“Would You Rather…” – Escobar’s Demanding Materiality Standard or Actual Causation?
According to a recent decision in United States ex rel. Scollick v. Narula, Case No. 14-cv-1339 (D.D.C. Nov. 6, 2020), the fraudulent inducement theory of False Claims Act (“FCA”) liability does not require plaintiffs to satisfy the “demanding” materiality standard set forth in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). Though that may sound like good news for plaintiffs, it is not. The fraudulent inducement theory holds that fraud in a contractor’s proposal can taint every claim for payment it submits under the resulting contract, making them all “false claims” under the FCA. This bears hefty consequences if proven: the defendant could be liable for civil penalties on every single claim for payment submitted over the life of the contract, in addition to treble damages the government may have suffered as a result of the fraud. Perhaps in recognition of these severe consequences, the U.S. District Court for District of Columbia held that a plaintiff must plead and prove an even higher standard than Escobar materiality to establish fraudulent inducement liability—actual causation. Rather than alleging that misrepresentation by the defendant merely was material to the government’s decision to award the contract to defendant, the Scollick decision concludes that “a misrepresentation in the defendant’s bid must have caused the government to award the defendant the contract.” If the FCA materiality standard is “demanding,” then the actual causation standard is formidable.
Under Escobar materiality, a plaintiff may satisfy its burden by showing “the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” Some courts have read this to mean that, even in the face of a slim evidentiary record of the government’s actual behavior on the particular contract, a defendant’s misrepresentation could be material if it likely would have affected the government’s decision to pay defendant’s claims. Consequently, a plaintiff might introduce evidence of the government’s routine behavior on other contracts and in response to similar misrepresentations in order to build its case that a misrepresentation would have been material to the government’s decision to pay a claim.
But according to Scollick, a plaintiff asserting fraudulent inducement does not have this same luxury (or flexibility). A plaintiff cannot point to the likely effects on the government’s behavior, or even a “reasonable person” standard to argue what the government might have done or whether a particular false statement might have been material to a payment request. Instead, a plaintiff must allege and prove that, but for the defendant’s alleged misrepresentation or false statement, the government would not have awarded the contract to the defendant in the first place. Even showing proximate cause is not enough—a plaintiff must prove cause in fact. To meet this burden, a plaintiff would have to show evidence of the government’s decision-making process in awarding the particular contract at issue—evidence proving that the misrepresentation actually caused contract award.
The whistleblower in Scollick alleged that defendants misrepresented their company’s status as a service-disabled veteran owned small business to fraudulently obtain government contracts set aside for such businesses. Defendants moved to dismiss, in part claiming that the plaintiff had not pled facts sufficient to meet the “demanding” materiality standard advised by the U.S. Supreme Court in Escobar. The District Court held that the Escobar materiality standard does not apply to the fraudulent inducement theory of FCA liability, but that the plaintiff had adequately pled causation, which was the correct standard for fraudulent inducement. Because the whistleblower alleged that the government awarded contracts to defendants “as a direct and proximate result” of the defendants’ fraudulent misrepresentations, the fraudulent inducement allegations survived dismissal.
The court further held that Escobar’s materiality standard applies to FCA allegations under only the implied certification theory of falsity. But even in confining Escobar’s demanding materiality requirement to the implied certification context—a limitation other courts may not adopt—the District Court fortified the other evidentiary hurdles that plaintiffs must cross under the FCA. As the Supreme Court instructed in Escobar, the FCA is not an all-purpose fraud statute, and it was not intended to punish garden-variety breaches of contract, nor minor or insubstantial noncompliance. The government and whistleblowers alike must meet a very high burden—according to Scollick, pleading and proving actual causation in the case of fraudulent inducement—to subject defendants to penalties and treble damages under the FCA.
The Scollick decision adds an arrow to the quiver of companies defending against FCA allegations. But it also highlights the importance of ensuring that small business certifications are accurate when seeking government contracts and subcontracts. Even recklessly disregarding whether your business qualifies for the set-aside contract you seek can lead to FCA liability. Small business size standards and contracting assistance program requirements can be nuanced and frequently change over time. Companies bidding and performing under set-aside contracts should regularly evaluate their size status with the help of counsel familiar with the legal risks and requirements.