Source: https://fcadefense.com/false_claims_act/whistleblower/qui_tam/category/materiality-2/
Timestamp: 2019-04-25 10:33:10+00:00

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On May 1, 2017, the United States Court of Appeals released an important decision interpreting the False Claim Act’s (“FCA’s”) materiality requirement in light of the Supreme Court’s 2016 decision in Universal Health Services Inc. v. United States ex rel. Escobar. The case, United States ex rel. Petratos v. Genentech, revolved around allegations regarding the cancer drug Avastin. According to the relator, Genentech allegedly conducted a “formal campaign” to suppress and conceal clinical data that would have revealed that side effects in certain patient populations were more common and severe. As a result of the campaign, the relator alleged, Genentech avoided the requirement to file adverse event reports with the FDA and avoided more-restrictive FDA labeling. As a result, according to the relator, the use of Avastin was not reasonable and necessary in these patient populations and “the standard of care would have been to prescribe a lower dose of Avastin, a lower frequency of doses, or no dose at all.” Essentially, the relator argued, doctors would have altered their of use and prescribing practices for Avastin. The district court dismissed the case for failure to state a claim, reasoning that whether a drug is reasonable and necessary is a determination for the FDA and not individual physicians.
Although the circuit court rejected the district court’s reasoning, noting that a physician’s actions can be relevant in determining whether a service or item billed to the government is reasonable and necessary, the Third Circuit affirmed the district court decision on the grounds that relator could not establish materiality.
As noted by the court, an FCA violation involves four elements: falsity, causation, knowledge and materiality. Materiality is defined by the FCA as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money.” 31 U.S.C. § 3729(b)(4). Last year, in the groundbreaking Escobar case, as explained more fully in a previous post, the Supreme Court expounded upon the FCA’s materiality requirement, describing the requirement as “demanding” and “rigorous.” As cited by the circuit court, Escobar stands for the proposition that “a material misrepresentation is one that goes to the ‘very essence of the bargain.'” The circuit court continued, “[m]ateriality may be found where ‘the government consistently refuses to pay claims in the mine run of cases based on noncompliance with statutory, regulatory, or contractual requirement’…On the hand it is ‘very strong evidence’ that a requirement is not material ‘if the government pays a particular claim in full despite its actual knowledge that certain requirements were violated.'” Where noncompliance is “minor or insubstantial,” materiality will not be found.
The alleged fraud’s effect on physicians is relevant to the extent that it caused claims eventually to reach CMS. That is, evidence of how the claim makes its way to the government should be considered under the causation analysis, while the materiality analysis begins after a claim has been submitted. The materiality inquiry, in asking whether the government’s payment decision is affected, assumes that the claim has in fact reached the government.
It is the government’s materiality decision that is dispositive. This does not change when an alleged misrepresentation flows through an intermediary in an indirect causation case.
A relator’s proof of causation, or proof that a claim reached the government, is irrelevant to establishing materiality.
FCA defendants should examine a relator’s pleadings carefully. If a relator fails to plead that knowledge of the alleged violation could influence the government’s decision to pay or that the government consistently refuses to pay claims like those alleged, the allegations will likely be susceptible to dismissal on the grounds that the relator cannot meet the FCA’s materiality requirement.
Federal Circuit Courts continue to consistently apply a “heightened” materiality standard in light of Escobar, rejecting the government’s arguments that Escobar represented little change.
Yesterday, the First Circuit Court of Appeals issued a new opinion in Universal Health Services, Inc. v. United States ex rel. Escobar. Applying the materiality test enunciated by the Supreme Court in June, the First Circuit reaffirmed its previous decision that the whistleblowers’ complaint sufficiently stated a claim under the False Claims Act (“FCA”) to survive the defendants’ motion to dismiss.
The whistleblowers in Escobar originally filed a FCA suit against Universal Health Services, Inc. (“UHS”) on July 1, 2011 in the United States District Court for the District of Massachusetts. The whistleblowers alleged that UHS had failed to disclose that certain of its personnel did not comply with applicable licensing and supervision requirements, and therefore claims submitted to the government for services provided by such personnel were false under the “implied certification theory.” The whistleblowers uncovered information that 23 UHS employees had obtained National Provider Identification numbers that misrepresented their licensure status. The district court originally dismissed the claims for failure to state a claim, finding that the licensing and supervision requirements were conditions of participation, rather than conditions of payment, and therefore could not establish falsity under the FCA. The First Circuit reversed, finding that the licensing and supervision requirements were conditions of payment, and therefore could establish falsity.
The Supreme Court granted certiorari to resolve a circuit split regarding the viability of the implied certification theory under the FCA. As explained in a previous post, while the Supreme Court upheld the implied theory of certification, it placed the emphasis on whether compliance with the requirement that was violated was “material to the Government’s payment decision….”. The Supreme Court then remanded the case to the First Circuit Court of Appeals.
• The licensing and supervision requirements go to the “very essence of the bargain” regarding the government’s relationship with healthcare providers.
UHS argued that the government was aware of the alleged violations and yet continued to pay for related claims, which the Supreme Court listed as evidence against a finding of materiality. In response, the First Circuit stated that it saw no evidence of the government’ actual knowledge of the defendant’s non-compliance, and furthermore that mere awareness of allegations concerning noncompliance “is different from actual knowledge” when considering materiality.
Given the First Circuit’s previous ruling and its previous broad interpretation of the implied certification theory, this outcome is not unexpected. However, it does provide additional insight into how courts will apply the Supreme Court’s materiality standard.
The First Circuit continued to emphasize the fact that the regulations at issue were a condition of payment, which indicates that the condition of payment vs. condition of participation distinction will continue to be important in future FCA cases. The court’s discussion regarding the impact of the government’s actual knowledge of violations on materiality could also have interesting implications on self-disclosure.
Although the First Circuit specifically declined to review this point, the opinion indicates that self-disclosing a violation to the government could potentially cut off FCA liability for future claims, or even for all implicated claims, if the government continues paying for such claims after the self-disclosure, as such violation might not be considered material.
While likely the end of the road for Escobar, this opinion demonstrates how a circuit that had adopted one of the broader interpretations of the implied certification theory can use the materiality standard to continue to support that broad interpretation. It is also interesting to contrast the First Circuit’s application of Escobar‘s materiality standard in support of its previous broad interpretation to the Seventh Circuit’s application of that same standard in support of its previous narrow interpretation, discussed here.
The Eighth Circuit Court of Appeals yesterday applied the materiality standard enunciated by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar to a False Claims Act (“FCA”) case alleging fraudulent inducement.
In United States ex rel. Miller v. Weston Educational Inc., d/b/a Heritage College, two whistleblowers alleged Heritage College altered grade and attendance records to falsely demonstrate satisfactory academic progress. Satisfactory progress is required for a student to be eligible for specific federal grants, loans and scholarships, pursuant to Heritage College’s Program Participation Agreement (“PPA”) with the Department of Education. Satisfactory progress is measured by the students’ cumulative grade point average.
The whistleblowers’ case was based upon an allegation of fraudulent inducement, that Heritage College knew at the time it signed the PPA that it did not intend to keep accurate records and that the knowingly false statement that it would keep accurate records was material to the government entering into the agreement that led to disbursements.
Heritage College responded that the PPA does not explicitly require the maintenance of those grade and attendance records and that there are no regulations that do so either. More important, none of the altered records actually impacted government disbursements or led to refunds, and, therefore, the alteration was not material.
A false statement or record is “material” for FCA purposes if either (1) a reasonable person would likely attach importance to it or (2) the defendant knew or should have known that the government would attach importance to it.
Heritage College’s argument, that there was no link between the false records and disbursements, missed the point of the allegation – that it fraudulently induced the government to enter the contract when it signed the PPA, though it did not intend to comply with the PPA requirement that it maintain accurate grade and attendance records. That promise, at the time the contract was signed, was the material misrepresentation that could form the basis for a False Claims Act violation, the court determined.
The court specifically rejected Heritage College’s argument that the false statements were not material because they did not cause any actual harm. It did so relying upon a line of cases that state a party may be subject to FCA civil penalties, even where there is no monetary injury.
Courts will continue to explore the full meaning of the ruling in Escobar for years to come. At its core, though, it stands for the proposition that a false statement that a defendant should know the government would find important in making decisions to enter into a contract or to make a disbursement will be material, even if there is no direct connection between the false statement and injury to the government fisc.
Written by David B. Honig and Steven H. Pratt.
On February 2, the Sixth Circuit Court of Appeals ruled on a case from the Southern District of Ohio, US ex rel American Systems Consulting, Inc. v Mantech Advanced Systems International. At issue was whether a court may determine whether a knowingly false statement in a proposal for a government contract was a material misrepresentation under the FCA or if that issue was reserved for a jury. The court ruled that the trial court properly concluded the statement was not material, and the grant of summary judgment was affirmed.
Mantech and ASC were competitors. Each responded to a Defense Information Technology Contracting Organization RFP with a proposal. ManTech, as required by the RFP, identified a specific individual as the prospective Program Manager and addressed his skills and qualifications. After the initial proposal was submitted, that individual resigned from ManTech. ManTech did not advise the government and did not modify its proposal, even as it submitted subsequent information in support of its proposal.
ASC, in its own proposal, identified a prospective Program Manager but did not address his skills and qualifications.
Based upon the higher score received because of the experience of ManTech’s proposed Program Manager, ManTech received the contract. ASC filed its FCA action against ManTech, alleging ManTech fraudulently induced the government into awarding it the contract by misrepresenting the identity, skills and qualifications of the person who would act as Program Manager.
During discovery, government contracting managers testified ManTech would have received the contract, even if they had known of the man’s resignation. The designation of an individual, they explained, was to show the type of personnel the company could attract and retain; it was not to approve the qualifications of a specific individual. The government considered it in this way because it knew that people change jobs, retire and leave employers for other reasons.
It was also revealed during discovery that the government continued to work with ManTech after it learned of the alleged misrepresentation.
The trial court found, and the Court of Appeals affirmed, that the government’s testimony that the alleged misrepresentation had no tendency to influence their decision-making, along with the fact that the government continued to work with ManTech after it learned of the proposed Program Manager’s resignation, left ASC without evidence upon which a jury could reasonably find that the alleged misrepresentation was material to the government’s decision-making.
The Court of Appeals did reject the trial court’s finding that the government’s continued work with ManTech after it learned of the resignation necessarily precluded a finding of materiality. Rather, the court stated, it could preclude such a finding in the absence of evidence of other reasons the government might continue with the contract, such as investments in reliance upon the agreement, additional costs to find a replacement or unavailability of other contractors.
Government health care programs are incredibly complicated. Guidance from the government, and acts taken with the full knowledge and approval of the government, can help ensure compliance with both regulations and expectations. Based upon ManTech and similar cases from other circuits, receiving and following guidance from the government can also limit risk and costs in FCA cases, reducing the chances of being a defendant in such a case and allowing for earlier and less expensive pretrial dismissal.

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