Contractors are now familiar with the Supreme Court’s June 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar [PDF]. That decision recognizes False Claims Act liability for implied false certifications. But it also holds that FCA liability is available only when the false statement or omission is “material” to the Government’s decision to pay a claim. Our discussion of Escobar is available here.

Over the last 18 months, courts across the country have been asked to determine the impact of the Escobar decision. Ten of the eleven U.S. Circuit Courts of Appeal have interpreted Escobar. Numerous U.S. District Courts have applied Escobar in resolving pre-trial motions. Cases based on “garden-variety breaches of contract or regulatory violations” are being thrown out. Even jury verdicts are being overturned for insufficient evidence of materiality. There is one inescapable conclusion from these post-Escobar decisions: materiality matters.

In this entry, we discuss two recent decisions that illustrate the impact of Escobar. One reaffirms the notion that, after Escobar, minor non-compliance with a regulatory requirement will not normally support FCA liability. The other highlights the critical role the government’s actions can play in establishing materiality. Together they reject jury verdicts imposing more than $1 billion in False Claims Act liability.

Minor non-compliance is not a False Claims Act violation.

In United States ex rel. Ruckh v. Salus Rehabilitation, LLC, Judge Merryday of the U.S. District Court for the Middle District of Florida overturned a nearly $350 million jury verdict because the evidence of the defendant’s minor non-compliance was not sufficient to meet the materiality requirement set forth in Escobar.

The relators in Ruckh alleged that the defendants (owners of specialized nursing facilities) violated the FCA by submitting claims for payment under Medicaid even though they had not maintained the comprehensive care plans required by applicable regulation. Although the evidence showed noncompliance, Judge Merryday concluded that the evidence showed nothing more than a minor record-keeping defect. The government was aware of the lack of comprehensive care plans, but it never threatened to withhold payment and took no other steps to enforce the requirement. Furthermore, there was no reason for the defendant nursing facilities to believe that the comprehensive care plans were material.

Judge Merryday highlighted the fact that “Escobar rejects a system of government traps, zaps, and zingers that permits the government to retain the benefit of a substantially conforming good or service but to recover the price entirely—multiplied by three—because of some immaterial contractual or regulatory non-compliance.”

As to the question of whether a particular requirement is material or not, the test is often one of common sense. The relator cited the U.S. District Court decision in United States ex rel. Beauchamp v. Academi Training Center, Inc., to support the claim that common sense required the comprehensive care plans be considered material. Beauchamp involved a contract to provide security for diplomats in Afghanistan. The FCA allegation was that the contractor had submitted false weapons qualifications for security personnel that protecting U.S. diplomats. In the district court’s view, that allegation adequately stated an implied certification claim under the FCA. One would naturally assume that armed personnel providing protection for diplomatic officials in a warzone “were qualified to handle the very firearms they needed to protect those officials.”

Judge Merryday found the reasoning in Beauchamp to be unimpeachable, but reached a different conclusion based on the facts.

The leap of logic and the gap in “common sense” is too great to apply the otherwise unimpeachable ruling in Beauchamp to the decisively different facts of the present action. The defendants in the present action used qualified providers who ably provided services in accord with orders issued by qualified professionals but who, for example, could not—years later—identify a “comprehensive care plan” for each patient. “Common sense” falls far, far short of dictating that in the later event a reasonable purchaser would abruptly refuse to pay those providing continuing and sustaining health care to a mass of highly vulnerable and mostly elderly and frail patients.

According to the decision in Ruckh, there is an obvious difference between “actually not qualified,” and “fully qualified but not in possession of a certificate.” Beauchamp fell into the former category, but the lack of comprehensive care plans concerned the latter.

Evidence of the government’s inaction is very strong evidence of materiality.

The Fifth Circuit’s decision in United States ex rel. Harman v. Trinity Indus., Inc., overturned a $663 million jury verdict. In that case, the court held that the evidence presented at trial overwhelmingly showed that the defendant’s “non-compliance” was immaterial.

Harman involved the design of highway guardrails that are installed throughout the country. State governments pay for the installation of the guardrail systems but can be reimbursed by the federal government if the guardrails meet Federal Highway Administration standards. The relator in Harman alleged that Trinity (a manufacturer of a common guardrail system) modified the design of the guardrails during manufacturing and ultimately installed (and was paid for) a guardrail system that was not FHA-approved. Trinity admitted that it had changed the design and that it had not disclosed the changes to FHA. Trinity’s response to the FCA claim was that the change was immaterial. Trinity argued that the change was so minor that it did not need to be disclosed and did not undermine the FHA’s approval.

At trial, the evidence showed that FHA was aware of Trinity’s design change and took no action to withdraw its approval of the guardrail system. In fact, FHA opined—on at least three different occasions—that Trinity’s guardrail system, as modified, was approved and eligible for reimbursement. The first occasion was before the FCA complaint was even filed, when the relator notified FHA of the design changes. Despite being aware of the modification, FHA continued to tell various state departments of transportation that Trinity’s system was eligible for reimbursement.

The second occasion was shortly before trial. The relator sought permission to depose FHA employees about Trinity’s design changes. The FHA responded with an official memo stating that Trinity’s modified guardrail system had been crash tested and approved. The memo stated that there had been “an unbroken chain of eligibility for Federal-aid reimbursement” from the date of the initial crash test and approval of the pre-modified design to the present day.

The third time FHA approved the modified guardrail design was after the trial. Although FHA’s official memo indicated that Trinity’s system was FHA-approved, the relator argued that the memorandum was procured by fraud. The jury returned a $663 million verdict against Trinity. The verdict was widely publicized and caused immediate concern among various states as to whether Trinity’s system was approved for federal reimbursement. In response to the outcry, FHA commissioned independent testing by a joint task force that examined more than 1,000 installations of Trinity’s modified guardrail system. The independent review confirmed that Trinity’s modified systems were representative of the pre-modified design that had been crash tested and approved. FHA released the findings with an announcement that Trinity’s system was approved and eligible for reimbursement.

Despite the evidence of FHA’s repeated and apparently knowing approval of Trinity’s design changes, the trial court denied Trinity’s post-trial motions.

On appeal, the Fifth Circuit (in an opinion written by Judge Higginbotham) held that the relator’s claim failed because the evidence was insufficient to show that Trinity’s design change was material. FHA had full knowledge of Trinity’s design modification and its failure to disclose it. But FHA took no action to withdraw its approval of the system. Instead, FHA affirmatively asserted, on three different occasions, that the modified design was eligible for reimbursement.

Indeed, the fact that the government made the weighty decision to approve the modified guardrail design multiple times strongly suggested that the undisclosed modification was not material. “When the government . . . repeatedly concludes that it has not been defrauded, it is not forgiving a found fraud—rather it is concluding that there was no fraud at all.”

The conclusion from these decisions is inescapable. Materiality matters.


Further reading on this topic—

When the government pays the defendant’s attorney fees in a False Claims Act case (Sept. 2017)

Universal Health v. Escobar establishes a new standard or proof for implied certification under the False Claims Act (June 2016)

Argument predicts the outcome in Universal Health v. Escobar (April 2016)