After the False Claims Amendments Act of 2021 (S. 2428) introduced this summer took heavy criticism, Senator Chuck Grassley (R-Iowa) has introduced a "manager's amendment" that overhauls the bill's materiality provision. Gone is the muddled "burden-shifting" approach to materiality. In its place, the proposed legislation now states: "In determining materiality, the decision of the Government to forego a refund or pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such refund or payment." (emphasis added). The Senate Judiciary Committee is scheduled to consider the revised legislation later this week.
Although the materiality language is different from earlier versions of the bill, the target remains the same-the Supreme Court's decision in Escobar, which Senator Grassley asserted during a Senate Judiciary Committee executive business meeting last week has "gut[ted] the bill," describing Escobar as a "disjustice (sic) to the original purpose of the False Claims Act." In urging his colleagues to vote for the legislation, Senator Grassley was particularly critical of courts that "have dismissed cases based solely on the government's decision to continue paying a claim without inquiring why the government kept paying," noting that "[t]here are many reasons" for continued payment "despite actual knowledge of fraud." In our view, that is precisely the point-if the agency, after taking into account the "fraud" and any other factors, decides to continue paying, the purported wrongdoing is not material to payment. The manager's amendment would adopt a view of materiality that is divorced from the plain meaning and common law understanding of that term.
Unlike the previous burden-shifting framework, however, the current bill's materiality language would not be breaking new ground. It would essentially codify one line of post-Escobar cases, in which courts have declined to dismiss cases on materiality grounds if there may have been "other reasons" for the government to continue paying. Chief among these is the Ninth Circuit's decision in United States ex rel. Campie v. Gilead Sciences, Inc., which reversed a Rule 12(b)(6) dismissal even though it was "undisputed" that the government continued to pay after learning of the defendant's alleged noncompliance. The Ninth Circuit reasoned that there could be "many reasons" for the government to keep paying and cautioned courts against "read[ing] too much" into continued payment. DOJ later agreed to dismiss the case under (c)(2)(A) while a cert petition was still pending, likely to avoid review by the high court. Campie's approach has been adopted by some courts-as noted in a lengthy string cite in the materials accompanying Senator Grassley's new manager's amendment-but largely stands in stark contrast to that of other circuits that have embraced Escobar and focused on the government's actual conduct in paying claims rather than speculating about the government's motives.
What effect will this new materiality language have if enacted? Here at Qui Notes, we see at least two potential consequences:
1. Prolonged Litigation of Unmeritorious Cases
At a minimum, the False Claims Amendments Act's proposed language will make it even more of a challenge to win a motion to dismiss on materiality grounds. In all but the most extreme cases, relators will likely be able to articulate some "other reason" why the government might continue payment-for example, to ensure that patients get their medicine or that soldiers receive needed supplies. That said, materiality is already an uphill battle at the motion to dismiss stage; courts have been far more willing to dismiss cases for lack of materiality on summary judgment. To obtain summary judgment under the new language, however, defendants may have to show that the government's decision to continue payment was motivated by a judgment that the alleged misconduct was not important enough to stop paying claims, not by any "other reasons." Faced with this ill-defined standard, companies may have to make difficult decisions on whether to settle meritless cases simply to avoid the costs of prolonged litigation.
2. Increased Discovery Disputes & Related Costs
Post-Escobar, defendants already regularly seek, and are entitled to, discovery regarding the government's actual conduct in paying claims. But the new materiality provision will compel far greater scrutiny of the government's "reasons" for acting as it did, necessarily requiring more probing discovery regarding agencies' deliberative processes and decision-making. We doubt, however, that the government will readily welcome FCA defendants into such internal government business, setting the stage for frequent, complicated, and high-stakes discovery disputes. Agencies may well argue that most information about the government's "reasons" for continued payment is protected by the deliberative process privilege - creating a dilemma for courts in which a federal statute seemingly requires the government to provide insight into its internal processes that otherwise would be largely immune from discovery.
Even setting aside the amendment's potential tension with privilege, the new materiality language, coupled with the False Claims Amendments Act's cost-shifting discovery provision, creates a system that may require defendants to foot the bill for the information they need to defend themselves. With an "essentially punitive" statute like the FCA, such a regime raises very real due process concerns. Defendants will be faced with the difficult task of crafting discovery that addresses the nebulous (and likely ever-shifting) standard of whether the government had "other reasons" to continue payment, while simultaneously demonstrating that their discovery is "relevant and proportionate to the needs of the case." In our view, given the new materiality language, almost any discovery request seeking information about the agency's decision-making would be relevant and proportionate. We suspect DOJ will not share that view, setting up discovery disputes in potentially every FCA case. This could substantially increase costs for all involved, including the government.
FCA practitioners and courts will have to sort through these issues if the False Claims Amendments Act becomes law. We here at Qui Notes hope that the Senate Judiciary Committee will carefully consider them before Thursday's vote on reporting Senator Grassley's proposed legislation to the full Senate. Stay tuned.
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.
