Seventh Circuit’s Application of Escobar Impacts False Claims Act Litigation
In 2016, the United States Supreme Court decided Universal Health Services, Inc. v. Escobar, 136 S.Ct. 1989 (2016), which clarified the circumstances under which a relator may bring an implied certification claim and unquestionably strengthened the False Claims Act’s (FCA) materiality standard. While federal courts across the country have proffered differing interpretations of the FCA’s materiality standard after Escobar, the United States Court of Appeals for the Seventh Circuit has issued recent interpretations of Escobar that are useful for FCA defendants.
With respect to implied certification, in Escobar, the United States Supreme Court recognized the theory as a potential basis of FCA liability. This theory is based on allegations where the contractor is not making express misrepresentations to the government; rather, when the contractor submits a claim for payment to the government, they impliedly certify to the government that they are in compliance with all underlying statutes, regulations, and contract terms. Thus, under this theory, if the contractor is in violation of any of underlying requirement, the contractor is in violation of the FCA due to their implied promise to the government be in compliance with all applicable requirements.
With respect to materiality, the Court reinvigorated the materiality standard and required lower courts to apply a “demanding” and “rigorous” materiality threshold. The Court pronounced that the government labeling a requirement a “condition of payment” is relevant, but not dispositive, of the materiality associated with a particular requirement. Further the Court noted that proof of materiality may include evidence that the government consistently refused to pay claims in the “mine run of cases” based on noncompliance with the particular statutory, regulatory, or contractual requirement. Finally, the Court held that, if the government regularly pays a particular type of claim despite actual knowledge that the requirements were violated (with no clear signal in change of position), this can be used as strong evidence that the requirement is not material.
To put it mildly, federal courts across the country have strongly disagreed with one another over the application of the materiality standard following Escobar. On July 25, 2018, the United States Court of Appeals for the Seventh Circuit decided Berkowitz v. Automation Aids, Inc., No. 17-2562, 2018 U.S. App. LEXIS 20694 (7th Cir. July 25, 2018). There, the relator alleged that multiple contractors who were awarded General Service Administration (GSA) contracts violated their obligations under the Trade Agreements Act (TAA), which resulted in the submission to, and payment of, false claims by the United States government. In other words, the relator was relying upon the implied certification theory to allege that the GSA contractors, when submitting claims to the Government, were impliedly certifying compliance with the TAA. When these GSA contractors were no longer compliant with the TAA, the GSA contractors were submitting claims to the Government in violation of the FCA.
The District Court for the Northern District of Illinois granted a motion to dismiss filed by the defendants on the basis that the relator failed to state a claim upon which relief could be granted. The relator appealed.
The Seventh Circuit of Appeals affirmed the District Court’s dismissal of the relator’s FCA allegations. Specifically, the court held that the relator failed to allege any specific facts demonstrating what occurred at the individualized transactional level for each defendant. The relator argued that Rule 9(b), which requires the relator to plead with particularity the circumstances constituting the fraud or mistake, should be relaxed in this context because he did not have access to the detailed information that would substantiate the claim. The court rejected the relator’s argument and held that, “[e]ven under this standard, however, the relator must still describe the predicate acts with some specificity to inject ‘precision and some measure of substantiation’ into his allegations of fraud.” Berkowitz, 2018 U.S. App. LEXIS 20694, at *12.
The court further held that, at most, the relator’s allegations established that the defendants made mistakes or were negligent. This, according to the court, is insufficient to infer fraud under the FCA. The court recited the Supreme Court’s decision in Escobar, and held that the FCA is not “‘an all-purpose antifraud statute’ … or a vehicle for punishing garden-variety breaches of contract or regulatory violations.” Id. at *13. If this were the case, the court espoused, then “every allegedly inaccurate claim would transform ‘into a false claim and consequently replace the Act’s knowledge requirement with a strict liability standard.’” Id. at *13-14. For these reasons, the court affirmed the lower court’s dismissal.
The takeaway from the Berkowitz decision is that the rigorous materiality standard that exists post-Escobar is one of many strong defenses government contractors, including healthcare providers, can raise against purported FCA violations. Healthcare providers should take note of whether the government continues to pay the claims at issue or takes some other remedial actions after learning of the alleged fraud – as such conduct that may be used to shed light on the materiality of the requirement at issue. Further, the Berkowitz holding is yet another caution to opportunistic FCA whistleblowers who rely on public information, inferences, and speculation to assert FCA claims.
This is not the only recent Seventh Circuit decision drawing national attention post-Escobar. Last year, and in reliance upon Escobar, the Seventh Circuit Court of Appeals in United States v. Luce, 873 F.3d 999 (7th Cir. 2017), overruled 25 years of precedent by abandoning its “but-for” causation test in FCA cases. Put briefly, the Seventh Circuit’s “but-for” test described that the government’s loss need not be “attributed directly” to the defendant’s conduct. The defendant in Luce argued that Escobar required the Seventh Circuit to abandon the “but-for” causation test and adopt the common law test for fraudulent misrepresentations – “foreseeability test,” which measures those losses a reasonable person would see as a likely result of his or her conduct. The Seventh Circuit agreed with the defendant’s position and abandoned its “but-for” test for the foreseeability test. The Luce decision allows an additional tool for FCA defendants to utilize in requiring the government to identify damages that were reasonably foreseeable due to the defendant’s conduct.
Finally, in 2016 and in reliance upon Escobar, the Seventh Circuit revisited and affirmed its prior rejection of an implied certification FCA claim in Nelson v. Sanford-Brown, Ltd., 840 F.3d 445 (7th Cir. 2016). The Seventh Circuit noted that, following Escobar, it is not enough to establish materiality that the government would have had the option to decline to pay if it knew of the defendant’s noncompliance. Materiality, citing to Escobar, looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation. The Sanford-Brown court noted that there was no evidence that the government’s payment decision would likely or actually have been different had it known of the defendant’s alleged noncompliance. To the contrary, the evidence was that the government had already examined the defendant multiple times and concluded that neither administrative penalties nor termination was warranted.