As we previously reported, the Supreme Court's decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), appears clear in its holdings that: (1) implied certification may support False Claims Act (FCA) falsity only when the plaintiff can establish a two-part test requiring a specific representation that contains a material omission; and (2) the FCA materiality standard is a "rigorous" and "demanding" one that requires evidence that the government would not have paid the claims at issue if it had access to accurate information.
But as the lower courts have begun to interpret and apply Escobar, the meaning of Escobar is proving to be anything but clear. With regard to implied certification, as we reported, at least one district court has held that while Escobar embraces one form of implied certification based on omissions, the various versions of implied certification that existed prior to the Supreme Court's decision potentially remain viable. This is in contrast to many other decisions supporting the interpretation that Escobar creates a mandatory test for implied certification. Courts similarly are showing signs of disagreement with regard to the materiality standard articulated in Escobar.
These differing interpretations frustrate the Supreme Court's goal in Escobar of bringing harmony to previously inconsistent case law on implied certification and materiality. Two recent circuit court decisions demonstrate this developing trend.
United States v. Sanford–Brown, Ltd., No. 14-2506, 2016 WL 6205746 (7th Cir. Oct. 24, 2016)
Consistent with its pre-Escobar implied certification decisions that rejected implied certification altogether, the Seventh Circuit recently applied a strict interpretation of Escobar. The relator in United States v. Sanford-Brown alleged that Sanford Brown College (SBC) made a false implied certification to the US Department of Education when it executed an agreement stating that it would comply with all applicable regulations. SBC won at the district court on the basis that SBC's contractual payment right was not conditioned on compliance with the regulations at issue. The Seventh Circuit affirmed, and the relator appealed to the Supreme Court. On July 27, 2016, the Supreme Court remanded to the Seventh Circuit for further proceedings in accordance with Escobar.
On remand, the Seventh Circuit held that the two-part Escobar test is necessary to establish implied certification liability and rejected the relator's allegation because it failed to meet either prong of the test. Further, the Court held that the relator failed to establish materiality because the relator did not present evidence that the government's payment decisions would have been different with accurate information. The Court held that it is not enough under Escobar to show merely that the government would have been entitled to decline payment.
The Seventh Circuit's interpretation of Escobar is encouraging for contractors because it places reasonable limits on the application of implied certification and materiality in a manner that is consistent with the Supreme Court's decision in Escobar.
United States ex rel. Miller v. Weston Educational, Inc., No. 14-1760, 2016 WL 6091099 (8th Cir. Oct. 19, 2016)
On the other hand, the Eighth Circuit recently applied a broad interpretation of Escobar's materiality holding in United States ex rel. Miller v. Weston Educational, Inc. The relators in Weston Educational alleged that now-defunct Heritage College (Heritage) violated the FCA based on alleged false promises to the US Department of Education to keep accurate student records related to financial aid funds, when Heritage allegedly had no intention to do so. The district court granted summary judgment to Heritage, finding that the relators failed to establish a causal link between the allegedly falsified records and receipt of any government funds, and that there was no evidence Heritage violated a material requirement.
On appeal, the Eighth Circuit concluded that Heritage's promise to keep accurate records was material to the government's payment of financial aid funds. Heritage appealed to the Supreme Court and, as in Sanford-Brown, its petition for certiorari was granted, vacating the Eighth Circuit's decision and remanding the case for further consideration in light of Escobar.
On remand, the Eighth Circuit reached the exact same conclusions it did prior to Escobar regarding materiality. Specifically, the Court's analysis of materiality was based solely on a finding that the government conditioned Heritage's participation in the financial aid program on compliance with the record keeping requirement. The Court gave short shrift to the actual or likely effect that Heritage's representations had on the government's behavior, instead looking to other cases to suggest Heritage's promises were material to the government. Further, while focusing on promises made when the agreement was signed, the Court ultimately concluded that those same promises were material to the government's later payment decisions, without ever actually citing any support that evidence of such a relationship existed.
Based on this opinion, it appears that the Supreme Court's robust discussion of materiality had no impact at all on the Eighth Circuit's analysis and consideration of materiality. The Eighth Circuit's decision is less than good news for contractors, indicating that some courts may not heed the Supreme Court's guidance to impose a more rigorous and demanding materiality standard going forward.
We will continue to monitor and report on this developing area of FCA law.
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