Analysis: Will Unclear Materiality Standard Embolden FCA Relators?

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By Daniel Seiden

July 21 — Justice Clarence Thomas' approach to False Claims Act (FCA) materiality in a recent ruling said it would clarify the requirement but instead added confusion that may encourage a spike in litigation.

A four-page portion of the opinion touched upon indicators of evidence of materiality — and what information doesn't necessarily demonstrate materiality — before ruling that the First Circuit relied upon an incorrect standard. The opinion's lack of concreteness, however, could be problematic for potential defendants.

This opinion leaves several questions open, Stephen J. Obermeier, a partner at Wiley Rein LLP, told Bloomberg BNA July 7.

“The court stressed that the materiality standard should be ‘demanding,' which should be very helpful for defendants,” he said, but because materiality is often a fact-intensive inquiry, “relators will likely have a better chance of surviving a motion to dismiss, increasing defendants’ incentive to settle or face costly litigation through summary judgment or even trial.”

He added that “by effectively shifting the focus in these cases to a materiality inquiry, the opinion likely made it easier for relators to survive motions to dismiss.”

David M. Nadler, a partner at Blank Rome LLP and chair of the firm's government contracts practice, agreed July 11, stating that the court's “adoption of a significantly more lenient materiality standard will enable more suits under the FCA and more cases to survive defendants’ motions to dismiss and summary judgment, given that the scienter requirements imposed by the court on the government and on contractors regarding payment decisions will generally raise disputed issues of fact that cannot be resolved without a trial.”

In Universal Health Servs. Inc. v. United States ex rel. Escobar, U.S., No. 15-7, 6/16/16 , the Supreme Court confirmed the viability of an implied certification claim but also said the First Circuit used an unreasonably broad test for determining whether a certification was material to the government's decision to pay a claim (105 FCR 543, 6/21/16).

Thomas found fault with the view providing that any statutory, regulatory or contractual violation is material so long as the defendant knows the government would be entitled to refuse payment if it knew of the violation.

Thomas said the court would “clarify how that materiality requirement should be enforced,” but the language he used left some potential litigants with more questions than answers.

What Materiality Probably Isn't

Something is material if has a “natural tendency to influence, or be capable of influencing, the payment or receipt of money or property,” according to Section 3739(b)(4).

The materiality standard is “demanding,” Thomas said.

But he followed this declaration by opaquely stating that a misrepresentation isn't material just because the government designates compliance with a requirement as a condition of payment.

Information is not necessarily material, he added, if the government would have the option to decline to pay if it knew of a defendant's noncompliance, nor could materiality be found where noncompliance is minor or insubstantial.

In sum, he said, the government's decision to expressly identify a provision as a condition of payment “is relevant, but not automatically dispositive.”

What Materiality Could Be

The vagueness continued as Thomas said “proof of materiality can include, but is not necessarily limited to” evidence that the defendant knows the government consistently refuses to pay certain claims based on the noncompliance with a particular requirement.

If the government pays a claim despite actual knowledge of a violated requirement, and has signaled no change in position, he said, “that is very strong evidence that those requirements are not material.”

Arguably, the clearest statement in the materiality discussion is that materiality can't be found with minor provision noncompliance. This isn't a significant revelation, however, and rest of what Thomas said dances around what materiality could be and what it probably isn't.

Thomas didn't have to set a four-element materiality test in stone to reverse and remand the First Circuit's approach, but the open-ended language in the materiality section could embolden more relators to take a shot at an FCA recovery.

Brian T. McLaughlin, a partner at Crowell & Moring LLP, said July 13 that this ruling “opens the door to all kinds of subjective and fact-intensive inquiries, from the defendant's knowledge that the government would consider the representation material to evidence of whether the government accepted or rejected similar claims in the past knowing of the noncompliance at issue, even with respect to other companies or programs.”

There likely will be “a rise in discovery on both sides as a result, and the lower courts will have to grapple with how extensive such discovery should be in a given case,” he said.

Narrower Definition Discarded

Nadler said the court has now approved a “subjective, and thus heavily fact-intensive, standard which asks whether the government would have paid the claim if it knew of the contractor’s noncompliance, and whether the contractor knew that the government would have refused to pay the claim had the information been disclosed.”

Moreover, the opinion “effectively discards years of cases by lower courts to more narrowly define the materiality requirements under the FCA,” Nadler added. “While the court referred to the standard as information which has a natural tendency to influence a payment decision, this far broader definition can sweep in conduct that may not have been actionable under prior cases.”

To contact the reporter on this story: Daniel Seiden in Washington at dseiden@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

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