This is the second post of a two-part discussion of recent developments related to the materiality standard set forth by the Supreme Court in Universal Health Services v. U.S. ex rel. Escobar. Read our previous post, which covered appellate court decisions and key decisions related to government knowledge and payment.
Courts Take Differing Approaches to the Significance of Government Intervention Decisions
In assessing the False Claims Act’s (FCA) materiality element, courts have increasingly taken divergent approaches to analyze the significance of the government’s decision about whether to intervene in a qui tam action.
In several 2019 decisions, district courts held that the government’s decision to intervene in a qui tam action was relevant – even if not dispositive – to the materiality analysis under Escobar. In U.S. ex rel. Longo v. Wheeling Hospital, Inc., for instance, the U.S. District Court for the Northern District of West Virginia found that the government’s decision to intervene in the very qui tam action before it “strongly militate[d] in favor of materiality.” And in U.S. ex rel. Arnstein v. Teva Pharmaceuticals USA, Inc., the U.S. District Court for the Southern District of New York explained that the government’s decision to intervene in “a factually similar case” in the same district “provide[d] strong evidence that AKS [Anti-Kickback Statute] violations were material to the Government’s payment decisions,” even though the government had not intervened in the case before the court.
Other courts have similarly held that the government’s decision not to intervene is relevant to the materiality analysis. In U.S. ex rel. MacDowell v. Synnex Corp., the U.S. District Court for the Northern District of California stated that, although not dispositive, the government’s decision not to intervene “weigh[ed] toward finding a lack of materiality.” And in U.S. ex rel. Polansky v. Executive Health Resources, Inc., the U.S. District Court for the Eastern District of Pennsylvania noted that the government’s actions in the litigation – namely, “declining to intervene and moving for dismissal” – were “probative of the lack of materiality of [the relator’s] claims.”
Adopting a different approach, however, the U.S. District Court for the Eastern District of Michigan in U.S. ex rel. Rahimi v. Rite Aid Corporation refused to consider the government’s decision not to intervene in the litigation, somewhat confusingly reasoning that “to infer a lack of materiality from the Government’s non-intervention would make the Government’s non-intervention dispositive of the materiality analysis.”
The “Essence of the Bargain” Analysis Continues to Play a Role in Assessing Materiality
Some courts continue to focus their materiality analysis on whether the alleged violations went to the “essence of the bargain” between the government and the defendant. For example, the U.S. District Court for the Eastern District of Oklahoma in Brown v. Okmulgee Terrace, Inc., cited that factor to support finding a lack of materiality. There, the relator alleged that a mental health facility had employed a convicted felon in its housekeeping department in violation of applicable state regulations. Granting summary judgment for the defendant, the district court explained that any regulatory violation was “minor or insubstantial” – and not material – because “[h]ousekeeping duties, while certainly necessary and proper for the residents, are not central to Medicare/Medicaid cost reports” and thus were not “misleading” as to the “goods and services” provided by the facility to its residents and for which the government was billed.
Adopting a similar approach, in U.S. ex rel. Buth v. Walmart Inc., the U.S. District Court for the Eastern District of Wisconsin found a lack of materiality where the relator alleged that a Walmart pharmacy had dispensed and billed the government for 90-day supplies of medication when only a 30-day supply was required. Because the government was billed for exactly what the patients received, the district court concluded that the alleged “conversion” to 90-day supplies was not material to the government’s decision to pay the claims.
By contrast, in U.S. ex rel. Strauser v. Stephen L. LaFrance Holdings, Inc., the U.S. District Court for the Northern District of Oklahoma relied on the “essence of the bargain” analysis to conclude that the alleged regulatory violations were material to the government’s payment decision. In that case, the relator alleged that pharmacies overcharged government healthcare programs by reporting that their usual and customary (U&C) prices to the public were higher than their actual U&C prices. The district court held that the complaint adequately pleaded materiality because the “alleged misrepresentations go to an essential element of the bargain” – specifically, the price the government paid for drugs.
Despite these courts’ reliance on the “essence of the bargain” analysis, such a framework may nevertheless be subject to criticism on the basis that it largely ignores the specific materiality factors outlined in Escobar and would appear to be somewhat question-begging. Indeed, in Arnstein, the district court criticized the “essence of the bargain” test as “circular” and inconsistent with Escobar, finding it unhelpful in part because “[w]henever a contractor violates any contractual or regulatory provision, the Government does not get what it bargained for.”
Courts Continue to Assess Materiality in Cases Alleging Violations of the Anti-Kickback Statute
Finally, several courts reaffirmed that the materiality element often will be satisfied in FCA actions that are premised on underlying alleged AKS violations. As the district court explained in Arnstein, Congress amended the AKS in 2010 to provide that a claim resulting from an AKS violation “constitutes a false or fraudulent claim for purposes of [the FCA].” Although that language relates more directly to falsity than to materiality, the district court concluded that post-amendment AKS violations are, therefore “per se material,” leaving “no need for an independent assessment of materiality.”
Even pre-2010 AKS violations, however, often suffice to establish the materiality element of an FCA claim based on the government’s extensive history of enforcing the AKS, among other factors.
For instance, in Thornton v. National Compounding Co., the U.S. District Court for the Middle District of Florida cited the government’s record of excluding and suspending AKS violators from participation in government healthcare programs as strong evidence that AKS violations are material to claims for payment. Indeed, the district court described the materiality of AKS violations as a “common sense” proposition. Reaching the same conclusion, the district court in Longo held that AKS violations satisfy the materiality requirement because the AKS “is a felony statute requiring specific intent,” goes to the “essence of Medicare’s bargain with participating healthcare providers,” and has been the subject of numerous settlements and government enforcement actions.
Nevertheless, while most courts ultimately have concluded that AKS violations are material, that courts continue to analyze the materiality of AKS violations underscores Escobar’s directive that the materiality standard is a “demanding” one. The district court in Arnstein notably declined to find pre-2010 AKS violations material as a matter of law, instead concluding that their materiality was a disputed issue of fact that could not be resolved at the summary judgment stage. In support of that holding, the district court cited the “rigorous” nature of the materiality requirement and the fact that Escobar “contemplate[d] that a defendant will have an opportunity to provide evidence of a lack of materiality – specifically by demonstrating that the Government ‘pays a particular claim in full despite its actual knowledge that certain requirements were violated.’” Although the government had offered a wealth of evidence that the alleged AKS violations were material, the court concluded that the defendants had presented enough countervailing evidence – including continued payment by the government after disclosure of the allegations – to preclude summary judgment.