Seventh and Eighth Circuits Grade Relators’ Materiality Claims in First Appellate Materiality Decisions Applying Escobar
Last week, the Eighth Circuit issued the first appellate decision to engage in a detailed application of the False Claims Act’s (FCA) materiality standard after Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016). The court, reviewing a summary judgment ruling against the relators below, reversed, concluding that even under the Escobar’s “demanding” materiality rule, there was a genuine issue of material fact about whether the regulatory and contractual violations at issue were material. The Seventh Circuit quickly followed this week, concluding that the relator
presented no evidence of misrepresentations connected with claims for payment and
no evidence that the government’s decision to pay actually would have been
affected by knowledge of the defendant’s alleged violations.
Eighth Circuit Finds Evidence of Materiality
The relators in U.S. ex. rel. Miller v. Weston Educational, Inc., 14-1760, 2016 WL 6091099 (8th Cir. Oct. 19, 2016), claim that the for-profit Heritage College fraudulently induced the Department of Education (DOE) to provide funding to the college by falsely promising to keep accurate student grade and attendance records. After the Eighth Circuit’s earlier ruling against Heritage College was vacated and remanded by the Supreme Court in light of Escobar, the court faced the question of whether Heritage College promised to comply with regulations and contractual language requiring accurate recordkeeping and, if so, whether that promise met Escobar’s “rigorous” and “demanding” materiality standard.
The Eighth Circuit held that there was sufficient evidence to find a genuine issue of material fact about whether Heritage College’s allegedly deficient recordkeeping was material. In reaching this decision, the court applied a materiality standard derived from the Restatement (Second) of Torts § 538 (on which Escobar also relied): “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.”
The Eighth Circuit emphasized that the government repeatedly and expressly conditioned eligibility to receive DOE’s funding upon compliance with rules requiring accurate recordkeeping. The court recognized the government’s descriptions of these requirements as conditions of participation do not alone establish materiality under Escobar, but considered them evidence of the recordkeeping requirements’ importance. The court also explained that DOE relies on school records to “ensure funds go where they are supposed to go” and cited DOE administrative cases relying on similar records, noting that “DOE sometimes terminated otherwise eligible institutions for falsifying student attendance and grade records.” The court thus concluded the district court erred in granting summary judgment against relators based on materiality. (The court also held that summary judgment was inappropriate on the question of knowledge, as there was at least some evidence that would support an inference that the college promised to comply with the recordkeeping regulations knowing that it would not comply with that promise.)
Seventh Circuit Sees No Evidence of Materiality
The Seventh Circuit case U.S. ex rel. Nelson v. Sanford-Brown, Ltd., No. 14-2506 (7th Cir. Oct. 24, 2016), concerned allegations that a for-profit college violated obligations under the same DOE program—this time requirements that the for-profit college not pay incentive compensation to employees engaged in recruiting, and that it obtain valid accreditation and (as in Miller) maintain accurate student grade and attendance records. The Seventh Circuit had affirmed the district court’s grant of summary judgment for the college, but the Supreme Court vacated and remanded in light of Escobar.
On remand, the Seventh Circuit made short work of the relator’s arguments that Escobar compelled reversal of the district court. First, the court held that the relator offered no evidence that the college made any representations in connection with its claims for payment, much less misleading representations, so that relator alleged nothing amounting to a half-truth. Second, the court held that relator presented no evidence that the government’s decision to pay would likely or actually have been different had it known of the college’s alleged noncompliance. Rather, “the subsidizing agency and other federal agencies in this case ‘have already examined [defendant] multiple times over and concluded that neither administrative penalties nor termination was warranted.’” The court also observed that at most relator showed the government was “entitled . . . to decline payment,” not that it actually would decline payment, which “is not enough” under Escobar. Notably, as we reported previously, a district court in California recently reached the opposite conclusion about the same incentive ban and the university in that case sought immediate appeal of the decision. U.S. ex rel. Rose v. Stephens Institute, No. 09-cv-05966, 2016 WL 5076214 (N.D. Cal. Sept. 20, 2016).
* * *
These cases are important early indications of how circuit courts will apply the Supreme Court’s standard in Escobar. Although Miller was a loss for the defendant, the Eighth Circuit’s decision follows Escobar in looking for evidence that the government in practice actually treats the requirements at issue as significant to its payment decisions. The same is true of Sanford-Brown. That approach should help defendants in cases where there is no evidence of government reliance on the requirements at issue. Sanford-Brown also shows how powerful the government’s knowing acquiescence to an alleged breach or violation can be for defendants. We will continue to monitor these cases and others remanded from the Supreme Court after Escobar to keep you up to date on how materiality case law is developing.