A Civil War-era statute may become increasingly utilized in the wake of COVID-19. While the government and private plaintiffs have long relied on the False Claims Act (“FCA”), filings often spike after times of crisis and concomitant federal spending.
The post-COVID-19 environment appears ripe for FCA activity. The $2 trillion Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) has already increased the number of requests for payment or reimbursement from the government, often with requestors having certified compliance with regulations or other “strings” attached to the receipt of government funds. Additionally, the large number of laid-off or furloughed workers provides a large pool of potential whistleblowers to bring claims under the FCA or other statutes.
Two recent developments in FCA practice may prove significant in the coming months: the development of the “materiality” standard following the Supreme Court’s 2016 decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar and guidance from the DOJ as to what types of agency guidance the Department can use to show a claim was knowingly false.
Although there are a number of different potential theories of FCA liability, at its core, the statute imposes civil liability for making a material “false claim” for payment to the federal government.
FCA claims can be brought by the DOJ or by a whistleblower (also known as a “relator”). When initiated by a whistleblower, the complaint is initially served on the government but sealed from the defendant for a minimum of 60-days as the DOJ investigates and decides whether it will “intervene” to take the action over from the relator. Where the DOJ declines to intervene, relators can continue to pursue the case solo entitling them to a greater portion of the treble damages permitted by the statute if successful. The DOJ can also seek dismissal of the whistleblower’s case.
Post-Escobar materiality developments
In Escobar, two parents claimed that the mental health facility where their daughter had received treatment violated the FCA by submitting Medicaid payment requests, even though certain practitioners at the facility were not properly licensed. The parents’ theory was that each time the facility made a payment request, it was impliedly certifying its compliance with all conditions of payment—particularly that medical providers were licensed and supervised.
In unanimously reversing the lower courts’ dismissal of the case, the Supreme Court reached two holdings. First, it endorsed the “implied false certification” theory of FCA liability where “liability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement.”
However, second, the Court reiterated that the materiality element of FCA claims is a “demanding” standard, and that merely failing to comply with a condition of payment does not automatically render a false claim material. This is particularly significant, because it is applicable to all kinds of FCA claims, not just those brought under an implied false certification theory.
The Escobar Court clarified that, like materiality in other contexts, FCA materiality “looks to the effect” of a statement “on the likely or actual behavior” of the listener—in the FCA context, the government. For example, if the government “consistently refuses” to pay a claim because of non-compliance with a condition, the false statement connected to that condition is more likely to be material.
Since Escobar, lower courts have reached varying results on the relevance of a non-compliance with an explicit payment condition.
- On remand, the First Circuit in Escobar itself declined to require relators to plead facts regarding the government’s past payment practices (despite the Supreme Court suggesting that would be relevant), reasoning that a relator would not be able to access such information at the dismissal stage, particularly in the healthcare industry.
- The Sixth Circuit held that pleading that an express condition is material was sufficient to survive dismissal.Where the government makes payment without knowledge of non-compliance, the government’s payment decision is irrelevant to materiality and no related facts need to be pleaded.
- The Fifth Circuit overturned a $600 million jury verdict, holding that a condition of payment is immaterial where the government maintains it was not defrauded and unrebutted evidence shows the government paid the claims with full knowledge of non-compliance.
- The Ninth Circuit held that questions concerning whether the government paid claims despite “actual knowledge” of non-compliance were “matters of proof, not legal grounds to dismiss relators’ complaint.”
- The Ninth Circuit also held that non-compliance with administrative rules was not immaterial as a matter of law, even though the government regularly paid claims that did not comply with the rule. The court noted there was also evidence that the government required non-complying claimants to take at least some corrective measures if they did not comply.
Thus, despite Escobar’s statement about the “demanding” nature of the materiality inquiry, courts have shown at least some willingness to allow plaintiffs leeway, particularly at the motion to dismiss stage. For defendants, it is critical to build a discovery plan that maximizes the chances of prevailing on the materiality issue at summary judgment.
FCA Enforcement Under the DOJ’s Recent Policy on Agency Guidance
An important related issue is what federal rules and regulations can form the basis of a false claim.
In January 2018, then-Associate Attorney General Rachel Brand issued a memorandum (the “Brand Memo”) directing that federal agency guidance not subject to notice-and-comment rulemaking “cannot create binding requirements that do not already exist by statute or regulation.”
The principles of the Brand Memo were then incorporated into a 2018 update to the Justice Manual, the DOJ’s official policy publication. The Justice Manual now states that enforcement actions it brings “must be based on violations of applicable legal requirements, not mere noncompliance with guidance documents issued by federal agencies, because guidance documents cannot by themselves create binding requirements that do not already exist by statute or regulation.”
There are, however, certain exceptions, such as that the DOJ may use evidence that a party read agency guidance to prove that the party had “the requisite scienter, notice, or knowledge of the law.”
This exception is potentially significant because, although “the FCA does not reach an innocent, good-faith mistake about the meaning of an applicable rule or regulation,” the scienter element may be satisfied if there is “sufficient evidence of government guidance that ‘warn[ed] a regulated defendant away from an otherwise reasonable interpretation’ of an ambiguous regulation.” For example, one district court denied a motion to dismiss because the defendant had “fair warning,” via an agency’s handbook, that it could not seek specific property valuations from appraisers in order to confirm its eligibility for government insurance.
Other examples of permissible uses of guidance include: (1) “as probative evidence that a party has satisfied, or failed to satisfy, professional or industry standards or practices relating to applicable statutory or regulatory requirements”; and (2) when a party’s compliance with guidance is itself relevant to particular claims in a case, such as when a company “falsely certifies compliance with a guidance document.”
Escobar’s materiality holding and the recent DOJ Guidance are likely to be particularly relevant in the post-COVID-19 FCA environment. For example, the CARES Act’s Paycheck Protection Program requires borrowers to make a number of different certifications. At the same time, the Small Business Administration has attempted to clarify certain requirements surrounding these certifications through an FAQ document.
Under Escobar, mere non-compliance with one of these certification requirements is unlikely, without something more, to make a claim material, but courts may be willing to find such an allegation sufficient to get past a motion to dismiss.
And what of the FAQ guidance? Under the Justice Manual, “mere non-compliance” with the FAQ guidance is not a basis for a violation of the FCA. While that will not stop private plaintiffs from bringing claims based on those violations, the DOJ will likely decline to intervene in such cases, or even seek to dismiss them. At the same time, however, both private plaintiffs and the government may seek to use FAQs or similar guidance documents as the “something more” to show non-compliance with a certification requirement was material to the government.
 See DOJ Civil Division Fraud Statistics, https://www.justice.gov/opa/press-release/file/1233201/download.
 See 31 U.S.C. § 3729(a).
 See 31 U.S.C. § 3730(a)-(b).
 See 31 U.S.C. § 3730(b)(2).
 See id.
 See 31 U.S.C. § 3730(c)(2)(A).
 The government declined to intervene in the case at the trial court. Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016).
 Id. at 1995 (emphasis added).
 Id. at 2002.
 Id. at 2003.
 U.S. ex rel. Escobar v. Universal Health Servs., 842 F.3d 103, 112 (1st Cir. 2016).
 U.S. v. Brookdale Senior Living Communities, Inc., 892 F.3d 822, 837 (6th Cir. 2018).
 U.S. ex rel. Harman v. Trinity Indus. Inc., 872 F.3d 645, 667-69 (5th Cir. 2017).
 U.S. ex rel. Campie v. Gilead Scis., Inc., 862 F.3d 890, 907 (9th Cir. 2017).
 U.S. ex rel. Rose v. Stephens Inst., 909 F.3d 1012, 1021-22 (9th Cir. 2018).
 See DOJ Memorandum, https://www.justice.gov/opa/press-release/file/1028756/download.
 See Justice Manual, https://www.justice.gov/jm/1-20000-limitation-use-guidance-documents-litigation#1-20.100.
 U.S. ex rel. Purcell v. MWI Corp., 807 F.3d 281, 287 (D.C. Cir. 2015).
 See U.S. ex rel. Donegan v. Anesthesia Assocs. of Kansas City, PC, 833 F.3d 874, 879-80 (8th Cir. 2016) (citing Purcell, 807 F.3d at 290).
 U.S. v. Quicken Loans Inc., 239 F. Supp. 3d 1014, 1019, 1028-29 (E.D. Mich. 2017).
 See PPP Changes Trip Up Small Businesses, Wall Street Journal (May 12, 2020), https://www.wsj.com/articles/paycheck-protection-program-changes-trip-up-small-businesses-11589288403.
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