United States: A Tale Of Two Escobars: Federal Courts Begin Grappling With Opposing Views Of "Materiality"

On June 16, 2016, the U.S. Supreme Court issued a highly anticipated opinion in Universal Health Services, Inc. v. U.S. ex rel. Escobar, which for the first time expressly recognized implied certification as a viable theory under the federal False Claims Act (FCA). Implied certification is a theory that has been widely criticized by government contractors because of the broad and open-ended liability it potentially creates. The opinion has been the subject of much discussion because, among other things, it set forth a new "materiality" standard under the FCA. Although the more "demanding" standard was intended to restrict the reach of implied certification by limiting the type of regulatory restrictions that could be actionable, we warned in June that it could ultimately lead to more involved litigation because it relies on a subjective and fact-intensive inquiry.

In the months following Escobar, the anticipated divide between defendants and the government has been coming to fruition in at least one form as parties begin contesting whether the new standard limits claims under the FCA to scenarios where the government would have denied payment had it known of the alleged regulatory violation. The divide largely arises from the opinion's language stating that "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."

Defendants have capitalized on this language, and in doing so, make the seemingly sensible argument that the government cannot genuinely consider a regulatory requirement to be material when it knew of a potential violation and continued paying on the claims without objection. Defendants contend the argument is consistent with the Court's view that materiality should be assessed on the government's actual and expected conduct, and in cases across the country, defendants are beginning to echo this view.

For example, AstraZeneca recently argued in the Eastern District of New York that the "Relator cites to dozens of publicly-available clinical studies and articles ... But these very studies and articles were equally available to the government, which nevertheless continued to reimburse claims for Seroquel." The relator "cannot plausibly allege that any purported misrepresentations were material to the government's payment decision" when it continued to reimburse claims for Seroquel despite having the "studies and articles" available to it.

Although having declined to intervene in the case, the U.S. Department of Justice (DOJ) did address AstraZeneca's position, contending that it misconstrued the materiality requirement in two respects. First, the DOJ argued that AstraZeneca failed to account for the "objective" version (reasonable person) of the "materiality" test:

AstraZeneca's chosen materiality standard – that the Government 'would' refuse payment – would adopt an outcome-dependent materiality standard that is stricter than the ... common law objective and subjective standards, and is therefore not supported by the Escobar decision.

The DOJ also noted that, although a factor, "the Government's decisions when acting with knowledge of the claim's falsity ... [are not] dispositive of materiality"; rather, it was only "relevant to materiality."

Second, the DOJ took issue with AstraZeneca's attempt to expand the Court's "actual knowledge" language into a "constructive knowledge" test, in reference to the "equally available clinical studies and articles."

In its response, AstraZeneca contended the DOJ "ignore[d] the bulk of the Court's discussion on materiality – in particular, the Court's conclusion that it is insufficient for a finding of materiality that the government has the 'option to decline to pay if it knew of the defendant's non-compliance.'" The district court has yet to decide on AstraZeneca's pending motion to dismiss the relator's ninth amended complaint.

In another case pending before the Fifth Circuit, Trinity Industries, Inc. recently argued in a reply brief that:

[t]his case is even easier. Here, the government has not only continued to pay for the ET-Plus – it has repeatedly reaffirmed that the ET-Plus is, and always has been, fully eligible for federal reimbursement ... That should be the end of this case.

Whether the Fifth Circuit will end the case is still undecided.

Following the opinion in Escobar, it was clear that the "materiality" standard would be heavily litigated, as the Court's language was parsed and construed by parties and courts alike. Where courts ultimately land on these initial "materiality" issues will assuredly vary across the country as the opinion is further applied. Although the full import of Escobar likely will not be known for years, what is known is that before all is said and done, the Supreme Court will undoubtedly be called upon to answer many lingering questions from its June 16 opinion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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