Practitioners expected the Supreme Court decision in Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), to mark a watershed in False Claims Act (FCA) jurisprudence, but not for the reasons that are becoming clear in a wave of appellate decisions on “materiality.” The Third Circuit opinion in United States ex rel. Spay v. CVS Caremark Corp., No. 15-3548, 2017 WL 5491935 (3d Cir. Nov. 16, 2017), is the latest in a series of judicial decision enforcing the “rigorous” materiality requirements announced by the Supreme Court in Escobar to defeat liability where, as a matter of pleading or proof, the plaintiff cannot show that an allegedly false claim actually influenced, or was capable of influencing, the Government’s payment decision.[1]

In Spay, The Third Circuit concluded that CVS Caremark Corporation’s use of dummy prescriber IDs in submitting Prescription Drug Event (“PDE”) records was not material to the Government’s decision to pay Caremark’s claims under Medicare Part D. In doing so, the Third Circuit affirmed summary judgment for Caremark, albeit on different grounds than relied upon by the trial court.

The case involved a dispute concerning coverage for prescription drug claims. In 2006–2007, Caremark experienced difficulty populating the PDEs with prescriber identification numbers needed for reimbursement. The Centers for Medicare and Medicaid Services (CMS) was aware that many pharmacies and Pharmacy Benefit Managers (PBMs) were experiencing the same problem. CMS also knew that they were using dummy prescriber IDs to get claims processed. CMS routinely paid the claims nevertheless.

The trial court granted summary judgment, holding that Caremark had raised a “government knowledge inference”—i.e., that there was overwhelming evidence that CMS knew, and permitted, pharmacies and PBMs to use dummy IDs to ensure prompt payment of claims. The Third Circuit rejected the district court’s holding on the application of the government knowledge inference, but upheld summary judgment on the alternate ground that the plaintiff had not adduced evidence of a material false claim.

The Third Circuit announced that it was joining other circuits in holding that government knowledge of the facts underlying an allegedly false record or statement can negate the scienter required to prove liability under the FCA, but it concluded Caremark had not established both elements needed to give rise to the government knowledge inference: (1) that the government agency knew about the allegedly false statement(s), and (2) that the defendant knew that the government knew. CVS Caremark Corp., No. 15-3548, 2017 WL 5491935 at *7. Caremark did not satisfy the second prong of that test, because it had not shown that Caremark knew CMS knowingly permitted PBMs to obtain reimbursement using dummy IDs. Instead, Caremark was “simply hopeful that its use of the dummy IDs would be acceptable.” Id. at *10.

Turning to materiality, the court first had to decide, because the acts occurred in 2006-2007, whether materiality was an element of an FCA violation before the Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21 (2009) (FERA) engrafted materiality as an express element of some of the liability provisions in the Act and defined “material” for purposes of the FCA. After surveying the pre-FERA case law and the Supreme Court’s decision in Escobar, the Third Circuit concluded that the FERA amendments did not inject a new materiality requirement into the FCA. Rather, the liability provisions of the FCA have been interpreted to incorporate a judicially-imposed materiality requirement, and Congress simply made that requirement explicit in the amendments.

The Third Circuit concluded that Spay’s case presented “precisely the situation” described by the Supreme Court in Escobar: “if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.” Id. at *13 (quoting Escobar, 136 S. Ct. at 2003-04). Here, there was a detailed record of CMS knowledge of the use of dummy IDs, and payment notwithstanding that knowledge. The court found that the defendant’s conduct involved “precisely the type of ‘minor or insubstantial’ misstatements where ‘materiality cannot be found.’” Id. at *14. A “common sense solution” was implemented to address a perplexing problem, and there was no justification for characterizing Caremark’s actions as “fraud.” Id.

The Third Circuit opinion is part of a wave of cases where courts apply, in an exacting manner, a heightened materiality requirement under Escobar. Where a purportedly false claim for payment is presented to the Government, and the Government is aware of the true state of the facts but makes payment nevertheless, the claim is not materially false. Such a claim has no ability to influence the payment of money by the Government—the very definition of materiality under the FCA.