Courts Are Taking Materiality Seriously Post-Escobar

Morrison & Foerster LLP

In the three months since the U.S. Supreme Court issued its decision in Universal Health Services v. United States ex rel. Escobar, lower court decisions suggest a trend of strict interpretation of the high court’s materiality requirement for False Claims Act allegations. Pleadings generally must allege facts demonstrating materiality to avoid dismissal. As a result, contractors have more tools to avoid liability by arguing that the materiality or scienter requirements have not been met. Thus, although the Escobar decision opened contractors to liability in jurisdictions that previously did not recognize implied certification theory — such as the Seventh Circuit — the high materiality bar may afford them additional protections.

The Escobar Decision -

On June 16, 2016, the Supreme Court handed down its decision in Escobar. This important case decided the fate of future False Claims Act allegations that were based on an implied certification theory. Implied certification is the notion that — instead of an actual, express misrepresentation — there is an implicit misrepresentation in the claim for payment as a result of a contractual or regulatory noncompliance. In other words, if the contractor failed to disclose a failure to comply with a contract term or regulation, it would be considered just as liable for fraud as if it had expressly certified compliance as part of its claim for payment. Prior to the Escobar decision, jurisdictions were split with some, such as the First Circuit, applying the implied certification theory liberally while others, such as the Seventh Circuit, refused to give the theory credence.

Originally published in Law360 on September 20, 2016.

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