At first, the Escobar decision, and its heightened materiality standard, appeared to transform the landscape of FCA enforcement. Case law developed rapidly in its wake, as lower courts grappling with its meaning and application treated similar scenarios differently. More recently, however, the case law has begun to approach an equilibrium – courts will take a “holistic”2 view of the circumstances of each case, including government (in)action despite knowledge of alleged misconduct, and under which no single fact is dispositive. Because materiality thus is such a fact-intensive inquiry, it has proven to be an issue unlikely to be decided on a motion to dismiss or even, at least in some circumstances, at summary judgment. This is often true despite the Supreme Court’s stated view that “materiality is [not] too fact intensive for courts to dismiss [FCA] cases on a motion to dismiss or at summary judgment.”3 Several cases from the past year are illustrative.
Materiality on motion to dismiss: “Many things” could explain the government’s continued payment
A split panel of the Seventh Circuit permitted a previously dismissed case to proceed after concluding the relator had sufficiently pled materiality even under heightened fraud-pleading standards.4 In U.S. ex rel. Prose v. Molina Healthcare of Illinois, Inc., the relator alleged Molina Healthcare had contracted with the Illinois Medicaid program to provide multiple tiers of medical service with scaled capitation rates.5 The complaint alleged that the highest capitation rate applied to Skilled Nursing Facility (SNF) services that Molina subcontracted to a third party, GenMed, to deliver.6 After a dispute caused GenMed to terminate the contract, Molina allegedly did not inform the state it had ceased providing SNF services.7 The district court found that provision of SNF services was material to the state’s payment, but dismissed the complaint after concluding the relator had insufficiently pled Molina’s knowledge of that materiality.8
The Seventh Circuit, over a strong dissent,9 disagreed and reversed, concluding the complaint plausibly alleged that “as a sophisticated player in the medical-services industry, Molina was aware that [SNF] services play a material role in the delivery of Medicaid benefits.”10 The court recognized that Molina’s “strongest argument against materiality” was that the government continued to contract with Molina after learning it could no longer provide SNF services even renewing its contract twice after the suit was filed.11 That argument, however, was “better saved for a later stage, once both sides have conducted discovery” and “[l]ater exploration will be needed before anyone can say what the government did and did not know about Molina’s provision of SNF services.”12 In the meantime, the court concluded Molina’s assertion that the government was aware of all material facts is not enough to dismiss the relator’s claim and that “[m]any things could explain the government’s continued contracting with Molina.”13
The D.C. Circuit reversed a district court’s dismissal of a suit in a similar manner. In Cimino v. Int’l Bus. Machines Corp., the lower court had ruled that the relator failed to plausibly allege materiality in a situation where the defendant used an allegedly inaccurate audit of software license usage in a contract negotiation with the IRS. The lower court had noted that the IRS continued making payments pursuant to the agreement that was allegedly fraudulently induced after learning of the alleged fraud and even exercised options extending the agreement despite that knowledge.14 In reversing, the D.C. Circuit explained the IRS could have continued to pay for “any number of reasons” that did not render the alleged fraud immaterial.15 The court acknowledged that later evidence could demonstrate the alleged fraud was not material to the IRS, but that was “for another day.”16 In the same decision, however, the D.C. Circuit held that to prevail on a fraudulent inducement theory of liability (the only theory remanded for further litigation), the relator would have to show that the allegedly fraudulent inaccuracies in the audits supplied to the IRS were the “but for” cause of the agency awarding IBM the new contract.
Materiality at summary judgment: The significance of continued government payment “may vary depending on circumstances”
In yet another important case on the issue of materiality, the Eleventh Circuit held that the “significance of continued payment may vary depending on the circumstances.”17 Bibby involved allegations by mortgage brokers that mortgage lenders were charging fees that were prohibited by the Department of Veterans Affairs (VA) regulations by bundling them with permitted fees18 while expressly certifying they charged only permissible fees. The defendant moved for summary judgment, which the district court granted after noting “the stringent materiality standard espoused by the Supreme Court chokes the life out of Relators’ case and mandates the end of this action.”19 In so ruling, the district court cited the fact that despite VA audits revealing the prohibited fees, the VA took no heightened action against the defendant other than requiring it to refund improper fees and continued to issue loans.20
The relators appealed, arguing – along with the government as amicus curiae – that the VA’s continued payment “merit[ed] little weight because the payments were required by law.”21 The Eleventh Circuit agreed. Absent a dispute regarding the VA’s actual knowledge of the defendant’s violation of VA regulations, the court looked to the VA’s reaction to that knowledge.22 And while the court acknowledged that, under Escobar, the “government action relevant to the materiality inquiry is typically the payment decision,” because the VA was statutorily bound to honor the payments, the “facts of this case” required the court to “cast [its] materiality inquiry more broadly” to consider “the full array of tools at the VA’s disposal for detecting, deterring, and punishing false statements, and which of those it employed.”23 After “looking at the VA’s behavior holistically,” the court described a number of actions taken by the VA to address noncompliance with fee regulations, including releasing a circular to lenders on the consequences of noncompliance, implementing more audits, and requiring lenders to refund any improperly charged fees.24 Because the VA “did take some enforcement actions” even though it “did not take the strongest possible action” against the defendant, sufficient evidence of materiality was present.25 The ultimate determination of materiality was a question for the factfinder.26
Proposed legislation attempts to limit materiality defenses
In July 2021, Senator Grassley, and a bipartisan group of co-sponsors, proposed amending the FCA to make it more difficult and burdensome for defendants to argue the government or relator failed to prove materiality.27 Specifically, the proposed amendment would establish new procedures for litigating materiality by permitting the government or relator to establish materiality by a “preponderance of evidence” while a defendant could only rebut materiality through “clear and convincing evidence.” The amendment would also make it harder for defendants to secure the necessary discovery from government agencies. Citing “confusion” and “fallout” from Escobar, the bill’s sponsors claim the proposed amendment would help “recoup even more” “lost taxpayer dollars” and help “ensur[e] that those who defraud the federal government are held accountable.”28
Since its introduction, and after receiving criticism, Senator Grassley introduced a “manager’s amendment” to the bill.29 The revised language removes, among other things, the burden-shifting language. The bill now states “In determining materiality, the decision of the Government to forego a refund or pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such refund or payment.”30 The amendment is still intended to “correct” “misinterpretation” by the courts that “gut” and do a “disjustice [sic] to the original purpose” of the FCA31 while seeming to endorse another line of case law that looks to other reasons the government might continue paying during the materiality inquiry, like the courts did recently in Prose and Cimino and going back a few years in Campie.32
The Senate Judiciary Committee voted the bill out of conference on October 28, 2021, and it awaits a vote by the Senate.33
* * *
Absent legislative action, case developments from the past year reaffirm the extent to which materiality will remain a fact-intensive, case-by-case inquiry – and one that parties to FCA litigation may find resolved only late in the litigation process.
1. Universal Health Servs., Inc. v. United States ex rel. Escobar (Escobar), 579 U.S. 176, 192-93, 195 n.6 (2016).
2. A “holistic” test “with no one factor being necessarily dispositive” was the First Circuit’s gloss on its new mandate in the remanded case. United States ex rel. Escobar v. Universal Health Servs., Inc., 842 F.3d 103, 109 (1st Cir. 2016).
3. Escobar, 579 U.S. at 195 n.6.
4. No. 20-2243, 2021 WL 5298012, at *8 (7th Cir. Nov. 15, 2021). The Seventh Circuit originally issued the opinion in August 2021, 10 F.4th 765, 776 (7th Cir. 2021), but amended the opinion slightly in November 2021 after voting to deny rehearing and rehearing en banc, No. 20-2243, 2021 WL 5296454, at *1 (7th Cir. Nov. 15, 2021).
5. No. 20-2243, 2021 WL 5298012, at *1 (7th Cir. Nov. 15, 2021).
9. Chief Judge Sykes in dissent accused the majority of disregarding both Escobar and Seventh Circuit precedent and would have affirmed dismissal of the complaint. Id. at *9-10.
10. Id. at *1, *8-9.
11. Id. at *7.
14. Cimino v. Int’l Bus. Machines Corp., No. 13-CV-00907 (APM), 2019 WL 4750259, at *7 (D.D.C. Sept. 30, 2019), aff’d in part, rev’d in part and remanded sub nom. United States ex rel. Cimino v. Int’l Bus. Machines Corp., 3 F.4th 412 (D.C. Cir. 2021).
15. United States ex rel. Cimino v. Int’l Bus. Machines Corp., 3 F.4th 412, 423 (D.C. Cir. 2021).
17. United States ex rel. Bibby v. Mortg. Invs. Corp., 987 F.3d 1340, 1350 (11th Cir. 2021), cert. denied sub nom. Mortg. Invs. Corp. v. United States ex rel. Bibby, 141 S. Ct. 2632 (2021).
18. Id. at 1343-45.
19. United States ex rel. Bibby v. Mortg. Invs. Corp., Civ. Action No. 12-CV-4020-AT, 2019 WL 11637354, at *2 (N.D. Ga. July 1, 2019).
20. Id. at *26 (noting “rampant noncompliance” and the VA’s “laissez faire attitude in dealing with the problem”), *29.
21. Bibby, 987 F.3d at 1350.
23. Id. (internal citations omitted).
24. Id. at 1350-52.
25. Id. at 1352.
27. See S5776, 117 Cong. Rec. (Aug. 3, 2021), https://www.congress.gov/117/crec/2021/08/03/167/138/CREC-2021-08-03-pt1-PgS5726.pdf. Senator Grassley also proposed the same changes in the standalone “False Claims Act Amendment of 2021,” introduced on July 22, 2021, as S.2428, https://www.congress.gov/117/bills/s2428/BILLS-117s2428is.pdf.
28. Senators Introduce Bipartisan Legislation to Fight Government Waste, Fraud, Grassley.senate.gov (July 26, 2021), https://www.grassley. senate.gov/news/news-releases/senators-introduce-of-bipartisan-legislation-to-fight-government-waste-fraud.
29. Executive Business Meeting, Senate Comm. on the Judiciary, 117th Cong. (Oct. 21, 2021), https://www.judiciary.senate.gov/ meetings/10/14/2021/executive-business-meeting.
30. Draft Copy of ALB21G65 FMS, Senate Legis. Counsel, S.2428, 117 Cong. (Oct. 19, 2021), https://g7x5y3i9.rocketcdn.me/wp-content/ uploads/2021/10/Managers-Amendment-pdf.pdf.
31. Executive Business Meeting, Senate Comm. on the Judiciary, 117th Cong. (Oct. 21, 2021), https://www.judiciary.senate.gov/ meetings/10/14/2021/executive-business-meeting.
32. See, e.g., United States ex rel. Campie v. Gilead Scis., Inc., 862 F.3d 890, 906 (9th Cir. 2017) (relator sufficiently alleged materiality reasoning, in part, that it would be a mistake to “read too much into the FDA’s continued approval” and that “there are many reasons the FDA may choose not to withdraw a drug approval, unrelated to the concern that the government paid out billions of dollars for nonconforming and adulterated drugs”).
33. False Claims Amendments Act of 2021, S. 2428, 117th Cong. (2021-2022), Congress.gov, https://www.congress.gov/bill/117th-congress/ senate-bill/2428/text?q=%7B%22search%22%3A%5B%22False+Claims+Act%22%5D%7D&r=1&s=1(last visited on Dec. 1, 2021).