For cases involving jury instructions on the various elements of a False Claims Act (FCA) claim, the evolving standard for materiality following the Supreme Court’s decision in United Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016), has created new questions about the content and scope of those instructions. With the Department of Justice touting over $5.6 billion in settlements and judgments from civil cases involving the FCA in 2021 (see U.S. Dep’t of Justice, The False Claims Act (updated Feb. 2, 2022)), the importance of clear and accurate jury instructions cannot be overstated. The FCA materiality standard has even caught the attention of Congress, with a proposed amendment to the FCA currently in front of the Senate. This amendment would eliminate the ability to argue that the government’s continued payment to a contractor, with the knowledge that the alleged fraud was occurring or that there was a violation of a payment condition, is a dispositive factor in determining materiality when alternative explanations for payment exist. False Claims Amendments Act of 2021, S. 2428, 117th Cong. § 1.
This article explores the status of materiality as an element of an FCA case and the potential factors implicated in making a materiality determination. This article also explores the proposed legislation that would affect materiality instructions and offers model jury instructions on materiality that encapsulate the current state of case law under the FCA.
The FCA creates civil liability for “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the U.S. government. 31 U.S.C. § 3729(a)(1). Whether brought by the government directly against the claimant or a third-party relator as a qui tam action on behalf of the government, FCA suits have four basic elements: (1) falsity, (2) causation, (3) knowledge, and (4) materiality. See id.; United States ex rel. Petratos v. Genentech, Inc., 855 F.3d 481, 487 (3d Cir. 2017).
The FCA defines “materiality” as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” 31 U.S.C. § 3729(b)(4). In Escobar, the Supreme Court addressed the materiality element, ruling that materiality is an “essential element” of an FCA claim and that the standard for establishing materiality is “demanding.” 579 U.S. at 194. Materiality is not proven where the noncompliance is minor or insubstantial, nor by the mere fact that compliance is required as a condition of payment. Id. To prove materiality, “[t]he facts must indicate that the government actually attaches weight to that requirement and relies on compliance with it.” United States v. Molina Healthcare of Ill., Inc., 17 F.4th 732, 740 (7th Cir. 2021). Escobar’s articulation of this rigorous standard subsequently made materiality a focal point of FCA litigation.
Escobar outlined the elements relevant to proving materiality, including “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.” Escobar, 579 U.S. at 194–95. Working in a defendant’s favor, Escobar identified instances that undercut the government’s materiality argument, including “pay[ing] a particular claim in full despite its actual knowledge that certain requirements were violated” or “regularly pay[ing] a particular type of claim in full despite actual knowledge that certain requirements were violated, and ha[ving] signaled no change in position.” Id. at 195.
As a result, jury instructions explaining the materiality standard can have a drastic effect on a case’s outcome. Below, we outline the major considerations in crafting jury instructions for FCA cases as they relate to the materiality standard.
While the specifics of how materiality is defined in jury instructions are debatable, the inclusion of materiality as an element is not. Even prior to the 2009 amendments to the FCA adding the explicit materiality requirement, courts regularly included “materiality” as an element of an FCA cause of action. See United States ex rel. Shemesh v. CA, Inc., 89 F. Supp. 3d 36, 45 n.5 (D.D.C. 2015); United States ex rel. Ervin & Assocs., Inc. v. Hamilton Sec. Grp., Inc., 370 F. Supp. 2d 18, 36 (D.D.C. 2005). Escobar likewise found materiality to be an element of a claim under 31 U.S.C. § 3729(a)(1)(A). See Escobar, 579 U.S. at 192–194; Tyson v. Amerigroup Ill., Inc., 488 F. Supp. 2d 719, 727 (N.D. Ill. 2007) (citing United States v. Castillo, 406 F.3d 806, 821 n.6 (7th Cir. 2005)); United States v. Matsumaru, 244 F.3d 1092, 1102–3 (9th Cir. 2001); United States v. Blasini-Lluberas, 169 F.3d 57, 67 (1st Cir. 1999)); Hays v. Hoffman, 325 F.3d 982, 992 (8th Cir. 2003).
While the Escobar decision sparked debate about the definition of materiality, it did give some guideposts for navigating jury determinations. Notably, materiality is based on “the effects of the government’s actual conduct, specifically the actual or likely behavior of the government recipient of the alleged misrepresentation.” Escobar, 579 U.S. at 193 (citing 26 R. Lord, Williston on Contracts § 69:12, 549 (4th ed. 2003)). Recent case law developments have highlighted that the Escobar standard is a subjective one. See United States ex rel. Janssen v. Lawrence Mem’l Hosp., 949 F.3d 533, 540 (10th Cir. 2020). Therefore, jury instructions should be based on the government’s actual behavior, not that of a hypothetical, reasonable government official. Id. at 541. Furthermore, the subjective standard hammers home the point that a mere violation of a condition for payment does not warrant a finding of materiality. See id. at 540–41. To ensure that the FCA does not become a catchall mechanism for prosecuting any noncompliance, jury instructions should highlight, with particularity, the “demanding” standard of materiality.
There are two additional elements to consider: the government’s decision to intervene or subsequent motions and per se materiality:
The FCA defines “material” as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” 31 U.S.C. § 3729(b)(4). Therefore, a requirement is material under the FCA if the government actually attaches weight to that requirement and relies on compliance with it. United States v. Molina Healthcare of Ill., Inc., 17 F.4th 732, 740 (7th Cir. 2021). Minor or insubstantial noncompliance with payment terms does not, in itself, support a finding of materiality.
Materiality is a subjective test based on the effects of the government’s actual conduct and not the mere failure of a party to comply with a requirement that is contingent for government payment. The government’s continued payment of funds with knowledge of ongoing violations may be proof that a requirement is not material.
In light of the high bar for materiality articulated in Escobar, the False Claims Amendments Act of 2021 directly targets the decision, which Senator Grassley, a long-time proponent of the FCA, has alleged has “made it all too easy for fraudsters to argue that their obvious fraud was not material simply because the government continued payment.” Press Release, Sen. Chuck Grassley, Senators Introduce Bipartisan Legislation to Fight Government Waste, Fraud (July 26, 2021).
The False Claims Amendments Act would provide 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.” False Claims Amendments Act of 2021, S. 2428, 117th Cong. § 1. The False Claims Amendments Act would thus effectively undercut a defendant’s argument that continued payment was proof that a requirement was not material and thereby diminish FCA liability. Other amendment changes would (1) require the government to “identify a valid government purpose and a rational relation between dismissal and accomplishment of the purpose” when it moves to dismiss an FCA case against a relator’s wishes and (2) prohibit retaliation against potential whistleblowers both before and after reporting. Id. §§ 3–4.
Materiality under the FCA remains a hotly litigated topic, and proposed legislation may undercut the Escobar decision’s stringent standard. However, as of the writing of this article, jury instructions must still capture the high materiality bar articulated in Escobar. Therefore, proof of continued payment in the face of a violation will still weigh in favor of a finding that a requirement is not material. Jury instructions should clearly note the subjectivity of the materiality standard and highlight the fact that a mere violation of a condition for payment, in most situations, does not in itself fulfill the materiality requirement. While the materiality standard may face changes if the False Claims Amendments Act becomes law, there will still be room to litigate the validity of the reasons the government points to as its justification for continued payment with knowledge of fraud or a violation.
