The FCA Insider

The FCA Insider

Insights and updates on False Claims Act Litigation

FCA Litigation, Implied Certification

First Circuit Finds that the Allegations in Escobar Satisfy the Supreme Court’s Materiality Requirements

The United States Supreme Court’s landmark decision in Escobar, which we have discussed previously, upheld the use of the implied certification theory where the implied certification of statutory/regulatory compliance is material to the government’s decision to pay the claims at issue. See generally Universal Health Servs., Inc. v. United States and Commonwealth of Mass. ex rel. Escobar, 136 S. Ct. 1989 (2016) (“Escobar I”).  After setting forth this standard, the Supreme Court remanded Escobar to the First Circuit “for consideration of whether [Relators] have sufficiently pleaded a False Claims Act violation.”  In United States ex rel. Escobar v. Universal Health Servs., Inc., 2016 WL 687650 (1st Cir. Nov. 22, 2016) (“Escobar II”), the First Circuit applied the Supreme Court’s framework and determined that the relators had adequately alleged an FCA violation.

The Escobar relators alleged that Universal Health Services, Inc. (“UHS”) sought reimbursement for mental health services provided by practitioners who did not meet the regulatory requirements for training, supervision, and/or credentials under Massachusetts’ Medicaid program (MassHealth).  The First Circuit found that UHS’s alleged misrepresentations were material for three reasons:

  1. The relators alleged that compliance with MassHealth regulations was a condition of payment. The Court in Escobar I noted that this was a “relevant,” though “not dispositive,” factor when determining materiality.
  2. The First Circuit held that MassHealth’s licensing, credentialing, and supervision regulations “go to the ‘very essence of the bargain’” between MassHealth and its contracted providers. Thus, the First Circuit concluded that UHS’s requests for reimbursement for services rendered by providers who were not properly licensed or did not have the proper supervision “would be ‘sufficiently important to influence the behavior’ of the government in deciding whether to pay the claims.”
  3. While defendants argued that the government’s continued payment of UHS claims was “strong evidence” of non-materiality, the First Circuit declined to dismiss the Second Amended Complaint because (1) the Massachusetts Department of Public Health likely did not learn the extent of the regulatory violations until after the original complaint was filed, and (2) the pleadings did not suggest that MassHealth, which is the entity that was paying the claims at issue, had knowledge of the violations at the time of payment.

The First Circuit noted that discovery may establish MassHealth’s knowledge of UHS’s noncompliance with the pertinent regulations during the time period that it was paying the relevant claims, which would affect the court’s evaluation of materiality. However, because the case was at the pleadings stage, the First Circuit concluded that UHS’s alleged representations were material and the relators were entitled to proceed with their FCA claims.

Damages, FCA Statistics

DOJ Recovers More Than $4.7 Billion from False Claims Cases in 2016

The United States Department of Justice has issued a press release announcing that it has recovered over $4.7 Billion from cases brought under the False Claims Act (FCA) during fiscal year 2016.  Fiscal year 2016 ran from October 1, 2015 through September 30, 2016.  The recovery of more than $4.7 Billion is the Government’s third highest annual recovery, though it still trailed behind the record $5.69 Billion that was recovered in fiscal year 2014.  This also marks the fifth consecutive year that the Government has recovered at least $3.5 Billion from FCA cases.  The Government has recovered a staggering $31.3 Billion from FCA cases during the time period since fiscal year 2014.

The healthcare industry was responsible for the majority of the Government’s FCA recoveries, with $2.5 Billion coming from the healthcare industry.  Significantly, the DOJ also noted that the announced recoveries include only money that was recovered by the federal government, and does not include state recoveries that may have arisen out of the same cases (or other cases) during 2016.  The recoveries in the healthcare sector came largely from drug companies, medical device companies, hospitals, physicians, laboratories, and nursing homes.

The financial industry was responsible for most of the remaining recoveries, with $1.7 Billion of the Government’s recoveries in fiscal 2016 coming from the financial industry.  A substantial portion of this amount pertaining to federally insured residential mortgages.

Once again, whistleblowers were involved in many of the cases that led to these Government recoveries.  FCA whistleblowers filed 702 claims in fiscal 2016, which is a substantial increase over the 632 filings in fiscal 2015.  In fiscal 2016, the Government recovered $2.9 Billion from cases that were initiated by whistleblowers.

These significant numbers in terms of recoveries and the number of qui tam filings provide a meaningful reminder of the need to emphasize compliance and accuracy in the submission of claims to the Government.

Implied Certification

On Remand, the Seventh Circuit Applies Escobar’s Materiality Standard

At the end of last month, the Seventh Circuit issued its opinion on remand in United States v. Sanford-Brown, Ltd., No. 14-2506, — F.3d —-, 2016 WL 6205746 (7th Cir. Oct. 24, 2016) (“Sanford II”).  The court once again granted summary judgment for the defendants, holding that the relator’s FCA action failed under the implied certification theory of liability articulated by the Supreme Court last term in Universal Health Services v. United States ex rel. Escobar, 136 S.Ct. 1989 (2016).

In Sanford, the defendant was a for-profit college located in Milwaukee and the relator was a former employee.  To receive federal funding, the defendant was required to enter into a government contract pursuant to which it agreed to comply with a “panoply of statutory, regulatory, and contractual requirements.”  United States v. Sanford-Brown, Ltd., 788 F.3d 696, 701 (7th Cir. 2015) (“Sanford I”).  The relator filed a qui tam action alleging that the defendants violated a number of federal regulations concerning the payment of bonuses to employees involved in recruiting and complying with certain educational standards. Id.

Sanford I generated a considerable amount of attention as the Seventh Circuit became the first appellate court to outright reject the implied certification theory.  The opinion created a circuit split, which was resolved by Escobar where the Supreme Court ruled that the implied certification theory of liability is actionable under the FCA provided two conditions are satisfied: (1) “the claim does not merely request payment, but also makes specific representations about the goods or services provided,” and (2) “the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”  Escobar, 136 S.Ct. at 2001.  Shortly after Escobar was handed down, the Supreme Court granted cert in Sanford, vacated the judgment and remanded for further consideration in light of Escobar.

On remand, the Seventh Circuit found that the relator could not satisfy either of the conditions set forth in Escobar.  First, the court found that the relator had failed to provide any evidence that the defendant made false or misleading representations in connection with its claims for payment.  Second, the court found that the relator could not establish that the defendant’s purported regulatory violations were material to the government’s decision to issue payment.  Building on this latter point, the court quoted from Escobar in explaining that the materiality standard is “rigorous” and “demanding” and that the relator’s claim failed because, at best, he had simply shown that the defendant’s noncompliance would have entitled the government to decline payment.

As we wrote when Escobar was first handed down, the Supreme Court’s focus on the materiality standard constituted a marked turn away from years of FCA case law and left the courts with significant discretion in determining the standard’s contours.  Sanford is helpful in that it cleanly applies the exacting standard for addressing implied certification claims post-Escobar and illustrates the principle that FCA liability will not be found where the violation merely provides the government with the option to decline payment.


Can a Relator Plead with Particularity without Alleging that a Patient’s Bill was Submitted to the Government?

The Seventh Circuit says yes. Early this month, the Seventh Circuit reversed and remanded a district court’s holding that a qui tam Relator failed to properly plead a False Claims Act suit where the Complaint did not allege that the defendants sent a claim to the government. In reversing the District Court for the Eastern District of Wisconsin, the Seventh Circuit held that “a plaintiff does not need to present, or even include allegations about, a specific document or bill that the defendants submitted to the government.” U.S. ex rel. Presser v. Acacia Mental Health Clinic, LLC, No. 14-2804, 2016 WL 4555648 (7th Cir. 2016) (citing United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849 (7th Cir. 2009)).

The Court’s decision was based on the fact that the Relator, a nurse practitioner, did not have “regular access to medical bills” causing the Court to “not see how [the Relator] would have been able to plead more facts pertaining to the billing process.” Id. at *5. And so the Court determined that “an inference is enough” under Fed. R. Civ. P.’s 9(b)’s requirement to plead fraud claims with particularity.

The Relator’s factual pleadings – which were determined to be particular “enough” to make a sufficient “inference” – were mere allegations that the defendant billed Medicare, based on the fact that the defendant told the Relator that “almost all of [the] patients were ‘on Title 19’ and that they dealt with Medicare” coupled with the plausible allegation that an illegal billing practice, upcoding, was applied to all patients. Id.

Hospital and billing administrators should beware of Presser v. Acacia as a reminder to create and enforce carefully crafted coding procedures. Presser demonstrates the unpredictability of civil pleading post-Iqbal and Twombly which problematically promotes not “more clarity and less litigation, but to less clarity and more litigation.” Id. at *11 (Hamilton, J., concurring in part and dissenting in part). Judge Hamilton’s dicta should additionally alert hospital and billing administrators towards stricter billing compliance to avoid False Claims Act litigation as he suggests “[t]he best approach is to let the plaintiff try her best, and then to be liberal in allowing amendments once the court has indicated what is necessary.” Id.


DOJ Announces Will Appeal Loss in AseraCare, Triggering Issues on Battle of the Experts, Statistical Sampling, and Bifurcation

$200 million and pivotal legal precedent are at stake in the False Claims Act (“FCA”) case against AseraCare, Inc. (“AseraCare”), a for-profit hospice chain that was alleged to have fraudulently submitted claims that falsely certified hospice eligibility for patients who were not terminally ill. In May 2016, the United States Department of Justice (“DOJ”) announced that it will appeal three orders accompanying its stunning loss to AseraCare: the judge’s decision to split the case into two parts, an opinion granting AseraCare a new trial, and a summary judgment award to AseraCare.

The AseraCare case instantly became a noteworthy case that initially derived attention after the district court allowed the DOJ to use statistical sampling to prove liability, contradicting historical precedent that only permitted statistical sampling to prove damages. The new sampling practice allowed the DOJ to extract, from a pool of 2,181 patients, records and payments of a sample size of 124 patients.  The DOJ then scrutinized the records that incorporated “ineligible patients” and extrapolated the payments to a larger universe of claims, rooting its FCA suit and the $200 million claim for damages on that evidence.

The DOJ’s first appeal resolves around the United States District Judge Karon O. Bowdre’s unprecedented move in June 2015 to bifurcate the trial – requiring the parties to try the FCA’s elements of falsity and scienter in two different trials. Though splitting a FCA into two separate trials has never occurred in the FCA’s 150-year history, Judge Bowdre divided the case against AseraCare as a way to remove any juror prejudice that could taint the case.

During the first trial deciphering the “falsity” element, the jury found that 104 of the 121 (three claims were removed from consideration) were objectively false. But Judge Bowdre granted AseraCare a new trial after concluding that the jury instructions that incorporated the wrong legal standard of “falsity” were a “reversible error.”   Consequently, the second order that the DOJ will appeal is the district court’s ordering of a new trial regarding the instructions on “falsity.”

The third and final order on appeal is the district court’s grant of summary judgment in favor of AseraCare. Judge Bowdre introduced her memorandum opinion granting AseraCare’s motion for summary judgment with an appropriate quote from Pascal stating that “[c]ontradiction is not a sign of falsity, nor the lack of contradiction the sign of truth.”  Judge Bowdre concluded that dismissal was warranted because the Federal government could not prove fraud merely by presenting one medical expert’s disagreement with AseraCare’s diagnoses of terminal illness.  The conflicting medical expert opinions and differences in clinical judgment were considered not enough to establish the FCA’s objective “falsity” element.

The first sentence in Judge Bowdre’s opinion granting AseraCare a new trial in 2015 was that “[FCA] cases have been particularly hot.” And this FCA “heat wave” will continue to rise throughout 2016 and into 2017.  In accordance with a prior article discussing the likely demise of medically unnecessary false claims cases, the AseraCare case could also affect various FCA theories rooted on claims for medically unnecessary services.

Further, the DOJ’s announcement to appeal three district court orders in the AseraCare case comes just one month after the Supreme Court released its unanimous opinion in Universal Health Services, Inc. v. United States ex rel. Escobar, discussed in a prior article, sustaining the implied false certification theory and rejecting the distinction between conditions of payment and conditions of participation.  This case currently presents a significant “win” for the defense bar and it will be particularly interesting to track how the Eleventh Circuit incorporates the Escobar opinion into its analysis of the AseraCare case.

The author acknowledges and thanks Erin Dine, a rising 3rd year law student at Loyola University Chicago School of Law, for her help and support in the preparation of this post.


No Secret Here: Supreme Court Set to Hear Yet Another FCA Case Next Term

In May 2016, the United States Supreme Court granted the petition for a writ of certiorari in State Farm Fire & Casualty Co. v. United States, ex rel. Rigsby, et al.  During the next term, the Supreme Court will hear oral arguments and issue a ruling for the Rigsby case which is limited to one issue: “What standard governs the decision to dismiss a relator’s claim for violation of the [False Claims Act’s] seal requirement, 31 U.S.C. § 3730(b)(2).”

After Hurricane Katrina hit the Gulf Coast in 2005, residents typically received compensation for damaged or destroyed homes under either a flood policy, paid for by the federal government under the National Flood Insurance Program, or a wind policy, paid solely by the insurers. The relators in Rigsby, former State Farm Fire and Casualty Co. (“State Farm”) claims adjusters, alleged that State Farm falsely submitted claims for damage claimed to be flood-related, rather than its actual wind cause, in an attempt to compensate policyholders under the National Flood Insurance Program rather than their own pocket books.

The jury found for the relators and issued a verdict for $227,475 plus $2.9 million in attorneys’ fees and expenses. The relators appealed alleging that they were not entitled to a sufficient amount of discovery and State Farm appealed on several counts.  The Fifth Circuit Court of Appeals upheld the jury verdict.

Regardless of the accuracy of the allegations present in the suit, State Farm argued that the lawsuit should have been automatically dismissed because the relators’ former lawyer distributed information about the lawsuit to members of the media during the time in which the complaint should have been secret and under seal pursuant to the FCA’s seal requirements.

Under the FCA, a FCA complaint is to be kept secret or “under seal” for at least sixty (60) days while the federal government reviews and decides whether it will intervene in the case. 31 U.S.C. § 3730(b)(2).  But when the seal is lifted prematurely, debate ensues as to how grave the mistake is in relation to dismissal decisions.  The Supreme Court is set to resolve a three-way circuit split regarding the standard that governs the decision whether to dismiss a relator’s entire claim for violation of the FCA’s seal requirement, 31 U.S.C. § 3730(b)(2). The Fifth and Ninth Circuits have held that the violation of the FCA’s seal requirement does not warrant a complete dismissal, provided that the federal government was not “harmed.”  The Sixth Circuit has stated that any violation of the seal requirement subsequently warrants an automatic dismissal.

The United States Supreme Court’s recent decision to review a case involving a distinctive provision in the FCA proves that even the apparently-minor provisions can have major implications and the Supreme Court is willing to hear it.  Although the Supreme Court recently handed down its must-anticipated opinion in Universal Health Services, Inc. v. United States ex rel. Escobar, discussed in a previous article, the Supreme Court’s recent election to review Rigsby is further evidence that FCA lawsuits, and the succeeding debates revolving around the FCA, will not cease with the Court’s determination of the survivability of the “implied false certification” theory in Escobar.

The author acknowledges and thanks Erin Dine, a rising 3rd year law student at Loyola University Chicago School of Law, for her help and support in the preparation of this post.


Supreme Court Hands Down Opinion in Universal Health Services v. Escobar

The Supreme Court handed down its much-anticipated opinion in Universal Health Services, Inc. v. United States ex rel. Escobar et al. yesterday—a case addressing the viability of the implied certification theory in FCA litigation.  Justice Thomas, writing on behalf of a unanimous Court, found that the implied certification theory can in fact serve as a basis for FCA liability where a defendant has misleadingly failed to disclose its noncompliance with material statutory, regulatory, or contractual obligations.

The Court first addressed whether Universal Health Services, Inc. (“Universal Health”) impliedly certified that it had complied with Massachusetts Medicaid regulations by submitting claims for payment. Although the Court concluded that it did, the holding is narrowly drafted.  The Court held that the act of submitting a claim for payment is an actionable misrepresentation where two conditions are satisfied: (i) in addition to requesting payment, the claim also makes specific representations about the goods or services provided; and (ii) the failure to disclose noncompliance with material statutory, regulatory, or contractual requirements renders the representations “misleading half-truths.”  The Court expressly declined to address “whether all claims for payment implicitly represent that the billing party is legally entitled to payment.”

As discussed in a previous article, Escobar is a qui tam case in which two relators allege that Universal Health submitted claims for reimbursement that failed to disclose violations of Massachusetts Medicaid regulations governing the qualifications and supervision requirements for staff at a mental health facility.  The Court determined that when Universal Health submitted reimbursement claims for mental health services using certain payment codes, “anyone would [wrongly] conclude that Universal Health complied with core state Medicaid requirements regarding the qualifications and licensing requirements of its staff members.”  By submitting claims for payment without disclosing the alleged violations, the Court found that Universal Health’s claims constituted actionable misrepresentations.

Although many will be disappointed that the Court did not reject the implied certification theory, the Court’s limited ruling gives defendants room to argue that not all claims for payment implicitly represent compliance with statutory, regulatory, and contractual requirements. The Court looked to the common law to determine when nondisclosure constitutes an actionable misrepresentation, which is typically a fact-dependent, case-by-case inquiry.  The Court’s limited ruling leaves a lot of work left to be done in the lower courts and is sure to generate significant litigation.  Given that most jurisdictions had already adopted the implied certification theory, however, the Court’s limited ruling can be seen as a silver lining.

The second question the Court addressed was whether the implied certification theory is limited to instances where compliance with a statute, regulation, or contractual provision was a condition of payment. Most lower courts had adopted this bright-line rule to prevent nearly unchecked liability under the FCA for minor regulatory violations and contractual breaches.  The Court addressed this issue solely as a question of materiality, and concluded that “[w]hether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.”

In a bid to give some teeth to the materiality standard, the Court called the FCA’s materiality standard “rigorous” and “demanding” and reiterated that the FCA is not to be used as “an all-purpose antifraud statute.” The Court again turned to the common law, suggesting that materiality should be measured by whether noncompliance with a regulatory violation would influence the government’s decision to pay a claim.  The Court’s holding on this point was less precise, but it did reject the government’s argument that noncompliance with a regulatory violation is material simply because the government would be entitled to refuse payment.  Additionally, the Court appeared to suggest that defendants must have knowledge that noncompliance would be material.

From a litigation perspective, Escobar has swept away years of precedent on the bright-line rule.  Despite the Court’s effort to bolster materiality as a defense in implied certification cases, the loss of the bright-line rule will make it more difficult for defendants to win motions to dismiss.  The Court addressed this problem in a footnote, arguing that the pleading standards require the government and relators to plead facts to support their allegations of materiality.  No doubt the pleading standards will be an avenue to attack materiality on a motion to dismiss, but the Court may be overly optimistic.  Materiality is generally a mixed question of law and fact, meaning trial courts will be reluctant to dismiss a case before discovery.  As a result many cases that would have previously been dismissed will now go through expensive discovery.

The authors acknowledge and thank Erin Dine, a rising 3rd year law student at Loyola University Chicago School of Law, for her help and support in the preparation of this post.


Number of Medically Unnecessary False Claims Cases Likely to Diminish

The DOJ recently intervened in a lawsuit against Prime Healthcare Services, Inc., and its subsidiaries (“Prime”).  The lawsuit alleges that Prime submitted claims for medically unnecessary services and routinely pressured its staff to exaggerate Medicare beneficiaries illnesses in order to increase the number of inpatient admissions and billed for services as inpatient admissions that should have been classified as outpatient or observation stays.

Over the past several years, there has been a surge in the number of FCA cases based on the submission of claims for medically unnecessary services. This uptick is based in large part on the prevalence and increased recognition of the implied certification theory—the legal theory under which medically unnecessary claims are most commonly brought.  As discussed in our previous article, the implied certification theory is based on the concept that every time a payee submits a claim to the government it has impliedly certified compliance with all contractual, statutory, and regulatory obligations, and therefore, is entitled to payment.  As previously mentioned, the United States Supreme Court recently heard oral argument in Universal Health Services v. U.S. ex rel. Escobar, a case challenging the validity of the implied certification theory.  We anticipate a ruling in Escobar in the upcoming weeks and expect that its holding will have a dramatic impact on the FCA landscape.

And while the Court’s ruling in Escobar could curtail the viability of medically unnecessary claims going forward, there is evidence suggesting that volume-based medically unnecessary FCA claims will diminish for independent reasons; namely, healthcare providers have become more incentivized to focus on the value-rather than the volume-of claims submitted for reimbursement.  Starting most notably with the Affordable Care Act’s implementation of accountable care organizations (“ACOs”), legislators and the healthcare industry as a whole have moved towards value-based, high quality care.  ACOs participating in Medicare’s Shared Savings Program (“MSSP”) have the opportunity to receive a portion of the savings the ACO generates by lowering the total cost of healthcare of its Medicare beneficiaries.  Consequently, these providers are less incentivized to submit false claims based on an excessive amount of services rendered.

These incentives can eliminate waste and serve to negate the implied presumption in FCA complaints that providers seek to produce a high volume of services and patients.  The complaint against Prime argues an alleged internal pressure to generate inpatient admissions and high-costing claims.  But even Prime has shifted its internal pressure to value, rather than volume, by implementing an ACO and participating in the MSSP – instituting a type of internal compliance department focused on eliminating wasteful spending.  Although the DOJ’s invention has received attention, the Court’s ruling in Escobar and providers’ new financial incentives could cause the current plethora of medically unnecessary FCA cases to diminish.

The author acknowledges and thanks Erin Dine, a rising 3rd year law student at Loyola University Chicago School of Law, for her help and support in the preparation of this post.

FCA Litigation

Seventh Circuit Finds that Pharmacy Discount Programs Are Not Exempt from the Definition of “Usual and Customary”

Created in 2006, Medicare Part D is a government program that subsidizes the cost of prescription drugs to Medicare beneficiaries. The program is run through “Plan Sponsors” – private entities that receive a fixed monthly payment from the Center for Medicare and Medicaid Services (“CMS”) and subcontract with Pharmacy Benefit Managers to provide prescription drug benefits to eligible Part D members.  While CMS does not directly pay or reimburse prescriptions, it does require participating pharmacies to charge Part D members no more than the provider’s “usual and customary charges to the general public.”  42 C.F.R. § 447.512(b)(2).  The “usual and customary” price is “the price an out-of-network pharmacy or a physician’s office charges a customer who does not have any form of prescription drug coverage for a covered part D drug.”  24 C.F.R. § 423.100.

In United States ex rel. Garbe v. Kmart Corporation, No. 15-1502, 2016 WL 3031099 (May 27, 2016), the Seventh Circuit evaluated Kmart’s alleged practice of charging its cash customers (i.e. customers with no insurance) significantly reduced prices as compared to its customers who have insurance.  James Garbe, a pharmacist who began working at a Kmart pharmacy in 2007, was the whistleblower who commenced the qui tam lawsuit on July 12, 2008.

Mr. Garbe contended that Kmart had a policy of setting “discount” prices for cash customers who enrolled in one of Kmart’s discount programs, while charging higher rates to insured customers.  The purported purpose of this practice was “to drive as much profit as possible out of [third-party payor] programs.”  This allegedly created a substantial pricing discrepancy in which insured individuals, including Part D participants, were charged significantly more for prescription drugs than the prices charged to Kmart’s cash customers.  Mr. Garbe allegedly discovered the issue when he was picking up personal prescriptions at a competing pharmacy and noticed that the competitor was charging his Part D insurer far less than Kmart charged for the same prescription.

The Seventh Circuit evaluated whether Kmart’s discount program for cash customers represented its usual and customary charges to the general public.  Kmart argued that its discount members “belong to a particular group” or “organization” and are, therefore, not members of the general public.  Kmart argued that the prices charged to such customers for prescription drugs could not constitute Kmart’s usual and customary charges to the general public.  The Seventh Circuit disagreed:

Saying that someone is a member of a “particular” organization, however, does not make it so. We are given no reason to think that there was any meaningful selectivity for the people who joined Kmart’s programs, and thus that they could be distinguished from the “general public.” . . . Even if the prices were offered only to members of its “discount programs” – and it is disputed whether this was the case – the programs themselves were offered to the general public.

The Seventh Circuit’s ruling is instructive for retail pharmacies who must consider that their discount programs will be considered in determining their “usual and customary” pricing, rather than being an exception to such pricing.


Tenth Circuit Elaborates Upon FCA’s Materiality Requirement

The FCA’s implied certification theory is based on the concept that every time a payee submits a claim to the government it has impliedly certified compliance with all contractual, statutory, and regulatory obligations, and therefore, is entitled to payment. While the courts are currently divided on whether implied certification is a valid theory of liability, the courts that have endorsed this theory have distinguished between violations that are conditions of participation (where the penalty for a violation could be exclusion from a government program) and conditions of payment (where the penalty would be nonpayment of the claim) and have found that only the latter are actionable under the FCA.  These courts have also almost uniformly held that such a violation must be material to the government’s decision to pay the claim.  However, “materiality” is an amorphous concept under the FCA and courts have applied different standards and relied upon various sources of evidence in determining whether a payee’s violation was material.

In United States ex rel. Thomas v. Black & Veatch Special Projects Corp., the Tenth Circuit elaborated upon the materiality standard in an implied certification dispute between a government contractor and its former employees.  Defendant – an engineering and construction firm – was awarded a government contract to build facilities and distribute electricity in Kandahar, Afghanistan.  Pursuant to the contract, defendant was required to obtain visas and work permits from the Afghan government. The relators – former employees of the defendant – discovered copies of forged documents that had been submitted to the Afghan government as part of the defendant’s visa application process.  The relators reported their discovery to a supervisor, and two days later provided copies of the forged documents to the OIG.

Shortly thereafter, the defendant met with the OIG to discuss the forged documents, requested copies of all documents it had submitted to the Afghan government, launched an internal investigation to determine who created the forged documents, and had a third-party perform a forensic analysis of its computers.  The defendant also kept the OIG updated with any findings.  In response, the government never took any adverse action against the defendant and continued to make payments to the defendant in full.  In fact, the government amended the contract to provide the defendant with additional work.

In its motion for summary judgment, the defendant argued that the government’s awareness of its violations and subsequent failure to take any adverse action or reduction in payment evidenced that the defendant’s violation of the contract’s visa provisions was nonmaterial, and therefore, it was not liable under the FCA.  The district court agreed and granted summary judgment in favor of the defendant.

The Tenth Circuit affirmed, and in doing so provided guidance on the materiality standard.  Specifically, the court explained that “an FCA plaintiff may establish materiality by demonstrating that the defendant violated a contractual provision that undercut the purpose of the contract” or if the defendant has only violated minor contractual provision, “by coming forward with evidence indicating that, despite the tangential nature of the violation, it may have persuaded the government not to pay the defendant.” The court quickly dismissed the notion that the submission of forged documents undercut the purpose of the contract.  Turning to the latter option, the Tenth Circuit reasoned that because the government had made payment to the defendant (and in fact given the defendant more work), it was evident that the submission of forged documents was not material to the government’s decision to make payment, and therefore, the relators did not have an actionable claim under the FCA.  In so holding, the Tenth Circuit also expressly rejected the relators’ argument that the government’s knowledge and actions are irrelevant to the materiality analysis.

Thomas is a useful case for the FCA defense bar as it provides a detailed analysis of the “materiality” requirement and provides further support for the argument that the government’s knowledge of the defendant’s conduct serves as a valid defense to an FCA action.