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False Claims Act Update: The First Wave of “Materiality” Decisions Post-Escobar

October 25, 2016

By: Barbara Rowland and Carolyn H. Kendall

In our earlier post, we discussed the U.S. Supreme Court’s implied false certification decision of Universal Health Services Inc. v. Escobar, in which the Court rejected a bright-line rule on the False Claims Act's (FCA) materiality standard and adopted a fact-specific standard that is being litigated on a case-by-case basis. We’ve now seen about a dozen FCA decisions on motions to dismiss or for summary judgment informed by the Court’s opinion in Escobar. On net, courts are dismissing (sometimes with leave to amend) FCA cases where the whistleblower/relator merely asserts violations of contracts, regulations, or law as the basis for an implied false certification claim without sufficiently pleading a link between the alleged violation and the government’s payment decision. Courts are repeatedly holding that relators must plead this materiality link with plausibility and particularity as required by Rules 8 and 9(b) of the Federal Rules of Civil Procedure.

Here are some cases from within the First, Second, Seventh, Ninth, and Eleventh Circuits reflecting this post-Escobar reality:
 

  • United States ex rel. Williams v. City of Brockton, No. 12-cv-12193, 2016 U.S. Dist. LEXIS 103409 (D. Mass. Aug. 5, 2016)

    Relator claimed that the City of Brockton, Massachusetts, and its police department obtained grants from the Department of Justice in violation of the FCA by falsely certifying that they would comply with certain anti-discrimination laws, including Title VI of the Civil Rights Act. Holding that relator had not adequately pleaded materiality, the district court explained that Escobar instructs courts to “examine the extent to which the Government actually has or would refuse to pay a claim if it knows of non-compliance.” The court further explained that “[a]lthough discovery may in many cases be necessary for this inquiry,” a review of the relevant regulations governing the grants established that a false certification “would not affect the government’s decision to pay, unless and until there is a formal finding of discrimination” – which the relator did not plead.
     
  • United States v. N. Adult Daily Health Care Ctr., No. 13-cv-4933, 2016 U.S. Dist. LEXIS 121136 (E.D.N.Y. Sept. 7, 2016)

    Relators alleged that defendant adult day care center, Northern Adult, failed to comply with Title VI of the Civil Rights Act, Medicaid regulations, and New York Department of Health (DOH) regulations, despite being required to do so to participate in New York’s Medicaid program. In their FCA complaint, relators provided specific examples of defendant’s alleged false claims: “As in Universal Health, the claims for payment use codes that correspond to specific services, satisfying the first condition for an implied certification theory of liability.”

    Nevertheless, the court found that relators did not adequately plead materiality, holding that “Relators do not allege, as they are now required to do under Universal Health, that Northern Adult's misrepresentations were material and that the government would have refused reimbursement had it known of Northern Adult's noncompliance with Title VI and the cited DOH regulations.” The court also found that alleging noncompliance with a condition of Medicaid program reimbursement was insufficient to establish materiality under Escobar, although it “may have sufficed to support an implied false certification claim under the standard in” the Second Circuit’s pre-Escobar precedent. The court allowed relators to amend their complaint in light of Escobar.
     
  • City of Chicago v. Purdue Pharma L.P., et al., No. 14-cv-4361, 2016 U.S. Dist. LEXIS 134752 (N.D. Ill. Sept. 29, 2016)

    The City of Chicago alleged that defendant pharmaceutical companies took steps, through tactics including sales representative visits to doctors, to make the use of opioid prescriptions for long term pain commonplace and downplay the risks of addiction.

    Among the allegations in its multi-count complaint, including counts under Chicago’s False Statement Act and False Claims Act, the City alleged that “the defendants’ representations were material because if the City had known of the false statements [supporting the prescribing practices], it would have refused to authorize payment for opioid prescriptions to treat chronic pain.”  The City also alleged that “it ‘paid and continues to pay the claims that would not be paid but for defendants’ illegal business practices.’”

    Defendants argued that the fact that the City continued to pay false claims while advancing its lawsuit undermined its claim that defendants’ noncompliance was material. Applying federal FCA case law to the municipal fraud statutes, the district court agreed, holding that the City had “not sufficiently alleged that defendants caused misrepresentations that were material as defined in [Escobar]” and dismissed the City’s FCA claims with leave to replead.
     
  • Knudsen v. Sprint Communs. Co., et al., Nos. C13-04476 CRB; C13-4465 CRB, 2016 U.S. Dist. LEXIS 118438 (N.D. Cal. Sept. 1, 2016)

    Relator alleged that defendant cellular service providers failed to provide the government with price reductions and discounts to which the government was entitled under a contractual Price Reduction Clause (“PRC”). Defendants moved to dismiss relator’s FCA complaint, which the district court granted with prejudice.

    The United States, which had declined to intervene, filed a Statement of Interest in support of relator and argued that “materiality is easily met because a price reduction clause dictates how much the government pays, which has a natural tendency to affect the government’s decision to pay a claim.” The district court rejected the United States’ argument, explaining that “[a]lthough the government might be correct that a PRC violation is material to the government’s decision to pay, the issue here is the adequacy of [relator’s] pleading.” In the court’s view, relator’s “single, conclusory paragraph” alleging that regulations on price are per se material was insufficient and an example of the theory rejected by Escobar, i.e., “a theory of materiality that any statutory, regulatory, or contractual violation is material just because it can result in the government’s decision not to pay a claim.” 
     
  • United States v. Crumb, et al., No. 15-0655, 2016 U.S. Dist. LEXIS 112661 (S.D. Ala. Aug. 23, 2016)

    A district court refused to dismiss the government’s FCA complaint against a physician, his professional corporation, and former employer, finding the government had adequately pleaded materiality in its implied certification claims. The government alleged defendants sought reimbursement from federal health care programs for claims that included Botox injections and ultrasound guidance based on false diagnoses.

    The court held that the government’s complaint satisfied Escobar’s requirements because (1) the government alleged that [the former employer] defendant’s claims for payment also made representations about the services provided and reasons for the services, and (2) the government alleged that that defendant failed to disclose the claims were not supported by proper diagnoses and used improper billing modifiers, which “were, at best, misleading half-truths.” The court found: “Taken as a whole, the allegations of the Amended Complaint raise a compelling inference that the purported representations in question were material to the Government’s payment decision.”
     
  • United States ex rel. George vs. Fresenius Medical Care Holdings, Inc., No. 2L12-cv-00877, 2016 U.S. Dist. LEXIS 131002 (N.D. Ala. Sept. 26, 2016)

    Relator alleged that defendant dialysis center submitted false claims in violation of the FCA in connection with improperly shortened treatment times prescribed for Medicare patients. Relator made no allegation and provided no evidence of how long the treatments were shortened. The dialysis center argued that shortening prescribed treatment time was not material because Medicare does not request reporting of treatment duration and reimburses the center regardless of treatment time.

    The district court entered summary judgment in favor of the dialysis center on these claims because “not all deviations from treatment are ‘material’ under Escobar.” Without information regarding how much the treatments were shortened, the court could not “determine whether reimbursements on these treatments omitted ‘critical qualifying information’ that would have been ‘material to the Government’s payment decision.’”
     

We will continue to follow the fallout from Escobar.
 

Disclaimer: This post does not offer specific legal advice, nor does it create an attorney-client relationship. You should not reach any legal conclusions based on the information contained in this post without first seeking the advice of counsel.
 

About the Authors:

Barbara Rowland is a Principal in Post & Schell's Internal Investigations & White Collar Defense Practice Group resident in its Washington, D.C. Office. Her practice focuses on representing corporations and individuals from a variety of industries, including pharmaceutical and medical device manufacturers and distributors, retail pharmacies, pharmacy benefit managers, health care providers, and other government contractors. She conducts internal investigations, counsels clients subject to government investigation, represents executives, managers, and employees in such investigations, and defends clients in related litigation and at trial. Learn More >>

 

Carolyn Kendall

Carolyn H. Kendall is an Associate in Post & Schell's Internal Investigations &
White Collar Defense Practice Group. She conducts internal investigations and defends corporations, officers and other individuals facing criminal and civil investigation. Ms. Kendall's work includes matters involving pharmaceutical, manufacturing, and financial companies, relating to potential criminal tax and money laundering violations, as well as allegations involving securities violations, mortgage and financial institution fraud, the Federal Anti-Kickback Statute, and other fraud and regulatory statutes. Learn More >>