I'm Kirsten Mayer, a litigation partner at Ropes & Gray. In this video, I'm going to provide an update on the False Claims Act three years after Escobar.
It's been three years since the Supreme Court decided Universal Health Services v. U.S. ex rel. Escobar, an important case addressing the scope and reach of the False Claims Act. It was the first time the Supreme Court had addressed the scope of liability under the False Claims Act in a very long time. Almost before the ink was dry on the decision however, the fight over what it means began. Three years out, that fight is still going strong. The False Claims Act, at its most basic, says you cannot submit a false or fraudulent claim for payment to the government. Escobar addressed the circumstances under which noncompliance with a legal requirement (a statute, regulation or contract term) may make a claim for payment submitted to the government actionable under the FCA.
In the first part of the Supreme Court's decision—which has received less attention than the second part—the Court addressed how that situation could lead to a false claim. The starting point is a specific representation in a claim for payment about the goods or services provided. Then, noncompliance with a legal requirement may be a problem if it is not disclosed and that omission makes the specific representation in the claim false or misleading. In the three years since Escobar, this part of the decision received less attention than the second part – but cases are being dismissed based on a failure to plead or prove that the undisclosed legal violation at issue made any statement in the claims false.
The second part of the Court's holding has been a focus of litigation over the past three years. Here, the Court held that that misrepresentation about compliance can be pursued under the False Claims Act only if it is "material" to the Government's payment decision. Materiality in this context is a rigorous and demanding standard, descended from common law principles. In explaining the standard, the Court identified certain things that are insufficient to demonstrate materiality – that the government designates compliance as a condition of payment, for example, or that the government would have the option to decline to pay if it knew of the noncompliance. The Court concluded by addressing the importance of ongoing government payment despite government knowledge of noncompliance to this analysis. So the challenge under the False Claims Act for companies and individuals who are subject to complex regulatory and statutory schemes or complex contractual requirements is, how can you tell whether a specific representation in a claim for payment implies compliance with a particular legal requirement – and if so, whether compliance is material to the government's decision to pay? How do you tell?
In the three years Since Escobar...
In the three years since Escobar, lower courts have grappled with what relators are required to plead and prove. A number of key areas remain in dispute. For example, what does the government's continued payment of claims—despite its knowledge of noncompliance with the legal requirement—mean for materiality? For Falsity? It is clear that this is important. A number of Circuits, including the D.C. Circuit, the Third Circuit, the Fifth Circuit and the Ninth Circuit have affirmed dismissal of complaints, and grants of summary judgment or post-trial relief for defendants because the government continued paying defendants, even after becoming aware of the alleged statutory, regulatory or contractual violations at issue. But relators have also survived motions to dismiss and for summary judgment, even in some of these same Circuits, by emphasizing other Escobar factors, and by arguing that whether the government knew about the legal violations and continued to pay is both a more complex question and less relevant than defendants maintain. While it would be helpful for the Supreme Court to resolve these disputes, so far the Court is allowing the law to develop in the lower courts, denying several petitions for certiorari raising a range of questions under Escobar.
Escobar is still only three years old. Because the standard it announced defines and constrains the reach of the False Claims Act, we expect to see the high-volume of litigation of these issues continue, and also rapid development of the law. Ultimately, these issues will likely need to be resolved by the Supreme Court. Until then, we are monitoring decisions closely to identify any consensus that may emerge.
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