Vtel

Mar 17, 2023

To embed, copy and paste the code into your website or blog: <iframe frameborder="1" height="620" scrolling="auto" src="//www.jdsupra.com/post/contentViewerEmbed.aspx?fid=bbb0aa46-752f-43b9-a53b-08f8b2776806" style="border: 2px solid #ccc; overflow-x:hidden !important; overflow:hidden;" width="100%"></iframe> The Supreme Court’s 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar resolved a Circuit split regarding the implied certification theory as a basis for False Claims Act (FCA) liability. While the Court held that the implied certification theory can form the basis for liability, it defined the FCA’s materiality requirement as a “rigorous” and “demanding” one, opening the door to a range of new issues for litigation intended to distinguish mere non-compliance from fraud or reckless submission of false claims. 1 Courts have since grappled with Escobar’s emphasis that a misrepresentation about compliance with statutory, regulatory, or contractual requirements must be material to the government’s payment decision in order for an implied certification theory of liability to lie. While the Court in Escobar suggested that district courts could apply the “rigorous” standard at the pleading stage on motions to dismiss, and several district courts have attempted to do so, few appellant panels have agreed. 2 A few recent cases, discussed below, show how most courts view materiality to be a fact-intensive, case-by-case inquiry not well suited to resolution on motion to dismiss. Ninth and Tenth Circuits apply rigorous Escobar materiality standard Ninth Circuit affirms dismissal, enforcing materiality pleading requirements Relators in McElligott v. McKesson Corp. alleged that McKesson made false certifications in violation of the FCA, claiming that McKesson violated Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970 (CSA) because it failed to adopt adequate security protocols to prevent the diversion of Schedule II opioids from its sites. 3 Relying on an implied certification theory, the relators’ FCA claim depended on McKesson’s failure to disclose its CSA violations to the U.S. government when submitting claims for payment. 4 The relators argued that McKesson’s CSA violations were material to the government’s payment of claims because the government would not pay claims to a facility that is not eligible to register as a distributor of controlled substances under 20 C.F.R. 1301.71. 5 The district court disagreed. Citing Escobar, the court found that the relators failed to plead materiality because “a misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment.” 6 In short, the court found that claims that necessarily misrepresent compliance do not suffice to meet the materiality standard set out in Escobar. Rather, in order to meet the standard, the relators must have first established that McKesson failed to meet registration requirements, a determination that rests with the Drug Enforcement Agency. 7 The court also held that the relators failed to identify specific representations made in connection with the claims. 8 The Ninth Circuit affirmed, 9 finding that “nothing in the complaint gives rise to a reasonable inference that the security of McKesson’s supply chain was material to the government’s decision to pay for medical supplies that McKesson actually delivered.” 10 While the complaint alleged that the contract required McKesson to “obey all laws,” it did not adequately allege that compliance with this provision was a condition of payment. 11 Tenth Circuit holds similarly, emphasizing the rigorous materiality element The Tenth Circuit similarly upheld dismissal of a qui tam complaint that alleged false certifications of compliance. 12 In United States ex rel. Sorenson v. Wadsworth Brothers Construction Company, Inc., Salt Lake International Airport contracted with Wadsworth Brothers Construction Company (Wadsworth) to construct a deicing pad. 13 The contract stipulated that employees must be paid in compliance with the Davis-Bacon Act, which requires contractors on most federally-funded building projects to pay employees no less than the Department of Labor’s determination of prevailing wages for similar work in the area. 14 The relator believed that Wadsworth paid him lower wages than required under the Davis-Bacon Act. 15 Claiming that “certification to the United States of compliance with the Davis-Bacon Act was a prerequisite to Wadsworth’s payment under the construction contract,” the relator alleged that Wadsworth falsely certified compliance with the Act and received money from the federal government to which it was not entitled. 16 The district court granted Wadsworth’s motion to dismiss for failure to state a claim. 17 The Tenth Circuit affirmed. 18 The Court found that the complaint failed Escobar’s “demanding” materiality standard, “asserting a naked violation ... bereft of details.” 19 The Tenth Circuit emphasized that the FCA is not “simply some ‘all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations,” 20 nor is the law “an appropriate vehicle for policing technical compliance with administrative regulations.” 21 Rather, its purpose is to address large-scale frauds. D.C. Circuit relies on pre-Escobar case law to hold that analysis “focuses on the potential effect” of the false statement when it is made Relying on pre-Escobar opinions, the D.C. Circuit’s approach in a recent qui tam case veered from the post-Escobar analyses of other courts. In United States ex rel. Vermont National Telephone Co. v. Northstar Wireless, LLC, the Court held that the FCA’s materiality inquiry “focuses on the potential effect of the false statement when it is made,” rather than “the false statement’s actual effect after it is discovered.” 22 While that statement standing alone would seem uncontroversial, given the facts alleged and parallel litigation of which the district court had taken judicial notice, the question that remains in Vermont National is whether, under Escobar, courts are permitted to ignore agency action that prevents the alleged fraud from occurring. In an auction for spectrum licenses, the Federal Communications Commission (FCC) offered bidding credits to “very small businesses” (VSB), entitling them to discounts on their winning bids. 23 Defendants Northstar Wireless, LLC (Northstar) and SNR Wireless LicenseCo, LLC (SNR) submitted short-form applications to participate as VSBs and disclosed that they acquired the capital to participate in the auction from DISH Network. 24 Defendants won 43.5 percent of the licenses offered at auction, believing they were entitled under standards the agency had applied in prior auctions to discount the price of their winning bids from US$13.3 billion to about US$10 billion. 25 After defendants submitted long-form applications for the licenses, including all written agreements between DISH and each of them, the FCC found that Northstar and SNR were not eligible to receive the discounts they sought because they were “de facto controlled by DISH.” 26 Competitor Vermont National Telephone Company (VTel) filed a qui tam suit alleging that Northstar, SNR, and DISH violated the FCA by falsely certifying their eligibility to secure bidding credits, defrauding the government the difference of the discount (US$3.3 billion). 27 VTel argued that SNR and Northstar failed to disclose resale agreements with DISH, which would have increased their attributable revenues beyond the US$15 million eligibility cap for “very small business” credits. 28 Relying in part on the “demanding” materiality standard established in Escobar, the district court dismissed the suit after concluding that VTel failed to sufficiently plead the materiality of the false certifications to the FCC’s decision, which in that case had already been to deny each of the discounts. 29 VTel appealed, and the D.C. Circuit reversed. While defendants cited Escobar in urging the Court to focus on the FCC’s ultimate decision that defendants were ineligible, the appellate panel held that the defendants’ failure to disclose resale agreements with DISH was “certainly capable of influencing” the FCC’s decision. 30 The panel’s statement in VTel seems to be at odds with the Supreme Court’s sentiment in Escobar that under the “rigorous” and “demanding” standards of Rule 9(b) and the FCA, actual agency action matters when a court assesses whether a relator’s claims are well pleaded. 31 By the time VTel began litigating its qui tam claim, the FCC had already found reason to deny the benefit the relator alleged the defendants sought to obtain by fraud. As the district court recognized, the materiality question was no longer an abstract question of whether disclosure of an additional fact, even if true, was “capable of influencing” a decision; the question was whether the FCA provides a remedy when the facts allegedly withheld would not have changed the agency decision, when the complaint alleged government had not fallen victim to a fraud. Looking ahead As the materiality highlights of 2022 demonstrate, materiality is not proving to serve the analytical gate-keeping function that the Supreme Court predicted it could in Escobar. Few if any cases stay dismissed on the basis of failure to meet the “rigorous” and “demanding” standards the Escobar court point to. Nevertheless, the Court has placed materiality squarely at the heart of any analysis of potential liability under the FCA for false implied certifications, and that analysis plays out every day in settlement negotiations with the government and in discovery, summary judgment motions and trials in qui tam litigation. References