scales of justiceOver the last two decades, the False Claims Act (FCA) has become a popular tool for plaintiffs—and qui tam attorneys—to enrich themselves at the expense of government contractors.  To keep the profits flowing, private plaintiffs, called relators, have invented new legal theories under which to bring their claims. As they test the FCA’s bounds, defendants have urged courts to maintain the law’s traditional limits. Last June, the US Supreme Court addressed one of FCA relators’ more successful liability expansions: the “implied-certification” theory. As a recent WLF Legal Backgrounder notes, though the Court affirmed the availability of this liability theory in Universal Health Services v. US ex rel. Escobar, it also urged lower courts to carefully scrutinize relators’ complaints as a way of limiting the implied-certification claims. Federal appellate courts have begun taking the Supreme Court at its word and have rejected claims that cannot establish materiality or satisfy the FCA’s scienter requirement.

In Escobar, the Court considered FCA liability under a theory of implied certification. The FCA imposes treble damages and statutory penalties for submitting a false claim to the government.  The implied-certification theory posits that whenever a contractor submits a claim (even if the claim is merely a request for payment) the contractor impliedly certifies that it has complied with all underlying statutes, regulations, and contract terms. Hence, a violation of any of those legal requirements results in an FCA violation, even if the contractor made no false statement in carrying out the contract. Lower courts were split on how broadly to draw implied-certification liability, which led the Supreme Court to grant certiorari in Escobar.

In its opinion, the Court recognized the implied-certification theory’s viability under the FCA.  However, the majority also noted that lower courts must limit the reach of implied certification “through strict enforcement of the Act’s materiality and scienter requirements.” While the Court did not provide an exact test for materiality in the FCA context, the majority reminded lower courts that the test was “familiar and rigorous,” “demanding” and not “too fact intensive” to be addressed during a motion for summary judgment.

Since the Court decided Escobar, several federal circuit courts have applied it in a manner that limits FCA liability. In US ex rel. McBride v. Halliburton Co., the US Court of Appeals for the DC Circuit expressly cited Escobar’s materiality analysis when it affirmed the district court’s grant of summary judgment. The relators argued that the defendants submitted false claims when they claimed reimbursement for expenses related to entertainment services for soldiers stationed in Iraq without maintaining accurate data regarding costs. But, as the court noted, even if the defendants had a statutory duty to maintain such records (and the court was skeptical that they did), those records were clearly not material to the government’s decision to pay the claims—Army witnesses testified that the data “had no bearing on costs billed to the Government.” Further, the court used “the benefit of hindsight” by noting that the Army investigated the relators’ allegations and continued to pay the defendants for their services. Thus any false claims the defendants committed were not material to the government and not recoverable under FCA.

As it announced Escobar, the Court reversed and remanded several other FCA cases to be reconsidered in light of its decision. WLF’s September 30, 2016 Legal Backgrounder discussed a number of these cases. In one such case, US ex rel. Nelson v. Sanford-Brown, the Seventh Circuit tersely applied Escobar’s materiality requirements to affirm a district court’s dismissal. Nelson alleged that the defendant fraudulently admitted and retained students in order to maintain a high level of federal funding. Again quoting the “rigorous” and “demanding” language of Escobar, the court noted that the relator could not establish materiality. Like in McBride, federal agencies had investigated the alleged misconduct and “concluded that neither administrative penalties nor termination was warranted.” With such clear evidence that the allegations were not material to the government, the court upheld the district court’s dismissal.

Perhaps the clearest example of this hind-sight application of materiality, the Fifth Circuit affirmed a trial court’s grant of summary judgment in favor of the defendants in US ex rel. Abbott v. BP Exploration & Production Inc.  In that case the relators, a former BP employee and activist group Food and Water Watch, alleged BP violated the FCA when it submitted plans for an oil platform to the Department of the Interior (DOI) without all of the required documents.  Based on the complaint, both Congress and DOI investigated relators’ allegations.  According to the DOI report, the investigations determined that allegations were “without merit” and “unfounded.”  As the Fifth Circuit noted, such findings “represent ‘strong evidence’ that the requirements in those regulations are not material” to the government.  Because the plaintiffs could not rebut such evidence, the court affirmed the district court’s grant of summary judgment.

Even courts sympathetic to implied-certification theories seem to have paid attention to Escobar. The First Circuit, which originally decided Escobar, affirmed a dismissal of an FCA complaint in US ex rel. Hagerty v. Cyberonics because it held that the relators had not sufficiently connected their factual evidence to the submission of any false claims to the government under Rule 9(b).

Recent circuit court opinions demonstrate that although Escobar endorsed FCA implied certification, judges understood the Supreme Court’s desire to ensure that only material non-compliance with underlying statutes or regulations would result in such liability. It seems even when not analyzing materiality, appellate courts have correctly read Escobar as a signal to curb liability. But there is still work to be done. The case US ex rel. Harman v. Trinity Industries, currently before the Fifth Circuit, offers another chance to apply Escobar’s materiality requirement to dismiss a frivolous FCA claim. WLF has urged the court to recognize that because federal government officials declared themselves fully satisfied with the defendant’s performance, any non-compliance cannot meet the FCA’s materiality standard. Hopefully the court will take materiality seriously and overturn the record-setting jury award in the case.

Also published by on WLF’s contributor page.