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Materiality Part III: It Is Not Enough That The Government Could Refuse Payment—The Question Is Whether The Government Would Refuse Payment

In Part II of our series, we discussed government knowledge. When the government knows of a claim’s falsity, but nevertheless pays the claim, the falsity of the claim is not material to the government’s decision to pay. In other words, the falsity of the claim must not matter to the government and, consequently, there can be no liability under the implied certification theory.

But what about the situation in which the government could have refused payment, but did not have actual knowledge relating to the claim’s alleged falsity? Could the fact that the government retains the option to refuse payment be sufficient to establish materiality? Escobar says no. In so holding, Escobar rejected the Government’s and First Circuit’s pre-Escobar view of materiality (that any statutory, regulatory, or contractual violation is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation).

Under Escobar, to establish materiality, it is not enough that the government could have refused payment. Rather, the operative question is whether the government would have refused payment had it known of the alleged violation of a statute, regulation, or contractual provision.

In the Escobar decision itself, the Court described this principle in a paragraph beginning with: “The materiality standard is demanding. The False Claims Act is not ‘an all-purpose anti-fraud statute, or a vehicle for punishing garden-variety breaches of contract or regulatory violations.” Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2003 (2016) (quoting Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 672 (2008)). The court went on to say in plain and unambiguous terms that it is not “sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance.” Escobar, 136 S. Ct. at 2003.

This principle has been recognized and applied in several cases. For example:

  • United States ex rel. Petratos v. Genentech Inc., 855 F.3d 481, 490 (3d Cir. 2017) (“Petratos does not claim that Genentech’s safety-related reporting violated any statute or regulation. He acknowledges that the FDA would not “have acted differently had Genentech told the truth.” And as we have explained, he does not dispute that CMS would reimburse these claims even with full knowledge of the alleged reporting deficiencies.”).

  • United States v. Sanford-Brown, Ltd., 840 F.3d 445 (7th Cir. 2016) (“At bottom, even assuming Nelson’s allegations are true, the most he has shown is that SBC’s supposed noncompliance and misrepresentations would have entitled the government to decline payment. Under Universal Health, that is not enough.”).

  • United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325 (9th Cir. 2017) (“Evidence that the government ‘would be entitled to refuse payment were it aware of the violation’ is insufficient by itself to support a finding that the violation is material to the government’s payment decision.”).

  • United States ex rel. McBride v. Halliburton Co., 848 F.3d 1027 (D.C. Cir. 2017) (“Nevertheless, McBride persists, claiming as “dispositive” an Administrative Contracting Officer’s (ACO) statement in a declaration that he “might” have investigated further had he known false headcounts were being maintained, and that such an investigation “might” have resulted in some charged costs being disallowed. The ACO’s speculative statement could be true of the maintenance of any kind of false data; it tells us nothing special about headcounts.”).

  • United States v. DynCorp Int’l, LLC, 2017 WL 2222911 (D.D.C. May 19, 2017) (“The fact that ‘the Government would have the option to decline to pay’ is relevant but not sufficient to find materiality. Therefore, the FAR’s provision for contracting officers to refuse to pay unreasonable costs is one indication that unreasonableness may be material to some claims, but it does not automatically render unreasonableness material in every instance.”).

The takeaway from this aspect of Escobar is that discovery obtained from the government will be key to establishing or defeating materiality in implied certification cases. For example, deposition testimony of government officials or other record evidence will be needed to show that the government would (or would not) have acted differently regardless of whether the defendant actually violated a statutory, regulatory, or contractual requirement. Following Escobar, such evidence has taken on a new level of importance and will continue to do so in future litigation.

Part 1 here.

Part 2 here.


Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume VIII, Number 106

About this Author

Matthew Turetzky, Government Contracts, Sheppard Mullin, Law firm

Matthew Turetzky is an associate in the Government Contracts, Investigations and International Trade Practice Group in the firm's Washington, D.C. office.

Matthew's practice focuses on False Claims Act litigation in federal district and appellate courts, government contractor-specific litigation and counseling, and bid protests before the Government Accountability Office and Court of Federal Claims. Matthew also assists with other government contracts and complex civil litigation matters.