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June 01, 2017

Materiality Kicks Back: Escobar and the Anti-Kickback Statute

Rebecca L. Gibson, Berg & Androphy, Houston, TX


The Supreme Court’s landmark 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar resolved a circuit split as to use of the “implied certification” theory of False Claims Act (FCA) liability.1 Now implied certification can serve as a basis for FCA liability if two requirements are met: (1) the claim must not “merely request payment,” but must also make “specific representations about the goods or services provided,” and (2) the defendant’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements” must transform its specific representations into “misleading half-truths.”2

Just how, one may ask, does an implied certification FCA case relate to the Anti-Kickback Statute? Aren’t claims “tainted” by kickbacks automatically false claims, dispensing with any “implied” liability theories? Contrary to first impressions, however, Escobar does affect the Anti-Kickback Statute.

Escobar not only analyzed the implied certification theory specifically, but also addressed the general FCA threshold requirement of materiality.3 Materiality affects Anti-Kickback Statute FCA cases just as it affects implied certification FCA cases.4 The Escobar court emphasized that materiality was a “demanding”5 standard, and that whether or not the government would pay a particular type of claim is a key part of the materiality inquiry.6 Specifically, factors to be examined can include, for example, government practices of paying a noncompliant claim in full despite knowledge of the noncompliance, or evidence that the defendant knows the government consistently refuses to pay certain claims based on noncompliance.7 The court also clarified that a requirement’s designation as a “condition of payment” by the government is “not automatically dispositive” of materiality.8 As a result, “condition of payment” status is no longer required to show materiality, as some circuits previously held.9

Why should this have any effect on Anti-Kickback Statute cases, though? After all, the Patient Protection and Affordable Care Act of 2010 (PPACA) revised the Anti-Kickback Statute so that kickback-tainted claims automatically become false claims — dispensing with any materiality requirement.10 However, PPACA’s amendment of the Anti-Kickback-Statute is not retroactive; instead, it only applies to conduct occurring on or after March 23, 2010.11 It is for these pre-PPACA claims that Escobar is key. For conduct occurring on or before March 23, 2010, a relator12 will have to rely on an express or implied certification theory of FCA liability.13 And, in such cases, a relator will have to show that the non-compliance was “material.”14

United States ex rel. Wood v. Allergan, Inc.: Applying Escobar materiality to the Anti-Kickback Statute

This very situation was recently explored for the first time by the Southern District of New York in United States ex rel. Wood v. Allergan, Inc.15 In that case, defendant Allergan allegedly provided free “custom care kits” to physicians, both to induce new prescriptions of Allergan drugs and to reward high prescribers.16 Allergan also allegedly provided over $100 million in free drug samples, and tracked the ratio of Allergan drugs prescribed to free samples provided.17 Furthermore, although Allergan stopped these practices in 2010, it allegedly continued to provide free office supplies and prescription pads to high prescribers.18 The relator, Wood, a former employee of Allergan, alleged kickback-tainted claims occurring both prior to and subsequent to PPACA’s amendment of the Anti-Kickback Statute.19

Based on the PPACA-amended Anti-Kickback Statute’s transformation of kickback-tainted claims into false claims, the court found that Wood clearly alleged “a plausible FCA claim with respect to conduct on or after March 23, 2010.”20 However, conduct that predated PPACA was analyzed under express and implied certification theories of liability.21 The pre-PPACA Medicare Part D claims fell under the express certification theory, the court reasoned, because participation in Medicare Part D required physicians to sign the CMS Provider Agreement, which specifically certifies compliance with the Anti-Kickback Statute.22 All other claims were categorized as implied false certification claims by the court, as Wood’s complaint did not identify any express certifications for them.23

Turning to these implied false certification claims, the court asked the key question: “whether compliance with the [Anti-Kickback Statute] is ‘material’ to a payment decision by the government.”24 Applying the “holistic” approach mandated by Escobar, the court concluded that Anti-Kickback Statute compliance was indeed “material,” because: (1) Congress made Anti-Kickback Statute non-compliance a felony offense; (2) Medicare Part D and other Provider Agreements all expressly require Anti-Kickback Statute compliance; and (3) there was no evidence suggesting that the government paid noncompliant claims in full despite knowledge of the noncompliance.25 The court went on to find that Wood’s claims met the Rule 9(b) pleading standards, and denied Allergan’s motion to dismiss in part.26

Implications of Wood

Wood’s confirmation that Anti-Kickback Statute compliance is “material” under Escobar may seem trivial, because it only bears on conduct occurring prior to March 23, 2010.27 However, qui tam litigation can go on for years, if not decades — Wood, for example, dealt with conduct going back as far as 2003, but was not litigated until this year.28 The FCA’s statute of limitations is 10 years at the very longest.29 Thus, the holding in Wood will continue to be useful for cases involving pre-PPACA conduct.

Also, while it is true that many other courts previously found Anti-Kickback Statute compliance “material,” most of them analyzed this materiality under the “condition of payment” theory.30 Now, after Escobar, “condition of payment” status is no longer dispositive of materiality.31 Thus, Wood plays a crucial role in ensuring the materiality of the Anti-Kickback Statute for pre-PPACA conduct under Escobar. Relators no longer need to show that Anti-Kickback Statute compliance was a condition of payment, and can rest assured that Anti-Kickback Statute compliance is material under the FCA.

Additionally, PPACA is currently under attack, with revisions pending in Congress.32 Case law confirming that the Anti-Kickback Statute is material will ensure that PPACA’s protection of the Anti-Kickback Statute’s materiality will continue, even if PPACA were to be repealed in its entirety.33 This is why Wood and Escobar are critical in ensuring the continued strength of the Anti-Kickback Statute.

  1. See Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989, 2001 (2016) (hereinafter “Escobar”) (holding that implied certification theory can be the basis for False Claims Act liability when certain requirements are met). For more information about the facts of Escobar, see, e.g., Robert Anderson, Clarification of the Implied False Certification Theory Under the False Claims Act: The Supreme Court’s Decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 29 Health Lawyer Number 2, at 33 (December 2016); Joel M. Androphy et al., Federal False Claims Act & Qui Tam Litigation 3-17–3-18 (2017).
  2.  Id. at 2001. Escobar resolved a thorny circuit split as to whether, in implied certification FCA cases, materiality required the statute, rule, regulation, or contract at issue to set out a “condition of payment.” See Escobar, 136 S. Ct. at 2001–04 (noting circuit split and clarifying materiality requirements as to the condition of payment inquiry); see also, e.g., Mikes v. Straus, 274 F.3d 687, 700 (2d Cir. 2012) (requiring condition of payment showing).
  3.  See Escobar, 136 S. Ct. at 2002–04.
  4.  See 31 U.S.C. § 3729(b)(4); Escobar, 136 S. Ct. at 2002; U.S. ex rel. Westmoreland v. Amgen, Inc., 812 F. Supp. 2d 39, 46, 54 (D. Mass. 2011).
  5.  Escobar, 136 S. Ct. at 2003.
  6.  See id. at 2003–04.
  7.  Id. at 2003–04.
  8.  Id. at 2003.
  9.  See id. at 2001, 2003; Mikes, 274 F.3d at 700, abrogated by Escobar, 136 S. Ct. 1989 (2016).
  10.  See 42 U.S.C. § 1320a-7b(g) (“[A] claim that includes items or services resulting from a violation of this section [the Anti-Kickback Statute] constitutes a false or fraudulent claim for purposes of [the False Claims Act].”) (emphasis added).
  11.  See, e.g., Gonzalez v. Fresenius Med. Care N. Am., 689 F.3d 470, 475 n.4 (5th Cir. 2012); U.S. ex rel. Wood v. Allergan, Inc., No. 10-CV-5645 (JMF), 2017 WL 1233991, at *25 (S.D.N.Y. Mar. 31, 2017) (hereinafter “Wood”).
  12.  Or the government, if the government intervened in the case.
  13.  See, e.g., Wood, 2017 WL 1233991, at *27.
  14.  See id. at *27–*28.
  15.  Although Wood takes the controversial stance that Mikes v. Straus was not abrogated in full by Escobar, id. at *24, its analysis regarding the Anti-Kickback statute is still helpful.
  16.  See Wood, 2017 WL 1233991, at *3.
  17.  Id.
  18.  See id.
  19.  See id. at *25.
  20.  Id. at *25.
  21.  See id. at *26–*27.
  22.  See id. at *25.
  23.  Id. at *27.
  24.  Id. at *28.
  25.  Id.
  26.  See id. at *29, *40. On May 4, 2017, the Southern District of New York granted Allergan’s motion to certify the court’s opinion and order for appeal. See United States ex rel. Wood v. Allergan, Inc., No. 10-CV-5645 (JMF), 2017 WL 1843288, at *1 (S.D.N.Y. May 4, 2017). Allergan’s interlocutory appeal is based mainly on whether the FCA’s first-to-file bar is jurisdictional, which the court determined to be a controlling question of law. See id. at *1. As a result, the court stayed the case until the Second Circuit decides whether to grant interlocutory review. See id. at *2.
  27.  See Wood, 2017 WL 1233991, at *25
  28.  See id. at *3.
  29.  Under the FCA, a claim may not be brought: (1) more than six years after a violation of Section 3729; or (2) more than three years after “facts material to the right of action” are known, or reasonably should have been known by the U.S. official “charged with responsibility to act,” but not more than 10 years after the date of the violation. 31 U.S.C. § 3731(b). So, conceivably, a claim alleging pre-PPACA conduct could, at the very latest, be brought on March 22, 2020. See id.
  30.  See U.S. ex rel. Westmoreland v. Amgen, 812 F. Supp. 2d 39, 54–55 (D. Mass. 2011) (summarizing prior decisions).
  31.  See Escobar, 136 S. Ct. at 2001.
  32.  See Thomas Kaplan & Robert Pear, Health Care Bill, Passed By House, Faces Senate Test, N.Y. Times, May 5, 2017, at A1.
  33.  The current bill amending PPACA does not address PPACA’s changes to the Anti-Kickback Statute. See H.R. 1628, 115th Cong. (2017). However, the bill has yet to pass the Senate, and could change substantially in future iterations. See Kaplan & Pear, supra.

Rebecca L. Gibson

Berg & Androphy

Rebecca Gibson is an associate attorney at the Houston office of Berg & Androphy. She is a Phi Beta Kappa graduate of the University of California, Berkeley and obtained her Juris Doctorate from the University of Texas School of Law. Ms. Gibson primarily works on qui tam, commercial litigation, and white collar crime cases. She assists in writing periodic updates to Joel M. Androphy’s books Federal False Claims Act & Qui Tam Litigation and White Collar Crime, and has authored and co-authored articles published in the Texas Journal of Oil, Gas, and Energy Law and The Federal Lawyer. She may be reached at [email protected].