In United States ex rel. Kelly v. Serco, the Ninth Circuit became the most recent court of appeals to navigate the Supreme Court's Escobar decision. The decision provides three possible arguments that FCA defendants should consider.

First, the court held that, under Escobar, a claim for implied certification must be based on specific representations about the goods or services provided. Second, the court enforced Escobar's "rigorous" materiality standard in holding that government knowledge of the alleged non-compliances rendered any violations immaterial as a matter of law. Third, the court held that a claim brought under 31 U.S.C. § 3729(a)(1)(B) requires evidence of both a false statement and a false claim.

The Ninth Circuit's opinion, issued on January 12, 2017, affirmed summary judgment against a qui tam whistleblower, who brought a qui tam suit against Serco, Inc, for alleged billing improprieties. The relator, Darryn Kelly, accused Serco Inc. of failing to bill the U.S. Navy in accordance with American Nation Standards Institute/Electronic Industries Standards 748, or ANSI-748, and falsifying related monthly reports. In 2008, the U.S. Navy awarded Serco a project management subcontract for an Advanced Wireless Systems (AWS) project to upgrade cell towers along the U.S.-Mexico border and support a "virtual border." As part of the subcontract, Serco had to provide project and cost reports to the Navy according to a specific format. After the AWS billing system proved unworkable for Serco, its employees began manually recording their time using a single charge code. Serco then compiled the time entries into spreadsheets and used them as monthly cost reports. The Navy agreed to accept the simplified format.

In 2009, Serco hired Kelly as an Earned Value Management (EVM) analyst to monitor its performance on the project and identify cost overruns. Kelly subsequently informed the Department of Homeland Security that Serco's monthly cost reports were unreliable because they allegedly failed to comply with ANSI-748, and because Serco had allegedly falsified information in these reports. Unaware of Kelly's reports to DHS, Serco terminated him and eliminated his position shortly thereafter. Kelly then filed a qui tam lawsuit against Serco, asserting various FCA violations, including unlawful termination. The U.S. District Court for the Southern District of California ultimately granted summary judgment to Serco on all of Kelly's claims. Kelly then appealed to the Ninth Circuit.

On appeal, the Ninth Circuit panel first addressed the burden imposed by the Supreme Court's Escobar decision on qui tam relators asserting an FCA violation based on an "implied false certification theory," as Kelly had. The panel explained that, in light of Escobar, a relator can prevail under an implied certification theory where two conditions are satisfied. First, the defendant's claim for payment does not merely request payment from the U.S. but also makes specific representations about the goods or services provided. Second, the defendant's failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those representations misleading half-truths. While relators and the Department of Justice have argued-and some courts have agreed-that these two conditions are merely examples of conduct that can establish falsity under an implied certification theory, the Ninth Circuit rightly concluded that an FCA plaintiff must satisfy both criteria.

The court next addressed the "materiality" requirement and emphasized "how rigorously the FCA's materiality requirement must be enforced," as well as the interplay between materiality and government knowledge. It noted: "The materiality standard is demanding. The False Claims act is not 'an all-purpose anti-fraud statute' or a vehicle for punishing garden-variety breach of contract or regulatory violations." Kelly's claims failed to meet this "demanding" standard for several reasons. First, the Navy had repeatedly accepted Serco's bills despite the alleged improprieties and agreed-through the AWS project manager-that Serco could forego the ASNI-748 standard and follow a simplified format. Second, in April 2011, the DHS and Navy abolished the heightened billing requirement because it "provided minimal benefit and was not cost-justified." In light of the government's knowledge of Serco's billing procedures and changes in billing requirements, the court determined that Serco's alleged failure to comply with ASNI-748 was not material. After reciting the materiality standard, the court concluded that "Kelly's theory of liability falters on these shoals."

Finally, although not related to its interpretation of Escobar, the Ninth Circuit also provided a defense-friendly analysis of what an FCA plaintiff must show to establish a "false records" claim under 31 U.S.C. § 3729(a)(1)(B). The court noted that identifying an alleged false statement isn't enough-an FCA plaintiff must also show that "defendants knowingly made, used, or caused to be made or used, a false record or statement material to a false or fraudulent claim." This means that "[t]he existence of a false or fraudulent claim is therefore an essential element of a false records claim." Because Kelly "failed to raise a genuine issue of material fact regarding the submission of a false or fraudulent claim, his false records claim fails as a matter of law." This was a subtle but important aspect of the Ninth Circuit's ruling that many courts overlook. It is not enough to establish a "false records" claim to identify an allegedly false record or statement that exists out in the ether; an FCA plaintiff must show that the allegedly false record or statement is tied to (and material to) a false claim for payment. Thus, neither relators nor the United States can use (a)(1)(B) to evade the "sine qua non of an FCA violation"-a false claim.

The Ninth Circuit's ruling in Kelly catalogues the many obstacles a FCA plaintiff must pass to prevail under an implied false certification theory, as clarified by the Supreme Court's Escobar decision. As the remaining circuits continue to weigh in on Escobar and its progeny, FCA defendants can hope for similar, defense-friendly rulings.