The False Claims Act (FCA or Act) can be a real punch in the gut for businesses on the wrong side of an FCA claim. The Act, codified at 31 U.S.C. §§ 3729-3733, is designed to prevent private companies contracting with the government from knowingly submitting false or fraudulent claims for their services. The Act allows actions to be filed against the alleged wrongdoers in federal district court, and provides an incentive for whistleblowers to come forward and make such claims. These qui tam plaintiffs must be the “original source” of the information about the false claims, pursuant to 31 U.S.C. § 3730(e)(4), and are rewarded by receiving a percentage of the ultimate payout, calculated based on whether the federal government decides to intervene in the action, pursuant to § 3130(d).
All qui tam complaints are filed under seal and forwarded to the district’s U.S. Attorney’s Office to provide an opportunity (60 days, which can be extended) for the government to decide whether to intervene. If the government does intervene, the qui tam plaintiff is eligible to receive from 15% to 25% of any recovery; if the government does not intervene, the qui tam plaintiff can receive from 25% to 30% of it. And, either way, the defendant might have to pay a civil penalty of between $10,957 and $21,916 for each false claim and up to treble the amount of the government’s damages — and these amounts are increasing each year. All told, this can add up to a quite a pretty penny.
One key component of a case under the FCA is that the government paid a claim that was false or that was paid under false pretenses based on a false statement. But what is the standard that determines whether the payment was made because of the false statement?
The Supreme Court in Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (U.S. 2016), addressed that question and, in doing so, altered the landscape for FCA litigation. In Escobar, the Supreme Court instructed lower courts to scrutinize the materiality of the false statements to the government’s decision to pay a claim; in doing so, the Court raised the bar for successful prosecution of qui tam claims. It is insufficient for a prosecutor or relator to simply assert that if the government knew of the noncompliance it would not have paid the claim. The Supreme Court in Escobar recognized that the standard for materiality is “demanding” and “rigorous.”
In this article, we canvass a few key opinions from throughout the country that discuss Escobar’s impact. And with that brief introduction, we’re off to the Northeast Region.
This past May, the U.S. Court of Appeals for the Third Circuit “join[ed] the many other federal courts that have recognized the heightened materiality standard after [Escobar].” United States ex rel. Petratos, et al. v. Genentech Inc., 855 F. 3d 481, 492 (3d Cir. 2017). The Third Circuit noted that since last year in Escobar, “[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 under the False Claims Act.” Id. at 488. (internal citations omitted).
Genentech is a pharmaceutical company that sold an FDA-approved cancer drug, which accounted for $1.13 billion a year in Medicare reimbursements. Relator Gerasimo Petratos, former global head of health care data analytics for Genentech, claimed that the company concealed health risks associated with side-effects of the drug, and therefore violated the FCA. Id. at 485.
This case turned on the relator’s ability to establish materiality, which the Third Circuit determined had not been met. The FCA defines materiality as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money.” 31 U.S.C. § 3729(b)(4). Id. at 488. Escobar and its progeny require the heightened materiality element if one is to successfully allege a violation of the FCA, noting that the material misrepresentation must go to “the very essence of the bargain.” Id. The heightened requirement prevents the FCA from becoming “an all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract.” Id. at 89 (citation and internal quotation marks omitted).
The U.S. Court of Appeals for the Second Circuit recently found that the particularity requirement of Federal Rule of Civil Procedure 9(b) applies to allegations of fraud in a qui tam complaint. Chorches v. American Medical Response, Inc., 2017 U.S. App. LEXIS 13585 (2d Cir. July 27, 2017). The district court in that case held that the plaintiff did not satisfy “Rule 9(b) because it provides neither details, such as invoice numbers, invoice dates, and amounts billed or reimbursed, regarding actual requests for payment made to the government, nor a factual basis for its allegations that AMR submitted false claims.” Id. at *17.
The Second Circuit disagreed, noting that “[d]espite the generally rigid requirement [of Rule 9(b)], allegations may be based on information and belief when facts are peculiarly within the opposing party’s know- ledge.” Id. at *18 (internal citations omitted). The court noted that the plaintiff did not have access to the billing or accounting departments at AMR, and without the benefit of discovery, “lacked the ability to identify specific documents containing false claims that AMR submitted to the government.” Id. at *22. The court found that the relator was justified and the Federal Rules of Civil Procedure permitted bringing a claim based upon information and belief that a fraud was committed. So, despite the heightened pleading standards of Escobar and Rule 9(b), the plaintiff’s complaint withstood a motion to dismiss.
We now turn to a closely watched Fourth Circuit case, United States ex rel Badr v. Triple Canopy, Inc., 857 F.3d 174 (4th Cir. 2017), in which the court “readily concluded” that its pre-Escobar decision that the government had properly alleged an FCA claim should stand. On remand from the Supreme Court, the U.S. Court of Appeals for the Fourth Circuit was asked to reconsider whether the government stated a claim against Triple Canopy under the FCA in light of the high court’s ruling in Escobar. In short, the United States had awarded Triple Canopy a contract to provide security services at an airbase in Iraq.
According to the Fourth Circuit’s synopsis of the facts in its May 2017 decision, as part of that contract, Triple Canopy was required to meet certain responsibilities, including ensuring that all employees were qualified on a U.S. Army qualification marksmanship course. Triple Canopy brought in guards from Uganda who were not qualified marksmen. It was further alleged that Triple Canopy falsified its records on this point and submitted invoices to the government for payment on a monthly basis for the unqualified guards. In doing so, Triple Canopy was alleged to have submitted false claims to the government based on the implied certification theory.
After remand, the court rejected Triple Canopy’s argument that the case should be dismissed because it was not required to certify that the guard services complied with contractual responsibilities regarding marksmanship qualifications. Simply, the court held that the Escobar rule “is not as crabbed as Triple Canopy posits.” It continued that “the Court made clear that it was targeting omissions that ‘fall squarely within the rule that half-truths — representations that state the truth only so far as it goes, while omitting critical qualifying information — can be actionable misrepresentations.’ That ‘half-truth’ is exactly what we have here: Although Triple Canopy knew its ‘guards’ had failed to meet a responsibility in the contract, it nonetheless requested payment each month from the Government for those ‘guards.’” Id. at 178 (internal citations omitted).
Further, the Fourth Circuit concluded that, far from undermining its earlier conclusion that Triple Canopy’s falsity was material, Escobar compelled the same result. The panel emphasized that both common sense and Triple Canopy’s own actions in covering up its noncompliance were key factors in its conclusion that the omissions were material. Moreover, the court critically noted that the government did not renew its contract with Triple Canopy and immediately intervened in the FCA lawsuit and held: “Both of these actions are evidence that Triple Canopy’s falsehood affected the Government’s decision to pay. As we explained, the ‘Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight.’” Id. at 179.
It appears Triple Canopy is a case we should continue to watch, as on August 14, 2017, Triple Canopy filed another petition for a writ of certiorari with the United States Supreme Court. Triple Canopy cites a Circuit split among the Third, Fourth, and Ninth Circuits’ decisions post-Escobar and asks the Supreme Court to address whether merely submitting a request for payment that does not contain specific misrepresentations can give rise to implied certification FCA liability. Time will tell whether the Supreme Court takes up this case again.
Adding to the progeny of Escobar in the Western region, on July 7, 2017, the the U.S. Court of Appeals for the Ninth Circuit resurrected an FCA case that previously had been twice dismissed by the district court. This offspring, however, was different than its siblings discussed above — Petratos from the Third Circuit and Chorches from the Second Circuit — in that the court found the plaintiffs did adequately plead materiality under Escobar, but the case was sent back to the lower court to determine whether the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) were satisfied as well.
The case of United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890, 2017 U.S. App. LEXIS 12163 (9th Cir. 2017), arose out of a qui tam complaint filed by two plaintiffs who alleged that Gilead misrepresented the efficacy of three of its drugs in seeking approval from the Food & Drug Administration (FDA).
Additionally, Gilead allegedly concealed its use of illegitimate ingredients in these drugs and the efforts the company made to import those ingredients into the United States. One of the relators also asserted a retaliation claim for having been terminated after complaining of Gilead’s improper practices and threatening to disclose the practices to the government. The district court dismissed the complaint twice in 2015 for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), and the plaintiffs appealed. Notably, the United States declined to intervene at the outset of the case, but did request the appellate court to reverse the dismissal.
On appeal, the plaintiffs asserted that their claims should be sustained under the theories of factually false certification, implied false certification, and promissory fraud or fraud-in-the-inducement. The court analyzed each of the theories under the “essential elements of [FCA] liability,” which it explained as: “(1) a false statement of fraudulent course of conduct, (2) made with scienter, (3) that was material, causing (4) the government to pay out money or forfeit moneys due.” 862 F.3d 890, 2017 U.S. App. LEXIS 12163, *21–22 (citing Escobar, 136 S. Ct. at 2000–02; United States v. Nat’l Wholesalers, 236 F.2d 944, 950 (9th Cir. 1956); United States ex rel. Hendow v. Univ. of Phx., 461 F.3d 1166, 1174 (9th Cir. 2006)). For its materiality analysis, the court acknowledged that “the Supreme Court clarified that ‘[t]he materiality standard is demanding.’” Id. at *29 (citing Escobar, 136 S. Ct. at 2003).
Indeed, following its recitation of the guidance provided in Escobar, the court noted that plaintiffs “thus face an uphill battle in alleging materiality sufficient to maintain their claims.” Id. at *30. Despite this high hurdle, the court found the plaintiffs alleged “more than the mere possibility that the government would be entitled to refuse payment if it were aware of [Gilead's] violations” and so sufficiently pleaded “materiality at this stage of the case.” Id. at *34.
In making this finding, the court contrasted the facts of the case before it with those before the court in Petratos, where the Third Circuit found the materiality standard was not met. In Petratos, the relator conceded that CMS would have paid the claims even it knew of the alleged violations and the plaintiff there “did not allege regulatory or statutory violations[.]” Id. at *33 (citing Petratos, 855 F.3d 490). The plaintiffs’ assertions that the government would not have reimbursed the claims had it known of Gilead’s concealment and that Gilead had committed both regulatory and statutory violations were critical to the Ninth Circuit’s finding that the relators had adequately overcome the demanding materiality requirement.
Not all was lost for Gilead, however, with the revival of this matter.
The court made clear that it was declining to determine whether the allegations satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) because they had not yet been assessed by the district court. Id. at *39. As a result, we will have to wait to see whether Gilead challenges the complaint again on remand. Cf. United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 337 (9th Cir. 2017) (affirming grant of summary judgment against relator for failing to “satisfy the ‘rigorous’ and ‘demanding’ standard for materiality set forth in Escobar“).
So, where does this leave us? Different circuits have started to take different tacks with claims based on the Supreme Court’s opinion in Escobar. The opinion is relatively recent, so there will undoubtedly be more to come. But for now, qui tam litigants should be mindful of the changes to the pleading rules in their particular jurisdiction because of Escobar’s lineage. They should also watch other circuits in the country to see whether other courts’ rulings create opportunities in their litigation.