In Universal Health Services, Inc. v. United States ex rel. Escobar, the Supreme Court established a new framework for determining whether the FCA’s “demanding” materiality requirement is satisfied. Lower courts are now disposing of more qui tam cases where relators have failed to meet Escobar’s strict materiality standard. Because government agencies are the sole custodians of the core materiality evidence identified in Escobar, contractors are now obtaining broad discovery from governmental agencies in qui tam cases. Additionally, the government is dismissing more qui tam case due to the anticipated burden on government agencies of providing discovery related to Escobar’s materiality requirement.
In 2020, qui tam relators filed 672 complaints alleging fraudulent billing under the False Claims Act (FCA). Even if a qui tam case is meritless, it is not uncommon for these cases to last ten years or more, costing contractors millions of dollars in legal fees before the case is finally disposed of. Recently, contractors involved in FCA litigation have discovered new ways to fight back. A key weapon in this fight is the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar. To limit the reach of the FCA, the Escobar Court imposed a “demanding” materiality requirement and established a new framework for determining whether this strict requirement is satisfied. Contractors are now using Escobar to attack dubious FCA cases in three ways. First, contractors are filing (and courts are granting) more motions to dismiss on the grounds that the allegations in the underlying complaint do not satisfy Escobar’s materiality test.Second, contractors are taking broad discovery on the “case dispositive” materiality issue from government agencies. Third, government lawyers are filing more motions to dismiss qui tam actions, in part to avoid the burden of providing discovery to contractors related to Escobar’s materiality requirement.
A government contractor may be liable under the FCA for penalties and trebled actual damages if the contractor either: (i) presents a false or fraudulent claim for payment; or (ii) makes a false record or statement material to a false or fraudulent claim. Under the FCA, a claim can be fraudulent in one of three ways. First, a claim for payment may be “factually” false if it contains “an incorrect description of goods or services provided” or seeks payment “for goods or services never provided.” Second, under a false certification theory, a claim for payment may be “legally” false if the contractor certified that it complied with a “statute, regulation, or contractual term when it knew at the time that it did not do so.” Finally, under a “promissory fraud” theory, a claim for payment is false if the “contractor originally certified that it would comply with a law, regulation, or term when it knew at the time that it would not do so.”
Under a false certification theory, the relator may allege either express or implied false certification. Express false certification cases involve a contractor “falsely certifying that it is in compliance with regulations which are prerequisites to Government payment in connection with the claim for payment of federal funds.” In implied false certification cases, some relators alleged that compliance with a contract provision or regulation constitutes a “condition of payment” under the contract. Under this theory, every time the contractor submits a claim for payment, the contractor impliedly certifies compliance with all “conditions of payment” under the contract. For a number of years, there was a circuit split regarding the types of evidence or legal grounds required to support an implied false certification claim.
In Escobar, the Supreme Court resolved this circuit split.The defendant in Escobar had sought payment under the Medicaid program for mental health services, despite allegedly having been out of compliance with a number of licensing, qualification, and supervision requirements. Under the defendant’s care, a patient allegedly died from her reaction to prescribed medication. After the decedent’s parents learned of the defendant’s alleged deficiencies, they brought an FCA suit. The District Court granted the defendant’s motion to dismiss and held that “the allegations of [the] complaint raise serious questions about the quality of care provided to the Plaintiffs’ daughter[,] [b]ut the False Claims Act is not the vehicle to explore those questions.” The First Circuit disagreed and held that the regulations with which the defendant had failed to comply were “conditions of payment” sufficient to give rise to FCA liability based on the “express and absolute language” of the relevant regulations, which that court considered “dispositive.”.
Overruling the First Circuit, the Supreme Court announced that FCA liability did not depend upon whether contract requirements are deemed “conditions of payment.” Instead, the Court observed that the “implied certification” fraud theory is really a form of fraud by omission and that an omission can only render a statement false if the omitted fact is material to the statement, such that leaving that fact out renders the claim a “misleading half-truth[ ].” In analyzing what constitutes a material omitted fact, the Court rejected the government’s “expansive position” that any regulatory or contractual violation is material “so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation.” Rather, the Court explained the importance of enforcing a strict materiality standard:
The materiality standard is demanding. The False Claims Act is not “an all-purpose antifraud statute” . . . or a vehicle for punishing garden-variety breaches of contract or regulatory violations. A misrepresentation cannot be deemed material merely because the Government . . . would have the option to decline to pay if it knew of the defendant’s noncompliance.
Finally, the Escobar Court opined that this “demanding” materiality standard is not satisfied when two elements are present: government knowledge and government inaction. In other words, FCA liability will generally not attach where there is evidence of: (i) government knowledge (awareness of the alleged violation of a contract requirement); and (ii) government inaction (continued payment of the contractor’s claims).
When filing an FCA complaint, a relator must plead facts “with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b).” The Escobar Court also rejected the “assertion that materiality is too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment.” To survive a motion to dismiss, a relator cannot simply assert that the alleged non-compliance was “material to the government’s payment decision” or that the government “would not have paid” if it had known of the contractor’s alleged non-compliance.
In other words, a relator needs to identify specific past instances where the government has refused to pay claims following an alleged non-compliance similar to the one alleged in the complaint. For example, in United States ex rel. Gardner v. Vanda Pharmaceutical, the FCA complaint alleged that: (i) the drug uses defendant promoted were not medically accepted; (ii) defendant created misleading sales pitches to convince prescribers that the drugs were effective for unapproved uses; (iii) defendant deceived providers about the drugs’ safety profiles and dangers; and (iv) defendant created a fake target list of physicians. In granting defendant’s motion to dismiss, the court ruled:
[These allegations] concern the means employed by Defendant in furtherance of its alleged scheme to promote off-label uses. They do not speak to whether government payors “consistently refuse[ ] to pay claims in the mine run of cases based on” off-label use of prescription drugs . . . Escobar, 136 S. Ct. at 2003. The inclusion of some allegations addressing these considerations is critical to plausibly pleading materiality, but the Amended Complaint is silent as to them.
Similarly, in United States ex rel. PCA Integrity Assoc. v. NCO Financial Systems, Inc., the court dismissed a complaint for failing to plead with enough specificity to establish materiality under the FCA’s demanding standard. As an initial matter, the court noted that the relator did not allege that the government “consistently refuses to pay claims in the mine run of cases based on” the alleged noncompliance. The court also observed that there were “no factual allegations from which to draw the conclusion that the government has declined to pay this category of claim after evidence of noncompliance” surfaced. In addition, the complaint contained no indication that any specific claims submitted by defendant were not paid in full despite the alleged noncompliance. As a result, the court concluded that the complaint failed to provide “particularized factual allegations regarding the indicia of materiality” including “the lack of specific support regarding the government’s non-payment of similar claims[.]”
At the summary judgment stage, Escobar’s materiality standard is even more demanding. To survive a motion for summary judgment, a relator must come forward with specific evidence demonstrating that the government consistently refuses to pay claims where it has knowledge of similar alleged violations.
For example, in United States ex rel. Janssen v. Lawrence Memorial Hospital, the Tenth Circuit ruled that the government’s prior conduct precluded FCA liability. The court emphasized that the relator reported her allegations through a whistleblower hotline before filing suit, that a contractor investigated the allegations and flagged a “quality issue” for the government, but that the government nonetheless kept paying the defendant’s claim, even as the lawsuit proceeded. Although the government never “independently verified” the allegations, the Tenth Circuit reasoned that such “inaction in the face of detailed allegations from a former employee suggests immateriality.” On appeal, the relator had argued that “knowing about allegations” is different from “actual knowledge of noncompliance.” However, the Tenth Circuit held that this distinction was unavailing under the more demanding summary judgment standard and given the fact that the government continued to make payments after the suit was commenced.
In light of the Escobar decision, contractors are now carefully reviewing FCA complaints to see if the relator alleged any specific facts demonstrating that the government has consistently refused to pay contractor claims after the government has learned of similar non-compliances. Put another way, contractors are asking whether the relator has offered anything more than the conclusion that the non-compliance was “material to the government’s payment decision” or that the government “would not have paid” if it had known of the non-compliance. When contractors identify such conclusory pleadings, they are filing motions to dismiss and motions for summary judgment on grounds that these allegations are insufficient as a matter of law under Supreme Court’s decision in Escobar.
The government is a party to a qui tam action only if it decides to intervene. When the government does not intervene, the contractor must follow agency procedures that govern the extent to which a litigant may obtain agency information. These agency regulations are referred to as “Touhy” regulations, a name derived from the Supreme Court’s 1951 decision in U.S. ex rel. Touhy v. Ragen. If an agency refuses to produce the requested materials, contractors may serve a subpoena on the agency. However, the standard applied by courts when enforcing a subpoena in these cases varies from circuit to circuit.
On one hand, the First, Second, Third, Fourth, Fifth, Seventh, Tenth, and Eleventh Circuits have held that courts may review an agency’s refusal to comply with a subpoena pursuant to the Administrative Procedure Act (APA). The courts’ rationale for this holding is that, pursuant to the APA, an agency’s choice of whether or not to comply with a third-party subpoena is viewed as a policy decision about the best use of the agency’s resources. In other words, these circuits have adopted a deferential standard that analyzes an agency’s decision to withhold information or testimony under its Touhy regulations by assessing whether the decision was “arbitrary or capricious” under the APA.
On the other hand, in the District of Columbia and Ninth Circuits, the APA’s deferential standard of review does not apply. Rather, in these circuits, the regular federal rules of discovery apply, pursuant to the Federal Rules of Civil Procedure (FRCP), regardless of whether the agency is a party to the underlying action. Therefore, in these circuits, litigants seeking information from the agency must serve an ordinary subpoena upon the agency pursuant to FRCP 45, followed by a motion to compel filed in federal district court pursuant to FRCP 26 and 45. Following these steps, if an agency refuses to produce the subpoenaed discovery, the Department of Justice (DoJ) must seek a protective order and bears the burden to show that the subpoena requires disclosure of privileged material, is unduly burdensome, or is otherwise improper.
Even before Escobar, courts often granted motions to compel against the government in non-intervened FCA cases where the information at issue was relevant to the contractor’s defense. Although the government is technically a non-party in these cases, it is still the real party in interest. This is because the government stands to benefit directly and most substantially from any recovery:
Even in a qui tam case in which it does not intervene, the government is intimately involved in the case. It is the real party in interest and receives between 70 and 75 percent of any recovery. The government has the right to be served with all pleadings filed, so it is fully aware of all proceedings in the case. The government has the right to intervene or terminate a qui tam case at any time. Most important, the qui tam relator has standing only as the assignee of the government. The concern expressed in the Touhy decision—that government information may be disclosed to a third party without agency knowledge—simply cannot apply in qui tam cases.
In granting motions to compel in non-intervened cases, courts have stressed that it would be “unfair in the extreme” if the government could refuse to produce documents relevant to the contractor’s defense while simultaneously standing to benefit from the FCA litigation.
For this reason, government agencies will have difficulty withholding evidence that is relevant to Escobar’s materiality analysis. For example, in United States v. Paramedics Plus LLC, the government argued that its post-litigation actions—including the continued payments of claims after the filing of the FCA litigation—were not discoverable. The court rejected the government’s argument, ruling that the government’s “continued payment” of claims after the filing of the litigation was relevant and discoverable, and that, “[t]his is the exact type of information that is reasonably calculated to lead to the discovery of admissible evidence regarding the materiality element after Escobar.”
Additionally, under Escobar’s materiality test, the breadth of relevant discovery has greatly expanded. For example, the range of discoverable information now includes the government’s knowledge and continued payment of claims submitted by other contractors facing similar compliance issues. Accordingly, documents detailing how othercontractors were treated by the government play a central role in Escobar’s materiality analysis. The Arriva Medical court explained that
[i]t could . . . be the case that [the defendant] was being singled out for enforcement, while other companies were not subject to the same scrutiny. It would significantly undermine the holding of Escobar if the government could manufacture an illusion of indisputable materiality simply by being extra strict ahead of time with whichever company the government wished to sue.
Guided by Escobar’s materiality standard, contractors are propounding broad discovery seeking evidence of: (i) government knowledge (awareness of the alleged violation) and (ii) government inaction (continued payment of the contractor’s claims). Under Escobar, government knowledge and continued payment of claims submitted by other contractors facing similar compliance issues is highly relevant. Accordingly, contractors are taking discovery for any and all similar circumstances the agency has confronted and their response. Contractors are investigating whether the agency has continued to pay claims submitted by other contractors despite the agency’s knowledge of similar violations. Although this wide-ranging discovery may be taxing on government agencies, it is the only way for contractors to ascertain “what the government knew and when it knew it.”
After the DoJ declines to intervene in a qui tam case,the FCA provides that “[t]he Government may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.” This gives the government the right to dismiss a qui tam action over the relator’s objection.
In other words, the government has the prerogative to dismiss a qui tam case because the government is the real party in interest. Numerous courts have recognized that “the government can legitimately consider the burden imposed on the taxpayers” by an FCA case and that “the government would continue to incur enormous internal staff costs” if the case proceeded.
Over the last several years, there has been a marked increase in the number of dismissal motions filed by the government. Indeed, the DoJ dismissed roughly the same number of cases (forty-five) in the two years following the 2018 DoJ-published memorandum (the Granston Memo) as it had dismissed in the prior thirty years. This surge in cases dismissed by the government is the result of two factors. First, the Granston Memo directed DoJ attorneys to be more proactive in considering dismissal of qui tam cases. The Granston Memo identified a number of reasons for dismissing qui tam actions, including: (i) preventing interference with agency policies, and (ii) preserving government resources. Further, the Granston Memo explained that “the government expends significant resources in monitoring [non-intervened] cases and sometimes must produce discovery or otherwise participate.”
Second, as discussed previously, the Escobar decision enlarged thescope of relevant discovery in FCA cases. Under Escobar’s materiality test, the key factual issue is how the government agency responded to the defendant’s alleged violations and how the agency responds in similar situations. Thus, discovery now includes any instance where the government continued to pay invoices submitted by the defendant (or any other contractor) after the government learned of the alleged non-compliance. This discovery may be voluminous and will likely cause the government to expend significant resources.
In other words, in every case in which the government does not intervene, the government must now carefully consider whether it should expend substantial resources in responding to discovery relevant to Escobar’s materiality test. For example, in United States ex rel. Polansky Health Resources v. Executive Health Resources, Inc.,the government was ordered to produce over 42,000 pages of documents and had to devote resources to litigating numerous discovery disputes with both the relator and the defendant. Over time, the burdens of discovery caused the government to exercise its dismissal authority.
Similarly, in United States v. Gilead Sciences, the court granted the government’s motion to dismiss. In so doing, the court recognized the substantial burden on the government if it were required to respond to discovery requests relevant to Escobar’s materiality test and that this wide-ranging discovery would be unavoidable if the case proceeded. In particular, the court noted that discovery into “exactly what the government knew and when” cannot be avoided and it “will likely entail extensive discovery into government witnesses and documents by either or both [parties].”
In the wake of the Escobar decision and the Granston Memo, contractors are looking for opportunities to convince the government to dismiss qui tam cases pursuant to 31 U.S.C. § 3730(c)(2)(A). From the outset of the litigation, a contractor’s legal team will engage in discussions with DoJ lawyers regarding the application of Escobar’s materiality standard and its possible impact on the litigation—both in terms of the relator’s likelihood of success on the merits and the anticipated scope of Touhy discovery directed to governmental agencies. At key junctures in the litigation, the contractor’s lawyers may reach out to the DoJ to discuss the Granston Memo and whether the instant qui tam case might be a candidate for dismissal pursuant to 31 U.S.C. § 3730(c)(2)(A). If the DoJ signals an interest in discussing this topic further, the contractor’s legal team will then present the key facts and authorities supporting dismissal.
The landmark Escobar decision shifted the ground in FCA litigation in favor of contractors. Courts are now disposing of more cases where relators have failed to plead or establish materiality under Escobar’s demanding standard. Even though the Escobar materiality standard may impose additional costs on the government, contractors are now obtaining broad discovery from governmental agencies because these agencies are the sole custodians of the critical materiality evidence identified in Escobar. Additionally, the government is dismissing more qui tam case due to the anticipated burden on government agencies of providing discovery related to Escobar’s materiality requirement. In turn, each of these post-Escobar developments has made it easier for contractors to resolve FCA cases expeditiously.
