Falsity: "Specific Representations" Requirement Varies by Circuit
The first of the two FCA elements at issue in Escobar was falsity. On this element, the holding on "specific representations" has attracted the most attention. Some courts, but not others, have construed Escobar to require specific representations in implied false certification claims.
Escobar held that implied false certification may be a basis for falsity "at least where two conditions are satisfied": (1) the claim makes "specific representations about the goods or services provided"; and (2) the claim fails to disclose noncompliance with governmental requirements. 136 S. Ct. at 2001. Based on this language, some litigants have argued that specific representations are a necessary condition of implied false certification claims. Others have argued that specific representations are sufficient, not necessary.
Courts in the Second, Fourth, and D.C. Circuits have held that specific representations are not necessary. As one court explained, "the Supreme Court expressly left open the question whether a claim that 'merely demand[s] payment,' as opposed to one that makes specific representations . . . , is sufficient to provide a basis for an implied false certification claim." United States ex rel. Scutellaro v. Capitol Supply, Inc., No. 10-1094, 2017 WL 1422364, at *19 n.23 (D.D.C. Apr. 19, 2017) (quoting Escobar, 136 S. Ct. at 2000); accord United States v. Triple Canopy, Inc., 857 F.3d 174, 178 & n.3 (4th Cir. 2017); United States v. DynCorp Int'l, LLC, No. 16-1473, 2017 WL 2222911, at *5 (D.D.C. May 19, 2017); United States ex rel. Wood v. Allergan, Inc., 246 F. Supp. 3d 772, 815–16 (S.D.N.Y. 2017). Thus, circuit precedent that specific representations are not necessary appears to remain valid in the Second, Fourth, and D.C. Circuits.
On the other hand, the Seventh and Ninth Circuits have held that specific representations are necessary. United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 332 (9th Cir. 2017); United States v. Sanford-Brown, Ltd., 840 F.3d 445, 447 (7th Cir. 2016). In addition, the Third Circuit arguably agreed in a nonprecedential opinion. United States ex rel. Whatley v. Eastwick Coll., 657 F. App'x 89, 94 (3d Cir. 2016). A district court in that circuit has interpreted the nonprecedential opinion to overrule contrary circuit precedent. United States ex rel. Schimelpfenig v. Dr. Reddy's Labs. Ltd., No. 11-4607, 2017 WL 1133956, at *6 (E.D. Pa. Mar. 27, 2017).
Materiality: Consequence of Government's Payment Depends on Extent of Knowledge
The second of the two FCA elements at issue in Escobar was materiality. The Court held that the government's payment of claims "despite actual knowledge that certain requirements were violated . . . is strong evidence that the requirements are not material." 136 S. Ct. at 2003–04. Courts construing Escobar have held that the deeper the government's knowledge of the violations, the stronger the evidence of nonmateriality.
At one end of the spectrum, most courts have held a requirement may be material even if the government continues to pay after the relator files suit. As one court explained, "just because one agency within the vast bureaucracy of the federal government has knowledge of a contractor's wrongdoing does not mean that the Defendants have a 'government knowledge' defense." United States v. Pub. Warehousing Co. K.S.C., No. 1:05-CV-2968, 2017 WL 1021745, at *6 (N.D. Ga. Mar. 16, 2017); see also United States ex rel. Brown v. Pfizer, Inc., No. 05-6795, 2017 WL 1344365, at *11 (E.D. Pa. Apr. 12, 2017); United States ex rel. Brown v. Celgene Corp., 226 F. Supp. 3d 1032, 1050–51 (C.D. Cal. 2016); United States ex rel. Williams v. City of Brockton, No. 12-cv-12193, 2016 WL 7429176, at *6 (D. Mass. Dec. 23, 2016); Rose v. Stephens Inst., No. 09-cv-05966, 2016 WL 5076214, at *6 (N.D. Cal. Sept. 20, 2016). On the other hand, one court has held that the government's continued payment "casts serious doubt on the materiality of the fraudulent representations." D'Agostino v. ev3, Inc., 845 F.3d 1, 7 (1st Cir. 2016).
At the other end of the spectrum, most courts have held that a requirement is not material if the government continues to pay after a thorough investigation. E.g., Abbott v. BP Expl. & Prod., Inc., 851 F.3d 384, 388 (5th Cir. 2017); United States ex rel. McBride v. Halliburton Co., 848 F.3d 1027, 1029, 1034 (D.C. Cir. 2017); Sanford-Brown, 840 F.3d at 447; United States ex rel. Quartararo v. Catholic Health Sys. of Long Island Inc., No. 12-cv-4425, 2017 WL 1239589, at *23 (E.D.N.Y. Mar. 31, 2017). Relatedly, one court has held that a requirement is not material where the government itself filed the FCA action but continued to pay claims. City of Chicago v. Purdue Pharma L.P., 211 F. Supp. 3d 1058 (N.D. Ill. 2016).
Materiality: Courts May Also Rely on Condition of Payment and "Essence of the Bargain"
Escobar emphasized that "materiality 'look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.'" 136 S. Ct. at 2002. Accordingly, most courts have focused on the government's likely or actual behavior. In addition, however, several courts have considered two other indicia of materiality: whether the requirement is a condition of payment, and whether the requirement goes to the "essence of the bargain."
First, some courts continue to put significant weight on whether a requirement is a condition of payment. Escobar held that "[w]hether a provision is labeled a condition of payment is relevant to but not dispositive of" materiality. 136 S. Ct. at 2001. Some courts, however, have held that a requirement is material on the basis of little more than the requirement's being a condition of payment or eligibility. United States ex rel. Fisher v. IASIS Healthcare LLC, No. CV-15-00872, 2016 WL 6610675, at *13–14 (D. Ariz. Nov. 9, 2016); United States v. Crumb, No. 15-0655, 2016 WL 4480690, at *24 (S.D. Ala. Aug. 24, 2016). Other courts have identified additional evidence of materiality but place primary emphasis on the existence of a condition of payment or eligibility. United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 504–05 (8th Cir. 2016); United States v. Luce, No. 11 C 05158, 2016 WL 6892857, at *2 (N.D. Ill. Nov. 23, 2016).
Second, some courts have held that a requirement is more likely to be material if it "goes to the very essence of the bargain." This language appeared in Escobar only in a string citation in a footnote discussing contract law. 136 S. Ct. at 2003 n.5. Nonetheless, some courts have considered it in assessing materiality. E.g., United States ex rel. Escobar v. Universal Health Servs., Inc., 842 F.3d 103, 110 (1st Cir. 2016); United States ex rel. Emanuele v. Medicor Assocs., 242 F. Supp. 3d 409, 431 (W.D. Pa. 2017); United States v. Quicken Loans Inc., 239 F. Supp. 3d 1014, 1039–40 (E.D. Mich. 2017); City of Brockton, 2016 WL 7429176, at *7; see also Celgene, 2016 WL 7626222, at *12 ("essential feature"). Judicial discretion appears to play a greater role than evidence in determining whether a requirement "goes to the very essence." Cf. Triple Canopy, 857 F.3d at 178 (basing materiality, in part, on "common sense").
Escobar resolved disagreements among courts regarding the FCA's falsity and materiality elements, but at some cost to clarity. The interpretations courts have given Escobar over the year since the Supreme Court decided it have provided much of the clarity that Escobar itself did not.