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Supreme Court Implied False Certification Case Reargued to First Circuit

On Tuesday, October 25, 2016, a three-judge panel of the United States Court of Appeals for the First Circuit heard argument in United States ex rel. Escobar, et al. v. Universal Health Services, Inc.  This case was sent back to the First Circuit by the United States Supreme Court in Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989 (2016) (“Escobar II”).  The 90-minute argument focused on the boundaries and application of Escobar II’s “clarified” materiality standard, which will have a significant impact on how False Claims Act (“FCA”) cases are prosecuted and defended in the future.

Flag, Government, The core arguments by Plaintiff-Relators and the United States were (1) the Supreme Court did not articulate a new or heightened standard for pleading materiality (although the Court in Escobar II described the standard as “rigorous,” “demanding,” and subject to “strict enforcement” and heightened pleading requirements); and (2) the fact that a government payor, such as Medicare or Medicaid, may pay claims with knowledge of a provider’s legal violations does not mean the payor does not view the violations as “material.”  Such payment, they argued, could be a proper exercise of agency discretion, which should not preclude a future FCA action.  The Government referred to this as a potentially appropriate “business decision” by an agency, and not one that demonstrates there is no materiality, and certainly not at the initial stages of a lawsuit.  To the contrary, Relators and the Government argued, there could be a number of practical or policy reasons a claim could be paid even if the agency understands it is fraudulent.

Defendant Universal responded by focusing on the agency’s payment decision, which it argued was “singular,” such that once a claim for reimbursement is paid, the payor agency can no longer claim an alleged violation was material to, i.e., capable of influencing, the payment decision, as required by Escobar II.  As Universal told the panel, if you ordered a green car and you see I am providing you with a blue one, you cannot accept and pay for the blue car and then later claim an FCA violation.  In addition, Relators alleged that MassHealth not only did not exercise any of the payment remedies available to it but continued paying claims submitted despite the Department of Health’s findings of violations of staff and licensing requirements for Universal’s mental health facilities.  Universal argued the Government cannot knowingly ignore legal noncompliance and rely on private relators to uncover and prosecute FCA violations.  Counsel also focused on what he called “rare” evidence of actual government knowledge in this case.

The panel of judges was very active in its questioning during this lengthy hearing and appeared unsure of how to interpret and apply the Escobar II ruling.  At the conclusion of the hearing, Chief Judge Howard captured what seemed to be the panel’s overall view, promising “we’ll do the best we can with this.”  We will report on the First Circuit’s forthcoming ruling.

© 2020 Foley & Lardner LLPNational Law Review, Volume VI, Number 301


About this Author

Lawrence M. Kraus, Boston, MA, Foley, Lardner law firm, Complex Healthcare, Business Litigation attorney

Lawrence Kraus is a partner and litigation attorney with Foley & Lardner LLP. His practice focuses on complex healthcare, False Claims Act, civil, commercial, and real estate litigation. Mr. Kraus is a member of the firm’s Business Litigation & Dispute Resolution and Government Enforcement, Compliance & White Collar Defense Practices and Health Care and Technology Industry Teams.

Mr. Kraus counsels corporations and individuals in a wide range of industries. He has represented clients in federal and state trial and appellate courts,...

Jason L. Drori, Foley Lardner, Drug industry Lawyer, Pharmaceutical Compliance Attorney
Senior Counsel

Jason Drori is a senior counsel in the Business Litigation & Dispute Resolution Practice of Foley & Lardner LLP. Mr. Drori concentrates his practice on the legal needs, business challenges, and regulatory pressures of the life sciences sector, particularly pharmaceuticals. He represents pharmaceutical companies and other drug industry stakeholders in commercial disputes as well as investigations and enforcement actions by the Department of Justice, federal regulatory agencies, and State Attorneys General. Mr. Drori litigates complex, high-profile cases involving claims of health care fraud, regulatory noncompliance, off-label drug promotion, drug misbranding and unbranded marketing, False Claims Act violations, and unfair competition.