Materiality Matters: Supreme Court Strengthens Materiality in Escobar
The Supreme Court decided Universal Health Services, Inc. v. United States ex rel. Escobar, (No. 15-7) on June 16, 2016, and held that the
implied false certification theory can be a basis for False Claims Act (FCA) liability, expanding implied certification into circuits that had not yet embraced it. But the Court snatched victory from the hands of the government and relator’s bar by articulating a “demanding”
As a result of Universal Health, “implied false certification” is a basis for FCA liability where “a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements,” resulting in misleading “half-truths” about its compliance with material
requirements. For example, when Universal Health billed for the health care services at issue, it used payment codes related to specific services and provider numbers corresponding to specific job titles. These codes and provider numbers “were clearly misleading in context” because they suggested that
Universal Health had complied with core Massachusetts Medicaid requirements for providing those services, even though Universal Health had not expressly claimed compliance. The Court declined to decide whether the implied certification theory is valid when a
defendant makes no representations in submitting a claim.
The Court also described a “demanding” and “rigorous” materiality standard, which applies to all FCA cases. While not rejecting the “natural tendency to influence” standard that appears elsewhere in the FCA, the Court articulated a more stringent materiality standard than existed before. The new test
“look[s] to the effect on the likely or actual behavior” of the government in deciding whether to pay the claim. It is not dispositive whether the violation was an “express condition of payment” or whether the government had the option to refuse to pay. Also, the Court emphasized that materiality
can be tested on a motion to dismiss or for summary judgment. Finally, the Court helpfully provided examples of evidence that would be relevant to the materiality inquiry:
- Evidence that the “Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement” is strong evidence of materiality.
- If the “Government pays a particular claim in full despite its actual knowledge that certain requirements were violated,” or the “Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, . . . that is
strong evidence that the requirements were not material.”
The new materiality standard provides ammunition to FCA defendants. It shifts the focus to what the defendant knew or should have known about how disclosure of the alleged noncompliance would likely have affected the government’s decision whether to pay a claim. And it makes
clear that how the government actually handles such claims is relevant to materiality. No longer can the government (and relators) simply assert after the fact that “of course” noncompliance with a requirement had a natural tendency to influence the government’s
decision to pay a claim.