FCA Materiality: It’s One thing to Proclaim but It’s Another Thing to Prove
In United States, et al., ex rel. Ruckh v. Salus Rehabilitation, LLC, et al., Case No. 8:11-cv-1303-T-23TBM (M.D. Fl. Jan. 11, 2018), a federal district court judge offered a thoughtful, cogent analysis of both the letter and spirit of the Supreme Court’s decision in Universal Health Services, Inc. v. Escobar, 136 S. Ct. 1989 (2016) to reverse a jury’s $350 million verdict in favor of the United States and Florida (as well as the relator). The decision provides valuable guidance concerning how the Escobar holding should be applied to analyzing the actual evidence established under a False Claims Act (“FCA”) case, as distinguished from mere allegations. The lesson is that while Escobar will undoubtedly affect the standard of pleading required in motions to dismiss, its greater potential impact is on motions for summary judgment, where mere allegations without substantiating evidence will be insufficient to survive dismissal.
In Ruckh, the relator alleged the defendant owners and operators of specialized nursing facilities violated the FCA by submitting implied false statements in support of false claims by (1) failing to maintain comprehensive care plans as required by Medicaid and (2) upcoding RUG levels. Ruckh, at 1-2. The court, applying Escobar’s holding and reasoning, set aside the jury verdict holding that relator “offered no meaningful and competent proof” that the responsible government agencies would have regarded the disputed practices as material to their payment decision, nor evidence that defendants knew or should have known the governments would have refused to pay the claims if they had known of the practices. Id. at 2. Importantly, the court added that both the United States and Florida have, in fact, continued to pay defendants despite the ongoing litigation:
In fact, both governments were — and are — aware of the defendants’ disputed practices, aware of this action, aware of the allegations, aware of the evidence, and aware of the judgments for the relator — but neither government has ceased to pay or even threatened to stop paying the defendants for the services provided to patients throughout Florida continuously since long before this action began in 2011.
Id. at 2.
The court’s decision carefully traced the Supreme Court’s analysis of the FCA statutory text to hold that a defendant’s misrepresentation or false omission supports liability only if “material to the other party’s course of action.” Id. at 6 (quoting Escobar, 136 S. Ct. at 2001). Conversely, the court pointed out that Escobar’s “rigorous” and “demanding” materiality and scienter requirements preclude FCA liability “based on a ‘minor or unsubstantial’ or a ‘garden variety’ breach of contract or regulatory violation.” Id. at 7 (quoting Escobar, 136 S. Ct. at 2003). FCA liability “rests comfortably on proven and successful principles of exchange – fair value given for fair value received.” Id. at 8. The court noted the unfairness of a system that imposes “essentially punitive” consequences of FCA’s liability. Liability “requires proof that a vendor committed some non-compliance that resulted in a material deviation in the value received and requires proof that the deviation would materially and adversely affect the buyer’s willingness to pay.” Id. at 8-9.
Put plainly, “Escobar rejects a system of government traps, zaps, and zingers that permits the government to retain the benefit of a substantially conforming good or service but to recover the price entirely — multiplied by three — because of some immaterial contractual or regulatory non-compliance.” Id. at 8. Adding force to this view, the court noted the FCA is not the only remedy available to the government for a contractor’s non-compliance. The government has alternative and more measured remedies, including providing notice of the deficiency and demanding a cure, administrative remedies, or a price adjustment, and proving materiality may require showing that the government would not have chosen one of those more measured remedies. See id. at 12-13. The opinion also recognized there may be numerous and legitimate reasons the government might choose to pay deficient claims, such as the impact on program beneficiaries or the government’s needs. For example, the government might understandably elect not to withhold payment for mission-critical goods or services. In Ruckh, the defendants provided care to vulnerable, elderly nursing home patients. The decision reinforces the principle established in Escobar that FCA liability cannot be premised on mere allegations or post-payment rationalizations. Rather, liability depends on proof of the parties’ agreement, their conduct, and knowledge.
The opinion also illustrates Escobar’s likely effect on FCA litigation and summary judgment. Although Escobar does raise the bar for pleading materiality, it is a bar that the government and relators will likely be able to clear in most cases. From there, however, their evidentiary climb becomes much steeper. First, claims at issue will have been paid long before litigation is commenced, often years before. Thus, the material facts are set and the government will have little meaningful ability to shape (or reshape) them. Second, the nature of agency regulation, practice, and decision-making is characteristically (although not invariably) more flexible than civil or criminal enforcement, and agency decision-makers often have greater discretion over how to address vendor non-compliance. In fact, agency officials are generally expected and required to consider programmatic needs when deciding the appropriate response to non-conforming goods, services, or regulatory paperwork. Proving that the administering agency has elected not to deny payment in favor of a more measured remedy may be a decisive defense. Third, among agency contractors, some agencies are notorious for giving little, none, or vague guidance concerning what they expect from contractors in terms of regulatory compliance or how the agency will respond to non-compliance. (Indeed, it is the dearth of agency guidance that has spawned an entire industry of compliance consultants.) This reality of agency practice will likely make it difficult for the government to show a contractor knew or should have known a particular non-compliance would be material to the agency’s decision to pay. Fourth, defendants’ employees will often be well-versed in the range of responses the regulatory agency makes to instances of non-compliance. If an agency routinely pays a particular deficient claim, a contractor would reasonably expect that deficiency was immaterial.
Through our blog, we have been following the evolution of materiality and knowledge in FCA jurisprudence post-Escobar. The Ruckh opinion adds weight to our view that for FCA defendants, Escobar may prove to be the light at the end of the tunnel because it underscores the oft-repeated aphorism, “[i]t is one thing to proclaim but another thing to prove.” By aligning proof of FCA liability with the reality of agency practice and decision-making, Escobar rebalances FCA jurisprudence to prevent will-intentioned companies from being subjected to the FCA’s draconian penalties based on technical, regulatory non-compliances or post hoc rationalizing.