In United States ex rel. Angela Ruckh v. Salus Rehabilitation, LLC, et. al., No. 8:11-CV-1303-T-23TBM (M.D. Fla. Jan. 11, 2018), the Middle District of Florida vacated a jury award totaling nearly $350 million because the plaintiff had not met the heightened standard of materiality and scienter for federal False Claims Act (“FCA”) claims established by the U.S. Supreme Court in Universal Health Services v. Escobar, 136 S. Ct. 1989 (2016). Specifically, the court held that the plaintiff not only failed to prove that the government regarded the defendants’ alleged fraudulent practices as material and would have refused to pay the defendants had the government known of the practices, but the plaintiff also failed to prove that the defendants knew that the government would consider the practices to be material. Below we consider the implications of Ruckh for successfully defending against FCA claims.
Background of Ruckh
This action was brought on behalf of the United States of America and the State of Florida by plaintiff Angela Ruckh (the “relator”) against various defendants pursuant to the qui tam provisions of the FCA, 31 U.S.C. §§ 3729-33, and the Florida False Claims Act, Fla. Stat. §§ 68.081 et seq. The defendants operate 53 skilled nursing facilities in Florida. The relator, who worked at two of the defendants’ facilities, alleged that the defendants engaged in a scheme to defraud the United States and Florida of millions of dollars each year by misrepresenting the medical conditions of, and treatment provided to, residents at the facilities. Specifically, the relator alleged that the defendants overstated residents’ medical needs and the amount of care provided to them in Minimum Data Set Assessment Reports (“MDA Reports”) to the government, which serve as the basis for Medicare, Medicaid, and TRICARE reimbursements. As evidence of the alleged fraudulent scheme, the relator cited a handful of paperwork defects, such as unsigned or undated documents.
After a month-long trial, the jury agreed with the relator and awarded a whopping judgment of $347,864,285. The defendants filed a motion for judgment as a matter of law, and in a colorfully-worded opinion, the trial judge granted the motion and vacated the jury award.
The Middle District’s Ruling on Materiality and Scienter
The FCA requires a plaintiff-relator to prove, among other things, that (1) a defendant’s violation of a legal requirement was material to the government’s decision to pay the defendant’s claim, and (2) the defendant knowingly violated the requirement and knew it was material to the government’s decision to pay.
In Ruckh, the court applied Escobar’s “rigorous” and “demanding” standard to determine whether the relator met these materiality and scienter requirements, noting that these elements are difficult to establish based on “minor or unsubstantial” or “garden-variety” breaches of contract or regulatory violations. Instead, the court explained, Escobar rejects a “system of government traps, zaps, and zingers” which might “permit[ ] the government to retain the benefit of a substantially conforming good or service but to recover the price entirely . . . because of some immaterial contractual or regulatory non-compliance.” Thus, according to the court, when a defendant’s activities violate the law, if the violation is disclosed to, or discovered by, the government, and the government pays regardless of the violation, the violation does not meet the materiality and scienter requirements.
Furthermore, it becomes more difficult for a plaintiff to establish materiality and scienter the longer the disputed practice continues after the government becomes aware of it. “If a non-compliance is found quickly and remains small, the government might likely demand perfect performance and full accounting,” but “if a non-compliance is larger and lingers longer and the repayment times three becomes a burden that threatens the vitality of the vendor and threatens the public interest, the government might not demand repayment times three.”
Considering the evidence in Ruckh, the court found that the “record fatally wants for evidence of materiality and scienter.” In fact, the government likely regarded the defendants’ alleged fraudulent practices with “leniency or tolerance or indifference or perhaps with resignation to the colossal difficulty of precise, pervasive, ponderous, and permanent record-keeping in the pertinent clinical environment.” The government never made a “single threat of non-payment, not a single complaint or demand, and not a single resort to an administrative remedy or other sanction.” Rather, evidence showed that the government knew of the disputed practices, and continued to pay for the defendants’ services nonetheless.
Implications of Ruckh for FCA Defendants
The Ruckh decision is likely to provide an escape hatch to FCA defendants in cases where an alleged false claim relates to non-compliance with technical statutory requirements and where evidence shows that the government would have, and did, continue payment despite the non-compliance.
The decision also will help defendants assess the potential for liability when a relator steps forward with an FCA claim, because it includes several hypothetical examples where a relator may satisfy the materiality and scienter requirements:
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If, after learning of the defendant’s alleged non-compliance with the law, the government insisted on a new “modus operandi” to resolve alleged deficiencies.
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If the government insisted on new computing requirements for internal reports, such as the MDA reports at issue in Ruckh.
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If the government discontinued payment.
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If the government implemented new administrative remedies in response to alleged irregularities.
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If the government insisted on new inspections, audits, and accounting.
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If the relator can otherwise establish a historical response by the government in similar circumstances.
The Ruckh decision demonstrates that Escobar’s materiality and scienter requirements have real teeth: defendants who are facing down allegations of minor non-compliance will want to follow its guidance and develop evidence that the government continued to pay and did not take other actions despite the non-compliance.
