Materiality Under Escobar
The current wave of proposed FCA amendments is a reaction to the Supreme Court’s discussion of materiality in its 2016 Escobar decision.
By way of background, the FCA defines materiality as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” In FCA cases, courts evaluate whether a misrepresentation made by a defendant influenced the government to pay a claim. In Escobar, Justice Thomas, writing for the Court, identified specific factors that lower courts should consider when evaluating materiality:
[P]roof of materiality can include . . . evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement. Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, 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.
Justice Thomas emphasized that the FCA is neither a catch-all anti-fraud statute nor a “vehicle for punishing garden-variety breaches of contract or regulatory violations” and the materiality requirement is the gate-keeping mechanism for ensuring it is not used as such. According to Senator Grassley, however, this language from Escobar “has made it all too easy for fraudsters to argue that obvious fraud was not material simply because the government continued payment.” Senator Grassley’s criticism over-simplifies what the federal courts — both district courts and circuit courts — have been doing since Escobar to consistently and properly apply the reasoning in Escobar, resulting in the dismissal of claims that do nothing to advance the FCA’s goal of uncovering actual fraud.
For example, in United States ex rel. Higgins v. Boston Scientific Corp., the relator claimed that the defendant had obtained approval for two medical devices by either misrepresenting or concealing safety information from the Food and Drug Administration (FDA), thereby causing hospitals to submit false claims for services involving those devices that should not have been considered medically necessary. After four years of discovery, the district court granted summary judgment to the defendant, because documents the defendant obtained from the FDA undisputedly showed that any issues with the devices’ performance, both before and after product approval, were known to the FDA, but the FDA nevertheless approved the devices and never withdrew that approval. Accordingly, none of the alleged misrepresentations or concealments were material to the FDA’s decision-making.
In United States ex. rel. Janssen v. Lawrence Mem’l Hosp., the Tenth Circuit also found the relator’s claims failed for lack of materiality. Despite reports of timekeeping discrepancies made to a Centers for Medicare & Medicaid Services (CMS) fraud hotline and a subsequent investigation into the discrepancies by a third-party investigator, the government continued to pay the defendant’s Medicare claims. The Tenth Circuit noted the government’s “actual behavior,” i.e., inaction with respect to the fraud allegations, was strong evidence in favor of a finding of immateriality.
Likewise, in United States ex rel. Spay v. CVS Caremark Corp., the Third Circuit declined to find that a defendant’s use of false prescriber identification numbers was material to government payment decisions because the defendant used the numbers as a work-around to avoid wrongful denials of payment for Medicare recipients. Further, the court found that CMS not only knew about the false prescriber identifiers, but continued paying claims because otherwise Medicare recipients’ prescriptions would have gone unfilled.
Finally, while “[t]he materiality standard is demanding,” it is hardly insurmountable. Indeed, on remand in Escobar, the First Circuit applied the standards of materiality set forth in Justice Thomas’ opinion and found “little difficulty in concluding that Relators have sufficiently alleged that [Defendant’s] misrepresentations were material.” Likewise, in United States ex rel. McIver v. Act for Health, Inc., the District Court for the District of Colorado denied a defendant’s motion to dismiss on grounds that the government made conclusory allegations of materiality in their pleadings. In this post-Janssen case, the court noted that the government may be able to develop its case on the materiality issue through discovery, thereby implicitly stating that it would reconsider the materiality element at the summary judgment phase.
The July Amendments
The July Amendments sought to create a burden-shifting scheme on the issue of materiality. In contrast to the current form of the FCA, which sets forth a straightforward approach to proving materiality whereby the government or relators must establish the materiality of a false record or statement by a preponderance of the evidence, the July Amendments proposed a two-step burden-shifting process. That is, under the July Amendments, the government would first have been required to “establish materiality by a preponderance of the evidence,” and then the burden of proof would have shifted to the defendant to rebut the “argument of materiality . . . by clear and convincing evidence.”
Despite Senator Grassley’s contention that the purpose of the July Amendments to the FCA’s materiality standard was to “clarif[y] . . . confusion and misinterpretation of the Supreme Court decision in [Escobar],” there is no evidence of any such confusion or misinterpretation. In fact, Senator Grassley and his co-sponsors never pointed to a single federal court that somehow confused or misinterpreted Escobar. Instead, the senators were likely responding to the protestations of the organized, relators’ bar, which correctly perceived that the FCA’s materiality standard — particularly as interpreted under Escobar — makes it difficult for comparatively weak theories of FCA liability to proceed past pleading stages; however, that is no reason to shift the well-established burdens of proof under the FCA, which is, after all, a punitive statute.
The November Amendments
Fortunately, the November Amendments abandoned the burden-shifting regime proposed in July, and instead propose amending the FCA to state only that: “In determining materiality, the decision of the Government to forego a refund or to pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such refund or payment.” Even this modest amendment may lead to unintended consequences.
Importantly, Escobar never held that the government’s decision to pay a claim despite actual knowledge of falsity was dispositive. Rather, Escobar simply stated that “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, 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.”
Thus, it is unclear what the November Amendments seek to clarify vis-à-vis the FCA’s materiality standard. And although the November Amendments generally align with Escobar, ironically, they run the risk of actually creating confusion, as they invite a new question — i.e., whether, based upon the language of the November Amendments, the government’s decision to forego a refund or to pay a claim despite actual knowledge of fraud or falsity is dispositive if “other reasons” do not exist for the decision of the government with respect to such refund or payment.
Conclusion
Ultimately, the False Claims Amendments Act of 2021 is a short-sighted attempt to close perceived, but non-existent, loopholes in the statute. The FCA is intended to be a limited purpose anti-fraud statute, and the materiality standard is one of the most important mechanisms for enforcing those limits. The more Congress tinkers with the standards for establishing materiality — particularly when the end goal of that tinkering is altogether unclear and appears to differ from one proposed amendment to the next — the more Congress runs the risk of creating the very sort of confusion it purportedly seeks to eliminate.