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False Claims Act Statistics, News & Analysis

"The Benefit of Hindsight": The D.C. Circuit Holds That the Government's Failure to Seek Repayments After Investigating a Relator’s Allegations Is "Very Strong Evidence" of Immateriality

On Friday, the D.C. Circuit issued its first decision applying Universal Health Services, Inc. v. United States ex rel. Escobar. The D.C. Circuit’s decision, United States ex rel. McBride v. Halliburton Co., provides important guidance regarding the False Claims Act’s materiality standard and applies that standard to an implied certification theory.

McBride involved FCA claims against defense contractor KBR, which was represented by Vinson & Elkins (the authors of LLB). The relator, Julie McBride, alleged that KBR had inflated headcounts representing the number of people who used recreation centers that KBR operated for the U.S. military in Iraq. McBride contended that KBR failed to disclose violations of its obligations to maintain accurate headcount data to support its claimed costs, thereby rendering its claims for payment from the government impliedly false.

The district court granted KBR summary judgment, and the D.C. Circuit affirmed in a unanimous opinion, holding that the alleged headcount inflation was immaterial because the headcounts had no bearing on government payment decisions. Noting that Escobar makes clear that materiality is not “too fact intensive” to be resolved at summary judgment, the D.C. Circuit rejected McBride’s reliance on an Administrative Contracting Officer’s declaration that he “might” have investigated further had he known false headcounts were being maintained, and that such an investigation “might” have resulted in some charged costs being disallowed. According to the D.C. Circuit, this speculative statement was insufficient to avoid summary judgment because it amounted to no more than a supposition that the government might have had the option to decline to pay, which under Escobar cannot satisfy the FCA’s “rigorous” and “demanding” materiality standard.

Emphasizing that “courts need not opine in the abstract when the record offers insight into the Government’s actual payment decisions,” the court further explained that it “should not ignore what actually occurred.” The Defense Contract Audit Agency had investigated McBride’s allegations and chose not to disallow or challenge any of the amounts KBR had billed for recreation-center services. KBR also continued to receive an award fee for “exceptional performance” after the government learned of McBride’s allegations. The court explained that, under Escobar, the government’s inaction despite its knowledge of McBride’s allegations was “very strong evidence” that the allegedly violated requirements were immaterial. Because the D.C. Circuit could resolve the case on the issue of materiality, it did not need to address whether, post-Escobar, an implied certification case can be grounded on a claim for payment that makes no representations at all about the goods or services provided.

McBride falls in line with other post-Escobar decisions, such as D’Agostino from the First Circuit and Sanford-Brown from the Seventh Circuit, suggesting that government inaction in response to a relator’s allegations can be fatal to an FCA claim. The Ninth Circuit likely will weigh in soon in the Rose case, which was certified for interlocutory appeal after a district court in California in an education funding case found that the Department of Education’s decision not to take action against a university despite its awareness of the FCA allegations against it was “not terribly relevant to materiality.” Under McBride, a contracting officer’s mere speculation about what the government “might” have done had it known earlier about alleged misconduct is insufficient to overcome evidence regarding “what actually occurred” when the government learned of the relator’s allegations. McBride thus elevates “the benefit of hindsight” over conjecture in assessing materiality. The decision should assist FCA defendants in the significant number of cases in which the government has looked into allegations of misconduct and failed to take any action.

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Joshua S. Johnson

Joshua S. Johnson Counsel