Materiality Part IV: Labels Matter, But Not As Much As They Used To
Before Escobar, some courts held that implied certification cases could survive a motion to dismiss only if the statute, regulation, or contractual provision that was allegedly violated was a “condition of payment,” as opposed to a “condition of participation.” The idea was that payments to contractors in connection with government programs (e.g., Medicare) were conditioned on compliance with conditions of payment, but not conditions of participation. Under this line of reasoning, there could be no liability under an implied certification theory for violations of conditions of participation, but violations of conditions of payment could result in False Claims Act liability under the implied certification theory.
Escobar eliminated the conditions of payment versus conditions of participation distinction, but conceded that the labels used to describe a statutory, regulatory, or contractual requirement were still relevant of materiality. The Court noted that “forcing the government to expressly designate a provision as a condition of payment would create . . . arbitrariness” because “misrepresenting compliance with a requirement that the Government expressly identified as a condition of payment could expose a defendant to liability. Yet . . . misrepresenting compliance with a condition of eligibility to even participate in a federal program . . . would not.” The Court conceded “[w]hether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.”
Petratos provides a good example of how post-Escobar courts deal with the labels used by a statute, regulation, or contractual provision. In Petratos, the court observed that section 1395y of the Social Security Act is one such express condition of payment, but nevertheless held that “[t]he mere fact that § 1395y is a condition of payment, without more, does not establish materiality.” The Petratos court found compliance with that statute not material to the government’s decision to pay based on the facts in that case.
Another case, Brown, reached a different result than that reached in Petratos. There, the labels used were Medicare regulations that stated Medicare Part D may reimburse only “covered part D drugs,” which must be “used for a medically accepted indication.” The court explained that although this language, which rendered a medically accepted indication “an explicit condition of payment under the program,” was not “automatically dispositive,” it was nevertheless “highly ‘relevant.’”
These holdings are significant because they demonstrate that what really matters in the post-Escobar world is only whether the violation was material to the government’s decision to pay, not the labels used by a statute, regulation, or contract. That a statute, regulation, or contractual provision renders compliance a “condition of payment” is certainly relevant to whether the government would pay a particular claim, but the above decisions demonstrate the label is not dispositive in light of evidence showing that the government agency pays claims despite the “condition of payment” label and despite its knowledge that a violation likely occurred. This represents a significant movement away from per se rules about what labels are used to a common sense view that the only things that matter for purposes of the False Claims Act are those things that actually mattered to the government payor responsible for approving claims.
In the upcoming fifth and final chapter on materiality, we will discuss facts that go to the “essence of the bargain” and how those facts play into the materiality analysis.
 Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989, 2002 (2016).
 United States ex rel. Petratos v. Genentech, Inc., 855 F.3d 481, 490 (3d Cir. 2017).
 United States ex rel. Brown v. Celgene Corp., 226 F. Supp. 3d 1032 (C.D. Cal. 2016).
 Id. at 1049 (citing 42 C.F.R. § 423.100).
 Brown, 226 F. Supp. 3d at 1049 (citing Escobar, 136 S. Ct. at 1996).