September 27, 2018

Post-Escobar Circuit Challenges

Bruce Frederick, Howell Schwabe Williamson & Wyatt and Emily S. Baker, Lewis & Clark, Portland, OR

AuthorAuthorThe Supreme Court’s 2016 decision in Escobar validated the implied false certification theory of liability under the False Claims Act (FCA). But while this theory adds an arrow to the quiver of a plaintiff in such a suit, the court also set new requirements to establish scienter and a heightened standard to show materiality. Unfortunately, the circuits do not agree on what exactly the decision requires for claims going forward, in particular whether the tests outlined in Escobar are in fact requirements or rather mere suggestion. While the battle rages on, the Ninth Circuit seems to have taken a side on both issues, finding the scienter requirement’s two-part “falsity” test is mandatory, and allowing a heightened materiality standard to stop many qui tam claims in their tracks.

Below is a review of the FCA and the facts of Escobar, as well as an analysis of how the courts are interpreting the Supreme Court ruling.

The False Claims Act
The FCA imposes civil liability on “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” of a government contract.1 Because the government does not have the resources to investigate or bring suit against every government contractor that violates the FCA, an individual can bring a qui tam claim on behalf of the government, and the government chooses whether to intervene.2 Defendants violating the FCA face steep civil penalties “essentially punitive in nature.”3

A claim under the FCA requires a showing of “(1) a false statement or fraudulent course of conduct, (2) made with scienter, (3) that was material, causing (4) the government to pay out or forfeit moneys due.”4

FCA claims generally focus on two of the necessary elements for liability: scienter and materiality. The FCA’s scienter requirement defines “knowing” and “knowingly” to mean a person has “actual knowledge of the information,” “acts in deliberate ignorance of the truth or falsity of the information,” or “acts in reckless disregard of the truth or falsity of the information.”5 Materiality is found where the false or fraudulent claim has “a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”6

Regarding scienter, the express certification theory of liability applies when a government contractor knowingly makes a false or fraudulent statement when submitting a claim for payment. But when the claim for payment remains silent about a violation of a contractual, statutory, or regulatory requirement, the express certification theory does not apply. Rather, a FCA claim under such circumstances is brought under the implied false certification theory, where the omission renders the claim for payment false or fraudulent.

Until 2016, circuits were split, and it was unclear if and when a claim could be brought under the implied false certification theory. Then the Supreme Court decided Escobar, holding that the implied false certification theory of liability is viable for plaintiffs alleging violations of the FCA and detailing the requirements of falsity and materiality for such a claim to succeed.7


The parents of Yarushka Rivera brought a qui tam suit against Universal Health Services and its subsidiary Arbour Counseling Services.8 The claim was based on violations of Massachusetts’ Medicaid program.9 From 2004 until 2009, Rivera received intermittent counseling services at Arbour for behavioral problems.10 In May 2009, Rivera was prescribed medication to treat bi-polar disorder.11 She had an adverse reaction to the medication, suffered a seizure, and died.12

After Rivera’s death, her parents found out that few of Arbour’s employees were actually licensed to provide mental health counseling.13 Of the five practitioners who treated Rivera, only one was properly licensed.14 The practitioner who diagnosed Rivera as bi-polar had received a degree from an unaccredited Internet college and was previously rejected for licensure by the state.15 The practitioner who prescribed the medication that caused Rivera’s death did not have the authority to prescribe medication absent supervision.16 The clinic’s director helped misrepresent the staff’s qualifications.17

Rivera’s parents based the FCA claim on Arbour’s reimbursement requests to the state Medicaid program. Under the implied false certification theory, the complaint asserted that Universal Health and Arbour submitted reimbursement claims that made representations about the services provided to patients like Rivera, as well as representations about the qualifications of the staff providing those services.18 By flouting the regulations associated with licensing requirements, Universal Health and Arbour made fraudulent representations and the state Medicaid program, unaware of the violation, paid the claim.19 Had the program known that it was billed for mental health services performed by unlicensed and unsupervised staff, it would not have paid the claims.20

The district court granted Universal Health’s motion to dismiss because Rivera’s mother and stepfather had failed to show that compliance with the licensing regulations was a condition of payment.21 The circuit court reversed in part and remanded.22

Because the circuits disagreed on the validity and scope of the theory, the Supreme Court granted certiorari to decide if, and under what circumstances, the implied false certification theory of liability is available to plaintiffs alleging FCA violations.

The Implied Certification Theory

According to the implied false certification theory, when a defendant submits a claim for payment to the government, it impliedly certifies compliance with all conditions of payment.”23 Liability under the theory is based on a defendant’s failure to disclose a violation of a material statutory, regulatory, or contractual requirement when submitting a claim.24 The omission makes the request for payment a “false or fraudulent” claim under § 3729(a)(1)(A) of the FCA.25 Liability further requires that the defendant know the legal requirement violated is material to the government’s decision to pay.26

The Supreme Court emphasized that the FCA is “not an all-purpose anti-fraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations” and pointed to the “rigorous” materiality and scienter requirements of the FCA to allay defendants’ fears of open-ended liability under the theory.27


Regarding scienter, “the implied certification theory can be a basis for liability, at least where two conditions are met: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”28 These conditions are often referred to as the two-part falsity test.


For materiality, the omission needs to have a natural tendency to influence, or be capable of influencing, the government’s decision to pay.29 And while this standard is demanding, not every violation of an express condition triggers liability.30 Further, statutory, regulatory, and contractual requirements are not automatically material.31 Materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.32

Examples of circumstances affecting materiality may include, but are not limited to, the government’s decision to identify a provision as a condition of payment and evidence that a defendant knows the government consistently refuses to pay similar claims.”33 Conversely, to show that the omission was not material, a defendant can show the government paid the particular claim in full despite its actual knowledge that certain requirements were violated or if the government pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position.34 While none of these circumstances is dispositive, all are relevant to the inquiry.

In finding United Health and Arbour’s misrepresentations material, the Court noted that “compliance with mental health facility requirements . . . are so central to the provision of mental health counseling that the Medicaid program would not have paid these claims had it known of the violations.”35

The Supreme Court remanded the case for further proceedings to determine if Rivera’s parents had adequately pled the materiality requirement of the FCA.

Escobar’s Ambiguity

Escobar was based on Medicaid fraud, but the decision reaches beyond healthcare law. The standards for materiality and falsity outlined by the Supreme Court are used in cases involving government contracts for weather satellites, fire alarms on military bases, and student loans backed by the Department of Education, among others. The materiality standard is even being cited in criminal wire fraud cases.36

While Escobar answered the question of whether the implied certification theory is viable for claims brought under the FCA, it also created ambiguity. Following Escobar, district courts and the circuits disagree over the specific requirements necessary for a claim to succeed.

Across all courts, the war over Escobar’s meaning is being waged largely on two fronts: first, whether the two-part falsity test is mandatory or optional to establish scienter; and second, whether the materiality standards are too high for plaintiffs to overcome motions to dismiss and summary judgment.

Two-Part Falsity Test to Establish Scienter Post-Escobar

To satisfy scienter, the two-part falsity test requires not only noncompliance, but also that the defendants’ request for payment include specific representations about the goods or services. Plaintiffs and the government view the two-part falsity test as advisory, rather than mandatory, and encourage courts to take this optional approach so “government contractors can’t hide behind invoices that obviously billed for specific services but technically didn’t say so.”37 Defendants favor a mandatory approach because without it “implied certification cases would be unconstrained by any reasonable boundaries.”38 In either case, the two-part test is required.

Courts across the country are inconsistent: a June 2017 Law360 review of the 22 cases addressing the issue post-Escobar found seven courts holding the test as mandatory, six finding it optional, and nine having ambiguous rulings.39

The Ninth Circuit Has Taken a Side

While most district courts say Escobar’s two-part falsity test is not required, others find it mandatory.40 Previously, district courts within the Ninth Circuit varied in their interpretation of Escobar. But on July 7, 2017, the Ninth Circuit announced “[t]he Supreme Court held [in Escobar] that although the implied certification theory can be a basis for liability, two conditions must be satisfied.”41 Without acknowledgement of the impact of the statement, the court then applied both conditions set out in Escobar to determine the plaintiffs in the case had adequately pled scienter. The two-part falsity test ⸻ at least in the Ninth Circuit ⸻ is mandatory.42

Not All Circuits Found Escobar Unclear

            Surprisingly, not all circuits found controversy in the Supreme Court’s ruling in Escobar. In the Fifth Circuit, debate surrounding post-Escobar requirements for scienter and materiality is conspicuously absent. The theory of this seems to be to allow discovery and then deal with a motion for summary judgment rather than focusing on the initial pleadings.43

            And while some district court cases discuss the two conditions for scienter from Escobar ⸻ often in a footnote there seems to be no discrepancy allowing courts that the conditions are requirements and such determinations are not usually accompanied by any explanation for how the court reached that conclusion. Escobar’s rigorous materiality standard is also often mentioned, usually in the context of the previous, even more rigorous, Fifth Circuit standard.

Materiality Post-Escobar

All post-Escobar cases reaching the Ninth Circuit have, in some way, upheld a district court’s dismissal of an implied certification based FCA claim:

We reject [the] assertion that materiality is too fact intensive for courts to dismiss [FCA] cases on a motion to dismiss or at summary judgment. The standard for materiality that we have outlined is a familiar and rigorous one. And [FCA] plaintiffs must also plead their claims with plausibility and particularity under [Rule 8 and 9(b)] by, for instance, pleading facts to support allegations of materiality.44

So, to overcome these motions a plaintiff must show that the defendant knew that compliance was material to the government’s payment decision. Without discovery, plaintiffs can have a difficult time overcoming this high bar.45


With the Ninth Circuit’s recent embrace of the two-part falsity test, and the “rigorous” and “demanding” materiality requirement of Escobar, defendants are well positioned to defeat many FCA claims at the pleading stage. Escobar restrains plaintiffs seeking to sue under the newly available implied false certification theory of liability. But while the Ninth Circuit consistently upholds lower court rulings dismissing claims for failing to adequately plead materiality ⸻ giving defendants a useful tool to stop litigation before the significant costs of discovery and trial are imposed ⸻ courts facing healthcare-related FCA claims seem to be less likely to dismiss a claim at such an early stage. So far, plaintiffs in district courts have overcome motions to dismiss where they pled facts showing the misrepresentation went to the “essence of the bargain” or was an “essential feature” of the government program.46

Defendants may be winning the battle on materiality at the appellate level, but FCA claims where the falsity is deemed central to the agreement, particularly in a healthcare context, tend to favor plaintiffs facing motions to dismiss.47 It remains to be seen how courts will ultimately rule in cases utilizing the implied false certification theory, but for now, the battle of the pleadings wages on.

At present, the Ninth Circuit appears to be the Circuit making the law in this time of post-Escobar. A split of the Circuits is likely and an appeal to the United States Supreme Court is almost certain.


A pioneer in the practice of health law, Bruce Howell leads Schwabe’s Healthcare Industry Group. Mr. Howell was among the founders of the Dallas (Texas) Bar Association's Health Law Section and one of the first Board Certified Health Lawyers in Texas. He is also one of 10 attorneys nationally to serve as a founding member of the National Board of Health Lawyers.

Mr. Howell counsels clients on a broad array of health law issues, including reimbursement, fraud and abuse, managed care issues, physician practice management issues and the Patient Protection and Affordable Care Act of 2010 (PPACA). He handles cases involving genetics, organ transplant technology, laboratory matters, clinical research and healthcare insurance coverage. He also helps providers and businesses comply with and find financial opportunities in connection with PPACA.

Mr. Howell has represented companies and individuals in healthcare governmental investigations and counseled clients in structuring transactions to comply with health law regulatory requirements. He has also created compliance programs and consulted on corporate governance matters and tax enforcement matters in nonprofit tax/healthcare work. He is experienced in litigating cases related to healthcare insurance, Employee Retirement Income Security Act of 1974 (ERISA) issues, health law regulatory matters, and PPACA, and has also served as an expert witness in these areas. He may be reached at

Emily Baker is a J.D. candidate at Lewis & Clark Law School, class of 2018.

Before Law School, Ms. Baker had many diverse career experiences. Upon graduation from the Art Institute, she was an apparel graphic designer for Nike and Adidas. At the same time, she was an Instructor at the Art institute, where she developed and implemented the Apparel Graphic Design curriculum and taught in areas such as Personal Branding, Brand Strategy, and Public Relations. This led to the role of statewide Marketing Manager for Pernod Ricard, specializing in brand management, spirits education, and event design. Law school was a lifelong goal, and at Lewis & Clark Ms. Baker is involved with Oregon Women Lawyers as a board member for the Queen’s Bench chapter, as well as being a peer mentor to incoming first year students. Ms. Baker can be reached at


31 U.S.C. § 3729(a).


A qui tam action is an “action brought under a statute that allows a private person to sue for a penalty, part of which the government or some specified public institution will receive.” Qui tam action, Black’s Law Dictionary (10th ed. 2014).


Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989, 1996 (2016); see also note 25.


United States ex rel. Hendow v. Univ. of Phx., 461 F.3d 1166, 1170 (9th Cir. 2006).


Id. (quoting § 3729(b)(1)(A)).


Section 3729(b)(4).


Escobar, 136 S. Ct. 1989.


Id. at 1997.




















Id. at 1998.










Id. at 1995.




“(a) Liability for Certain Acts (1) In General . . . any person who (A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval . . . is liable to the United States Government for a civil penalty of not less than $10,957 and not more than $21,916, as adjusted by the Federal Civil Inflation Adjustment Act of 1990 . . . plus 3 times the amount of damages which the Government sustains because of the act of that person.”


Escobar, 136 S. Ct. 1995.


Id. at 2002­–2003.


Id. (emphasis added) (internal quotations omitted).


Id. at 2002.


Id. at 2001.




Id. at 2002 (internal quotations omitted).






Id. at 2004.


See Jeff Overley, One Year Later, Escobar is Roiling FCA Landscape, Law360 (June 16, 2017).








See Rose v. Stephens Inst., 2016 U.S. Dist. LEXIS 128269 (N. D. Cal. Sep. 20, 2016); but see United States ex rel. Handal v. Ctr. for Emp’t Training, 2016 U.S. Dist. LEXIS 105158, at *12 (E. D. Cal. Aug. 8, 2016) (“To establish implied false certification, a plaintiff must show [Escobar’s two conditions].”); U.S. ex rel. Vincent Forcier v. Computer Sciences Corporation and The City of New York, 12 Civ. 1750 (USDC, SDNY).


United States ex rel. Jeffrey Campie and Sherilyn Campie v. Gilead Sciences, Inc., 2017 U.S. App. LEXIS 12163, at *20 (9th Cir. 2017) (emphasis added).


Prior to the Ninth Circuit’s announcement, a district court in northern California granted the defendant’s motion for interlocutory appeal to decide the two-part falsity test issue because “although [the] court did not understand Escobar to create a rigid two-part test for implied certification liability, other courts appear to treat the two conditions as absolute requirements.” The petition for permission to appeal under 28 U.S.C. § 1292(b) from the district court’s order was filed on November 11, 2016. As of October 31, 2017, no decision has been made in Rose, but the Campie decision likely moots the issue.


See note 45, infra.


Escobar, 136 S. Ct. at 2005, n6.


Contrast with the Fifth Circuit, where roughly half the cases decided after Escobar allow FCA claims to proceed to discovery, while later granting defendants’ motions for summary judgment.


See United States ex rel. Fisher v. IASIS Healthcare LLC, 2016 U.S. Dist. LEXIS 155517, at *49 (D. Ariz. Nov. 9, 2016) (finding adequate materiality at the pleading stage when the contractual violations went to the “essence of the bargain” where plaintiff claimed that defendant routinely backdated approval dates for procedures and failed to properly credential providers); United States v. Celgene Corp., 2016 U.S. Dist. LEXIS 180628, at *38 (C. D. Cal. Dec. 28, 2016) (reasoning Escobar “does not foreclose the possibility that a statutory requirement may be so central to the functioning of a government program that noncompliance is material as a matter of law” and finding materiality where alleged claims for payment of off-label pharmaceuticals under Medicare Part D “an essential feature” of the program).


Bruce Frederick, Howell Schwabe Williamson & Wyatt and Emily S. Baker, Lewis & Clark, Portland, OR