Just before the July 4 holiday, the Ninth Circuit easily affirmed summary judgment for technology and manufacturing company Honeywell in yet another False Claims Act case that turned in large part on application of the "demanding" materiality standard articulated by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar.1 Here, in United States ex rel. Berg v. Honeywell Int'l, Inc., No. 17-35083, 2018 WL 3237518 (9th Cir. July 3, 2018), Honeywell had an Energy Savings Performance Contract to overhaul the energy production systems at Fort Richardson and Fort Wainwright in Alaska. This included installing energy efficient lighting and converting certain buildings from central heating to commercial natural gas and electricity. The whistleblowers alleged that Honeywell made false statements regarding its energy savings calculations and fraudulently induced the Army to enter into the contract, thus rendering Honeywell's claims for payment false.
Continued Government Payment Points to Immateriality
The key ruling in this case relates to the materiality element of FCA liability. The Ninth Circuit acknowledged the requirement that a misrepresentation "must be material to the Government's payment decision in order to be actionable under the False Claims Act," citing Escobar.2 In Escobar, the Supreme Court found that "if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material." 3 In Honeywell, the Army paid Honeywell's claims from 2003 to 2008, despite being aware of relators' fraud allegations since 2002 and having conducted its own audit in 2003. 4 Given this history and relators' failure to present evidence on materiality to the contrary to create a triable issue of fact, the Ninth Circuit found that the relators' claim failed under the "demanding" materiality requirement of Escobar.5
The Honeywell ruling contrasts with the Ninth Circuit's recent ruling in United States ex rel. Campie v. Gilead Sciences, Inc. where relators allege that Gilead made false claims for reimbursement from Medicare, Medicaid, and other federal health care programs by falsely billing for drugs as FDA-approved when they did not meet FDA standards. 6 In that case, the defendant contended that because the government continued to pay after it knew of violations and because the FDA did not revoke its approval, those violations were not material to the payment decision. But in what the defense bar views as a departure from Escobar, the Ninth Circuit found that "to read too much into FDA's continued approval - and its effect on the government's payment decision - would be a mistake." 7 The court noted that there might be many reasons for the agency not to have withdrawn its approval of payments, unrelated to the concern over paying out billions of dollars for nonconforming and adulterated drugs. Also, the Campie defendant ultimately stopped using the non-compliant drugs, so the agency's decision to keep paying did not have the same significance "as if the government continued to pay despite continued noncompliance." 8
Thus the Honeywell case represents a shift back towards the "rigorous" and "demanding" materiality standard set by the Supreme Court in Escobar and away from the Ninth Circuit's own recent precedent in Campie. Notably, the Honeywell decision is unpublished, hinting that the Ninth Circuit may be making a one-time distinction and remains deferential to its decision in Gilead. Gilead currently has a pending petition for certiorari to the Supreme Court, so it also may be that the Ninth Circuit is waiting to see how the Court will rule in that case.
Falsity Requires a Lie
As to falsity, the relators argued that Honeywell's statements regarding its purported energy savings were objectively false because the estimates were incorrectly calculated under the statutory and regulatory framework that governs Energy Savings Performance Contracts. Honeywell, however, had disclosed the assumptions and math underlying its energy savings estimates, which the court said rendered its estimates not false. This is because falsity under the FCA does not mean "incorrect as a matter of proper accounting methods" and instead requires "a lie." 9 Quoting Escobar, the court reiterated that the FCA is not a "vehicle for punishing garden-variety breaches of contract or regulatory violations," and the Army's failure to reject the company's proposals does not mean the company's calculations were false. 10
What This Means For You
Going forward, this albeit unpublished decision joins the chorus of cases in which continued payment by the Government constitutes a defense to the "materiality" element of FCA liability, a question that seemed laid to rest in Escobar, but could be revisited should the Court grant cert in Campie. The Honeywell case also demonstrates that contractor transparency in its calculations can provide a defense to FCA allegations. Even if errors are found in a contractor's calculations and assumptions, disclosing those calculations to the Government can potentially negate the falsity element of FCA liability. Following this ruling, we will monitor Gilead's petition to the Supreme Court, which, if accepted, could have significant implications on materiality issues moving forward.
Footnotes
1 136 S. Ct. 1989 (2016).
2 United States ex rel. Berg v. Honeywell Int'l, Inc., No. 17-35083, 2018 WL 3237518, at *2 (9th Cir. July 3, 2018).
3 Escobar, 136 S. Ct. at 1995.
4 United States ex rel. Berg v. Honeywell Int'l, Inc., No. 17-35083, 2018 WL 3237518, at *2 (9th Cir. July 3, 2018).
5 Escobar, 136 S. Ct. at 1995 (2016).
6 862 F.3d 890 (9th Cir. 2017), petition for cert. filed (U.S. Jan. 3, 2018) (No. 17-936).
7 Id.
8 Id.
9 United States ex rel. Berg v. Honeywell Int'l, Inc., No. 17-35083, 2018 WL 3237518, at *1 (9th Cir. July 3, 2018).
10 Id. at *2.
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