False Claims Act and the Materiality Standard

Supreme Court Seeks Solicitor General’s Views on Certiorari for FCA Materiality Standard

FCA History

It comes as a surprise to many that the False Claims Act (FCA), 31 U.S.C. §§ 3729 – 3733, stretches back to the Civil War. Originally enacted in 1863 to combat fraud against the Union Army by suppliers, the FCA was not changed significantly until 1986, at which point double damages were increased to treble damages and penalties were raised from $2,000 to a maximum of $10,000. The statute lays out a basic definition of what constitutes a false claim: any person who knowingly submits a false claim to the government or causes another to submit a false claim to the government or knowingly makes a false record or statement to get a false claim paid by the government.

Publicly, FCA allegations are most often associated with the healthcare industry, especially with false Medicare claims. FCA claims can also include other sectors that involve a government contractor who knowingly submits false records. There are also “reverse false claims,” which occur when the government pays money for a service and then the receiving party uses false statements to retain more of the payment than they should.

FCA claims can be brought by private parties on behalf of the federal government in what are known as qui tam claims. The federal government can either agree to take the matter up and split the settlement with the relator who brought the action, or the government can decline to get involved. At this point, the relator can either drop the suit or continue with the suit on their own. If the government takes up the suit, then the relator will receive between 15 to 25 percent of the settlement, while if the government does not get involved, the relator will receive between 25 to 30 percent of the settlement if it is successful.

Escobar Materiality Standard

The last FCA case granted cert by the Supreme Court was Universal Health Services, Inc. v. Escobar in 2016. The Court upheld FCA claims under an “implied false certification” theory. This means that the false claim does not merely request payment, but also makes specific representations about the nature of the goods or services provided, and the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths. Escobar provides a clear example, a mental health facility submitted Medicaid claims knowing that their employees were not certified to the standards that were required for government compliance and reimbursement.

Escobar further gave rise to a strict materiality standard, which the Ninth Circuit sought to challenge in United States ex rel. Campie v. Gilead Sciences Inc. The Supreme Court described the materiality standard from Escobar as “rigorous and demanding.” The Court stated that a “misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision.” But the Court continued by clarifying that a “misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment.” The Court has asked the Solicitor general to file a brief on Gilead’s petition for writ of certiorari.

The Current Fight: United States v. Gilead

In Gilead, the FDA continued to pay for HIV drugs despite knowing that Gilead was manufacturing them in an unapproved foreign facility. The Ninth Circuit’s reasoning was that there could be any number of reasons why the FDA continued to pay for the violating drugs. This leads to the conclusion that the Supreme Court may have to wrestle with, which is that FCA claims can be brought based on FDA regulatory violations where the government has the option not to honor a claim based on noncompliance, rather than a ban on honoring the claim. This standard put forth by the Ninth Circuit questions the strict materiality standard gleamed from Escobar.

Do you know of a fraudulent scheme that is targeting the government or a privately held business? Or are you being accused of a similar scheme? Our RICO and Qui Tam attorneys can help guide you through the process of the False Claims Act and subsequent potential litigation. Contact our office today to schedule your free consultation.