Changes Coming to the FCA?  Proposed Amendments Would Impact Materiality Analysis, Government Discovery, Among Other Issues

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On July 26, Senator Chuck Grassley (R-IA) introduced a long-promised bill to amend the False Claims Act (FCA).  Not-so-creatively entitled the False Claims Act Amendments Act of 2021 (S.B. 2428), the proposed legislation is notably co-sponsored by a prominent—and bipartisan—group of senators.  The text of the bill, available here, would most importantly bring changes to the analysis of the FCA’s materiality element while also affecting the process through which defendants may obtain discovery from the government.

According to a press release issued by Senator Grassley, the legislation is mainly intended to “clarif[y] the current law following confusion and misinterpretation of the Supreme Court decision in United Health Services v. United States ex rel. Escobar.”  As we have previously covered at length (in blog posts dated June 23, 2016; March 20, 2020; April 8, 2020; and June 25, 2021) the U.S. Supreme Court’s 2016 decision in Escobar confirmed that the FCA’s materiality element is “rigorous” and “demanding,” and that it cannot be satisfied simply by showing that the government would have had the “option” to decline payment had it known the facts underlying an allegedly fraudulent claim.

Instead, Escobar focuses the materiality inquiry on the government’s actual or likely response to alleged fraud: if the government regularly pays similar claims with knowledge of the facts, that is “strong evidence” that the alleged misrepresentations are not material; on the other hand, if the government often denies payment under similar circumstances, that supports a finding of materiality.

In Senator Grassley’s view, however, Escobar has given way to “confusion” and “misinterpretation” that “has made it all too easy for fraudsters to argue that their obvious fraud was not material simply because the government continued payment.”   Consistent with that view, the proposed legislation appears calculated to make materiality-based dismissals—as well as other kinds of dismissals—more difficult for FCA defendants to obtain.  Whether it would succeed in that aim, however, is open to debate.

New Burden-Shifting Framework for Proving Materiality?

The proposed FCA amendments first introduce a new burden-shifting framework for proving materiality.  The legislation provides that the government or a relator “may establish materiality by a preponderance of the evidence,” after which a defendant “may rebut an argument of materiality … by clear and convincing evidence.”

Although this framework would certainly be new, its practical effect is far from clear.  After all, because materiality is a basic element of an FCA claim, the government or a relator already must prove materiality by a preponderance of the evidence to establish liability.  And the legislation does not purport to change what “material” means.  So, by giving defendants a chance to “rebut a materiality argument” even after the preponderance standard is met, the legislation might make materiality-based dismissals easier for defendants to obtain, contrary to Senator Grassley’s stated purpose.

Taking Aim at Government Discovery

In light of Escobar’s focus on the government’s actual conduct, obtaining discovery from the government about past payment decisions and enforcement efforts has become a key part of litigating the materiality aspects of an FCA case.  In Senator Grassley’s view, however, such discovery has become overly “burdensome” for the government, and thus the proposed amendments attempt to reign it in.

The legislation would not impose any substantive limits on government discovery, but would instead introduce a fee-shifting model through which a defendant could be required to pay the government’s expenses.  Specifically, FCA defendants would now be on the hook for the government’s costs and attorneys’ fees for responding to discovery in a non-intervened case unless the defendant could affirmatively show that the “information sought is relevant, proportionate to the needs of the case, and not unduly burdensome on the government.”

In theory, at least, the impact of this provision should be minimal, as the same criteria already governs the basic scope of discovery under Federal Rule of Civil Procedure 26(b).  Still, the specter of a fee award in favor of the government could create a chilling effect on government discovery: FCA defendants might be less inclined to seek legitimate—and indeed, critical—discovery from the government based on fears that a court might disagree about the discovery’s relevance or the burden it would impose.  This provision should thus present at least some concern for healthcare providers, government contractors and other potential FCA defendants.

Resolving the Circuit Split on FCA Dismissals

The proposed amendments also seek to resolve a nascent circuit split on the standard of review that applies to government dismissals of FCA actions under 31 U.S.C. § 3730(c)(2)(A).  As we have discussed before, courts have recently disagreed about the scope of the government’s power to dismiss qui tam litigation over a relator’s objection.  While some courts have held that the government’s dismissal authority is “unfettered,” others have required the government to demonstrate at least some “rational” or “legitimate” purpose for the dismissal before approving it.

The proposed amendments would side with the latter group of courts by requiring the government to “demonstrate[e] the reasons for dismissal” at a hearing while providing the relator an “opportunity to show that the reasons are fraudulent, arbitrary and capricious, or contrary to law.”  While this might mean an end to unchecked Department of Justice dismissal authority, however, the standard the amendments would impose is still unlikely to be difficult for the government to meet in most cases.

Broader Scope for Anti-Retaliation Provision 

Finally, the proposed amendments would clarify that the FCA’s anti-retaliation provision, 31 U.S.C. § 3730(h)(1), prohibits retaliation against would-be whistleblowers before or after the whistleblower’s employment with a defendant.  Although some courts had already reached that conclusion under the existing statutory text, this change would create a uniform rule that retaliation protections do not end with the termination of employment.

Prospects for Passage? Ask Again Later

As of this writing, the prospects for passage of the False Claims Act Amendments Act remain uncertain.  Although nearly identical legislation briefly appeared as an amendment to the recently passed Senate infrastructure package, that amendment was removed from the legislation without explanation shortly before the vote.  Meanwhile, S.B. 2428 itself has not yet advanced through the Senate Judiciary Committee.

That said, given the bill’s bipartisan sponsorship and the fanfare with which it was previewed and announced by Senator Grassley, we do not expect the FCA amendments’ demise within the infrastructure package to also be their death.  We are keeping a close eye on further legislative developments and will report them in this space as they occur.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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