arguably mere “paperwork defects” that the government may well have tolerated in order to provide healthcare to “a mass of highly vulnerable and mostly elderly and frail patients.” Id. at 1, 17.

This case is yet another example of a court holding the line against relators’ attempts to escalate mere contractual breaches into full blown fraud cases. The decision acknowledges that companies doing business with the government often operate in an environment in which both sides accept that perfect compliance is impossible. To maintain the symbiotic relationship, businesses cannot be subject to enormous treble penalties for minor violations that the government is willing to live with in exchange for receiving the relevant services.

Relator has already indicated her intent to appeal the ruling. It will be interesting to see what, if anything, the government does at the appeal level given the high dollars at stake and the potential for the appeal to result in another unfavorable (to the government) post-Escobar circuit opinion. Stay tuned, and as always, we here at LLB will keep you apprised of any developments in the case.