A smart and tactical choice of venue can set the stage for victory, and in a False Claims Act case, that choice may make all the difference.
In the November 10, 2022 edition of The Legal Intelligencer, Edward T. Kang wrote “Circuit Split on Materiality Standard in FCA Cases and Choosing the Right Venue“
In battles throughout history, the consensus is that the best place to station an army is on the “high ground.” While there are no swords or horses in the courtroom, plaintiffs still seek the “high ground” venue for their cases. A smart choice of venue has favorable precedent, established standards for issues of law pivotal to the claim, and a good history of allowing actions to reach trial. In False Claims Act (FCA) actions, this choice of venue can mean the difference between winning or losing a case. A central aspect of any FCA claim is whether the misrepresentation or fraudulent action taken by the party receiving government money is “material” to the receipt of the money. Therefore, in FCA actions, materiality can make a venue either a sunlight hilltop that vaunts a plaintiff (relator) to success, or a muddy bog that forces a relator to succumb and withdrawal from the fight.
Typically, the fraud perpetrated involves misappropriation of funds from government programs or government contracts. The relator files suit against the fraudster on the basis that the person receiving government funds submitted false claims to obtain those funds. Parceled inside the “explicitly certified” FCA liability theory—i.e., the defendant explicitly committed fraud in their application for funds—is the idea that a person may be liable for an FCA violation if they have violated any obligation imposed through participation in the government reimbursement or payment program, otherwise known as the “implied certification” theory. For example, under the “implied certification” theory, a doctor who has received reimbursement from Medicaid could be in violation of the FCA if she has not acted in accordance with, say, the tax obligations of the Medicaid program, even though her specific reimbursement request did not contain false claims (e.g., she submitted a request for payment to Medicaid for a medical procedure that was medically necessary). In determining whether a defendant has in fact violated the FCA, courts look to the materiality of the broken obligation to ascertain whether the defendant made a misrepresentation that constitutes a fraudulent claim.
In 2016, the U.S. Supreme Court issued an opinion in Universal Health Services v. Escobar that has significantly impacted FCA litigation by providing a number of nonexclusive considerations to guide lower courts in assessing whether an alleged misrepresentation was “material.” In Escobar, the court laid out four central considerations for lower courts to look to when assessing materiality: whether the government has expressly identified compliance with a specific statutory, regulatory or contractual requirement as a condition of payment; whether the government generally refuses to pay claims that fail to meet the specific statutory, regulatory, or contractual requirement; whether the government has continued to pay claims despite actual knowledge of noncompliance with the requirement; and whether the alleged noncompliance is considered minor or insignificant.
The U.S. courts of appeals have reached inconsistent results in analyzing and applying the materiality considerations posited in the court’s opinion in Escobar, resulting in a split among the circuits. The inconsistencies primarily arise from “false certification” cases, in which an entity, expressly or impliedly, falsely certifies its compliance with a law, rule, or regulation in submitting a claim for payment. See Rose v. Stephens Institute, 909 F.3d 1012 (9th Cir. 2018). In such cases, the defendants often argue that violation of the law, rule, or regulation at issue is not material, and point to the government’s continued payment of requested funds, despite the violation, as evidence of a lack of materiality.
Circuits have reached differing conclusions on materiality, with stricter courts requiring that the relator prove the government’s payment decision has been affected by the violation of the obligation, or would have been affected by the violation, to be considered a material violation. Other courts have adopted a more lenient standard, necessitating solely that the relator show that the government would have the option to decline to pay if it had known of the violation. Fittingly, the courts following the more lenient standard are also more likely to find a government organizations explicitly conditioning payment on compliance with a law, rule, or regulation is strong evidence of materiality, while the courts following the stricter standard are more likely to find such conditioning unpersuasive. See, e.g., Petratos v. Genentech, 855 F.3d 481 (3d Cir. 2017); Miller v. Weston Educational, 840 F.3d 494, (8th Cir. 2016).
Given the differing materiality standards adopted by the circuit courts, FCA relators should choose their venue carefully if they have the option to choose. The “high ground” of U.S. circuit court is the Ninth Circuit. The Ninth Circuit, encompassing the majority of the western United States, is favorable for relators’ bringing claims under the FCA where materiality may be ambiguous. The Ninth Circuit has treated the ruling in Escobar as “creating a ‘gloss’ on the analysis of materiality.” See Rose v. Stephens Institute, 909 F.3d 1012, 1016 (9th Cir. 2018). For example, in Campie v. Gilead Sciences, 862 F.3d 890 (9th Cir. 2017, the relator alleged that drug manufacturer Gilead bought a key ingredient for three of its HIV drugs from an unapproved Chinese supplier while telling the Food & Drug Administration that the substance came from an approved South Korean manufacturer. Gilead moved to dismiss the suit, arguing that because the government continued paying for the drugs even after learning of the company’s use of the Chinese ingredients, the alleged violations were not “material” to the government’s decision to pay the claims and therefore not subject to an FCA claim. The Ninth Circuit found that the relators had raised “more than a mere possibility” that the government would be entitled to refuse payment if it were aware of Gilead’s alleged violations, even though the FDA had continued payments. In the Ninth Circuit, a government organization’s continued payment through a program or a contract will typically not preclude a claim from alleging that the defendant’s fraudulent actions were material.
Certain plaintiffs may be precluded from heading west due to factual barriers in their claim. When plaintiffs are forced instead to file their case in of the circuits in the northeast (the First, the Second or the Third), it is important to understand the landscape and find the right spot to set up camp. The Second Circuit is slightly stricter than the Ninth Circuit on the issue of materiality, but has still frequently found that materiality exists in the context of FCA claims. By contrast, the First and Third Circuits adopt a strict view of materiality that is not favorable to relators.
In the Second Circuit, United States v. Strock, 982 F.3d 51 (2d Cir. 2020), provides a good summation of the court’s position. In Strock, the government alleged that the defendants fraudulently induced the government into awarding a contract reserved for service-disabled veteran-operated small businesses (SDVOSB) by misrepresenting their status as a SDVOSB. Despite its continued payments to the defendants, the government argued that the relevant “payment decision” was the government’s initial decision to enter into the contract, not the ultimate decision to pay claims, and the defendants’ misrepresentation was material to that initial award decision. The Second Circuit interpreted the Supreme Court’s ruling in Escobar to contemplate liability for “misrepresenting compliance with a condition of eligibility to … participate in a federal program and held that both the initial decision to enter into the contract and the later decisions to ultimately pay claims under it must be considered in assessing materiality.” In the Second Circuit, a misrepresentation at the outset of a government contract is likely material, which is favorable for relators bringing claims of fraud related to government contracts.
Plaintiffs seeking to file claims based on a misrepresentation to a government agency should be wary of filing in the First or the Third Circuit. The First Circuit has held that the government’s continued payment of claims despite knowledge that certain requirements were violated is “very strong evidence that those requirements are not material.” See Nargol v. Depuy Orthopaedics, 865 F.3d 29 (1st Cir. 2017). The Third Circuit can be equally unfavorable for plaintiffs. The Third Circuit has maintained that a misrepresentation alone is not sufficient to establish materiality in an FCA action. In Petratos v. Genentech, 855 F.3d 481 (3d Cir. 2017), the court found that the relator could not establish materiality under Escobar, reasoning that a misrepresentation is not material “merely because the government designates compliance with particular statutory, regulatory, or contractual requirements as a condition of payment … or because the government would have the option to decline to pay if it knew of the defendants’ noncompliance.” Instead, materiality lies where “the government consistently refuses to pay claims” based on such noncompliance.
Given the high importance of the materiality standard, the relator should strongly consider which venue to file his claim following an assessment of his options. The various circuit courts have adopted differing standards of materiality following Escobar, and until the Supreme Court decides to set a national standard, plaintiffs still have the ability to gain the “high ground” in their legal battles. A smart and tactical choice of venue can set the stage for victory, and in a False Claims Act case, that choice may make all the difference.
Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at firstname.lastname@example.org.
Reprinted with permission from the November 10, 2022 edition of “The Legal Intelligencer” © 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or email@example.com.