The False Claims Act imposes treble damages and per-claim civil penalties, adjusted periodically for inflation, on any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval. Those amounts, detailed in False Claims Act Damages and Per-Claim Penalties, grow with the number of claims at issue because the civil penalty applies to each false claim. Pharmacies, hospitals, and physician practices facing a qui tam suit or a Department of Justice civil investigation need to understand one element in particular: materiality. In Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the Supreme Court held that a misrepresentation about compliance with a statutory, regulatory, or contractual requirement is actionable under the FCA only if it is material to the government's decision to pay the claim, calling that standard rigorous and demanding. The Court also rejected the argument that materiality is too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment.
The Implied Certification Theory Escobar Confirmed
Before Escobar, federal appellate courts disagreed over the validity and scope of the implied certification theory. Under this theory, a defendant that submits a claim impliedly certifies compliance with all conditions of payment, and a claim that fails to disclose the defendant's violation of a material statutory, regulatory, or contractual requirement is a misrepresentation that renders the claim false or fraudulent. The Supreme Court held that the theory can be a basis for liability, at least where two conditions are satisfied: the claim makes specific representations about the goods or services provided, and the defendant's failure to disclose noncompliance with material requirements makes those representations misleading half-truths. The Court did not decide whether all claims for payment implicitly represent that the billing party is legally entitled to payment. The Court declined to limit the theory to requirements expressly labeled as conditions of payment, reasoning that such a label bears on materiality but does not resolve it.
Factors Courts Weigh in the Materiality Analysis
Escobar described several kinds of evidence that bear on materiality. A requirement's express designation as a condition of payment carries weight but does not, standing alone, establish materiality. Proof of materiality can include evidence that the defendant knows the government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular requirement. Materiality cannot be found where noncompliance is minor or insubstantial. The Department of Justice's Civil Division Fraud Section says that many of its cases are suits filed under the FCA, but the Court made clear that the statute is not a vehicle for punishing garden-variety breaches of contract or regulatory violations.
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.
Government-Knowledge Evidence as a Defense Tool
Escobar adds a related rule for a pattern of payments: 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. Circuit courts applying Escobar have weighed this evidence at the pleading and summary judgment stages. The First Circuit, affirming the denial of leave to amend a complaint as futile in United States ex rel. D'Agostino v. ev3, Inc. (2016), said that CMS's failure to deny reimbursement in the wake of the relator's allegations cast serious doubt on materiality. The D.C. Circuit affirmed summary judgment in United States ex rel. McBride v. Halliburton Co. (2017), where the Defense Contract Audit Agency investigated the relator's allegations and did not disallow any charged costs, and the contractor kept receiving an award fee after the government learned of the allegations, which the court called very strong evidence that the requirements were not material.
Why Early Legal Counsel Is Critical
It is critical that healthcare providers promptly retain healthcare defense counsel upon receiving a civil investigative demand, a subpoena, notice that a relator's complaint naming the provider has been unsealed, or any other government inquiry connected to a potential False Claims Act matter. Early counsel can review government requests before the provider responds, gather the payment histories and agency records that bear on materiality, and communicate with investigators and opposing counsel on the provider's behalf.
How Health Law Alliance Can Help
Health Law Alliance defends False Claims Act matters across pharmacies, providers, manufacturers, and corporate defendants, from the sealed-investigation stage forward. That work can include direct engagement with the Department of Justice Civil Division on the intervention decision before the seal lifts and, after unsealing, motion practice that covers materiality under Escobar. If your pharmacy, practice, or facility has received a civil investigative demand, a relator's complaint, or another notice connected to a False Claims Act matter, contact us for a free, confidential consultation.
