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Oct. 7 — If the government knows about a contractor’s alleged noncompliance and continues to pay its invoices anyway, that should be enough to defeat False Claims Act (FCA) cases, defendants have been saying since the Supreme Court’s June ruling on implied certification claims.
The Supreme Court said successful claims must satisfy a rigorous and demanding materiality standard, meaning the claims allege noncompliance with a certain requirement was nontrivial.
Justice Clarence Thomas’ four-page materiality discussion in Universal Health Servs. Inc. v. United States ex rel. Escobar (U.S., No. 15-7, 6/16/16) arguably raised more questions about materiality than answers ( 106 FCR 89, 7/26/16 ).
However, recent filings suggest that defendants believe they can defeat implied certification cases by saying there’s no materiality if the government knew about unsatisfactory performance but paid anyway.
Universal Health provided that proof of materiality can include — but is not necessarily limited to — evidence that a defendant knows the government consistently refuses to pay certain claims based on noncompliance with a particular statutory, regulatory or contractual requirement.
If the government pays a claim despite actual knowledge of a violated requirement, and has signaled no change in position, Justice Thomas said, “that is very strong evidence that those requirements are not material.”
Prior to Universal Health, some courts said it was improper to look at whether the government continued to pay despite falsity, while other courts said the government’s reaction is relevant, Robert S. Salcido, a partner at Akin Gump Strauss Hauer & Feld LLP in Washington, told Bloomberg BNA.
“It appears that the Supreme Court clearly sided with the viewpoint that it is very relevant to determine what the government typically does when it learns of the purported ‘falsity,’ meaning whether it denies payment or elects some other lesser remedy which would not result in an FCA violation,” he said.
Since Universal Health, several defendants have told courts that cases against them must fail because alleged noncompliance wasn’t serious enough to alter government behavior:
If a defendant can show that the government made payments on the particular claims at issue or has a track record of making payments or awarding contracts despite knowledge of noncompliance, “this would seem to be exactly the sort of ‘very strong evidence’ on the issue of materiality” the Supreme Court contemplated, Matt Curley, a member at Bass, Berry & Sims PLC in Nashville, Tenn., told Bloomberg BNA.
Under these circumstances, he said, “it would be very difficult for the government or a relator to establish that a violation was material when there is evidence that the violation did not previously deter the government from paying claims.”
Few courts have addressed materiality since Universal Health, Curley wrote in an e-mail, but “defendants are already seizing on it as one of the key ways to defeat alleged FCA violations based on allegations of non-compliance with regulatory requirements or contractual obligations.”
This line of attack might appear promising for defendants, but their path to victory remains uncertain.
Universal Health didn’t provide a one-size-fits-all rule on how to adjudicate materiality when the government makes payments notwithstanding knowledge of some arguable contractual or regulatory violations, said Barbara Taylor, special counsel in the government contracts practice group at Sheppard Mullin Richter & Hampton LLP in Los Angeles.
That factor is relevant to — not necessarily dispositive of — materiality, she said.
“We are already seeing that district courts will not uniformly find payment or contract awards coupled with government knowledge sufficient to negate materiality. This is consistent with prior case law stating that government knowledge is not a complete defense with respect to the element of falsity,” Taylor said.
She referred to United States ex rel. Hagood v. Sonoma County Water Agency , 9th Cir., Nos. 89-16290, 89-16360, 1991 , in which the Ninth Circuit said the requisite intent needed for an FCA claim is knowing presentation of what is known to be false, and that government knowledge of falsity is not itself a defense.
“Nevertheless, these facts would be highly relevant and favorable for a defendant,” Taylor added. “Not just to the materiality analysis, but also with respect to the element of scienter.”
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