A False Claims Act allegation can survive falsity and scienter and still fail on materiality, the element the Supreme Court sharpened in its 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar. Escobar held that materiality is a demanding standard, not satisfied by any regulatory violation that merely touches a claim for payment. One factor carries particular weight for a compliance department building a defense record: if the government continued paying claims in full after learning of the alleged violation, that is very strong evidence the violation was not material. Documenting what the government knew and whether it kept paying can decide whether a case survives a motion to dismiss.
The Escobar Materiality Standard
The False Claims Act imposes liability for knowingly presenting a false or fraudulent claim for payment, but liability also requires that the falsity be material to the government's payment decision. The statute defines material at 31 U.S.C. § 3729(b)(4) as having a natural tendency to influence, or being capable of influencing, the payment or receipt of money or property. In Escobar, the Supreme Court held that this standard is demanding: the False Claims Act does not punish garden-variety regulatory violations, and materiality cannot rest on a requirement's label as a condition of payment alone. The Court weighed whether the requirement was a designated condition of payment, whether the violation goes to the essence of the bargain, and whether the government's own payment conduct, especially continued payment with knowledge of noncompliance, shows the requirement did not actually drive its decision.
Government Knowledge as a Materiality Defense
The factor that does the most work in practice is the government's own conduct after it learns of the alleged violation. Escobar states that if the government pays a claim in full despite actual knowledge that requirements were violated, that is very strong evidence the requirements are not material. Circuit courts have applied that language to end cases at the pleading stage. In the Third Circuit's 2017 decision in Petratos v. Genentech, the court affirmed dismissal where the FDA had not merely continued approving the drug after learning of the relator's allegations, it added three more approved indications, and the Department of Justice had declined to intervene. Continued payment alone is not automatically dispositive, but a documented pattern of disclosure followed by continued government payment builds the strongest version of the defense.
If the government pays a claim in full despite actual knowledge that certain requirements were violated, that is very strong evidence the requirements were not material to its payment decision.
Building the Materiality Record
A materiality defense is built contemporaneously, not reconstructed after a complaint is unsealed. Compliance officers should preserve every written communication with CMS, the Medicare Administrative Contractor, or OIG showing the agency was informed of the conduct at issue, including audit responses, self-disclosures, and correspondence tied to the 60-Day Overpayment Rule repayment analysis. When claims keep processing after that disclosure, the payment record itself becomes evidence for the defense. The same discipline matters when the government's damages theory relies on extrapolation from a claims sample. Statistical Sampling in FCA Cases explains where courts have limited that methodology.
Limits of the Government Knowledge Factor
The factor is not a shield against every allegation. Courts distinguish actual, specific knowledge of the conduct at issue from generalized awareness of an industry practice, and a defendant that concealed the violation cannot claim credit for the agency's ignorance. A qui tam relator can also argue that continued payment reflects processing inertia, not an informed decision, especially where disclosure reached investigators but not the payment side of the agency. Left unresolved, that dispute can carry consequences beyond the judgment, including a negotiated corporate integrity agreement or OIG exclusion from federal healthcare programs. Inside an FCA Investigation: The Defense Timeline walks through that distinction once a complaint is unsealed and the government decides whether to intervene.
Why Early Legal Counsel Is Critical
It is critical that compliance officers and healthcare providers promptly retain experienced healthcare defense counsel upon receiving a civil investigative demand, subpoena, or other indication of a False Claims Act inquiry. Early legal intervention can protect the organization's rights, ensure appropriate responses to government requests, avoid inadvertent admissions, and preserve the materiality defense while the facts are still fresh. Delaying legal representation can significantly affect the outcome of a matter.
How Health Law Alliance Can Help
Health Law Alliance defends healthcare providers and pharmacies against False Claims Act allegations, from the first civil investigative demand through litigation over materiality and damages. Our bench includes a former federal prosecutor and a former senior healthcare-industry executive, a background that shapes how we build the government-knowledge record before a complaint is ever unsealed. If your organization is facing a False Claims Act inquiry, contact us for a free, confidential consultation.
