United States: Sixth Circuit Examines Materiality And Government Knowledge Under The FCA

As its name implies, the False Claims Act (FCA) prohibits false or fraudulent claims to the federal government. Broadly construed, the FCA can apply to anyone receiving federal funds, but it is especially critical to government contractors, health-care entities, and financial institutions that routinely do business with the government.

One of the key issues in FCA cases is whether a false statement is "material," that is, did it matter to the government decision-maker. Materiality has been defined and interpreted by courts in different ways, and, in a significant new holding, the Sixth Circuit Court of Appeals recently refined its materiality analysis in FCA cases. In U.S. ex rel. Am. Sys. Consulting, Inc. v. ManTech Advanced Sys. Int'l, No. 14-3269 (6th Cir. Feb. 2, 2015), the Court held, among other things, that materiality is an issue of law to be determined by the court and not reserved for the jury, a holding that increases the likelihood of cases being disposed of without a trial. Notably, the Court also held that the government's continued performance under a contract, despite knowledge of a misrepresentation, may weigh against a finding that the misrepresentation was material, though it does not necessarily preclude materiality.

Competing Bidders and Alleged RFP Misrepresentations

In ManTech, the parties were competing bidders on a request for proposal (RFP) for a government contract involving software and systems engineering. Under the RFP guidelines, each bidder had to provide the qualifications of a specific program manager. Defendant ManTech did so, but the identified program manager later resigned from the company. ManTech did not disclose his resignation to the government and, in later submissions in the RFP process, continued to identify him as the program manager. The government ultimately awarded the contract to ManTech.

Plaintiff ASCI lodged a bid protest. When that protest failed, ASCI sought review from the Government Accountability Office (GAO), arguing that ManTech made misrepresentations about the program manager. Although GAO dismissed the matter as untimely, the RFP issuer conducted its own evaluation, after which it chose to continue working with ManTech.

ASCI next filed an FCA complaint, alleging that ManTech violated the FCA by wrongly identifying a former employee as the project manager. When the government declined to intervene, the parties litigated the case. The district court ultimately granted ManTech's motion for summary judgment, finding that ManTech's alleged misrepresentations were immaterial as a matter of law. ASCI appealed.

Materiality Is an Issue for the Judge—Not Jury

On appeal, the Sixth Circuit affirmed. First, the Court held that under the FCA a statement's materiality was a matter of law that a judge can decide, not an issue of fact reserved for the jury. In so concluding, the Court drew support from U.S. ex rel. Wall v. Circle C. Constr., LLC, 697 F.3d 345 (6th Cir. 2012), which affirmed summary judgment under similar circumstances without explicitly addressing materiality, and from the Court's analogous holdings that materiality was a question of law in false statement cases.

Next, the Court rejected ASCI's claim that there were genuine issues of material fact regarding the government's use of the program manager's information and that information's effect on the government's decision. To the contrary, the Court held that the RFP language and deposition testimony both supported that the program manager's qualifications were merely representative of ManTech's capabilities and that the issue was not outcome determinative.

Third, the Court rejected ASCI's argument that the district court erroneously applied a subjective rather than objective standard of materiality. Quoting United States v. Techs. Corp., 626 F.3d 313 (6th Cir. 2010), the Court restated that the Sixth Circuit uses a "natural tendency" test under which a false statement is material if it has "the objective, natural tendency to influence a government decision maker." While noting that the district court did rely on the subjective statements of the actual decision-makers to reach its findings, the Court held that "nothing in the record about the actual decision-makers (or their decision-making process) suggests a gap between their subjective views and the hypothetical views of a reasonably objective government decision-maker." Finally, the Court rejected ASCI's claim that the district court applied an outcome-based test for materiality. The Court noted that it rejected that type of test—which focuses on the actual effect of the false statement when discovered rather than its potential effect when made—in favor of the natural tendency test in U.S. ex rel. A+ Homecare, Inc. v. Medshares Mgmt. Grp., Inc., 400 F.3d 429 (6th Cir. 2005). Here, the Court found the district court correctly used the natural tendency test and that ASCI simply misinterpreted the district court's analysis.

Government Knowledge Can Affect Whether a Statement Is Material Under the FCA

When addressing the materiality test, the Court also discussed at length the significance of the government's decision to continue to contract with ManTech after discovering the program manager's resignation. The district court had concluded that the resignation "precluded" a finding that the failure to disclose was material. The Sixth Circuit disagreed that such a decision "necessarily preclude[d]" a materiality finding, concluding instead that a subsequent decision not to terminate a contract after discovery of misrepresentations "may weigh against a finding of materiality" but does not foreclose it. The Court reasoned that a moderated approach to materiality was appropriate because circumstances could change between the decision to enter a contract and the subsequent decision not to terminate it. Because potential losses from termination could exceed the benefits, a decision not to terminate was "a poor indicator of materiality at the outset." Likewise, citing U.S. ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908 (4th Cir. 2003), the Court noted that contractors who make misrepresentations should not be protected by the government's later decision to continue working with them because doing so would create "perverse outcomes" in which "the more dependent the government became on a fraudulent contractor, the less likely it would be to terminate the contract (and the less likely the contractor would be held liable)."

Notably, while the Sixth Circuit did not mention the "government knowledge" defense, its discussion echoes recent holdings by the Ninth and Fifth Circuits regarding the significance of the government's continued performance after discovering an alleged falsity or misrepresentation. (Both cases—and many others—are discussed at length in BABC's False Claims Act: 2014 Year In Review). As these cases demonstrate, courts have analyzed the effect of government knowledge in different ways, and this issue will likely continue to be hotly contested, especially in government contracting and health care cases.

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