On Remand, First Circuit Finds Violations in Escobar Were Material

by Bass, Berry & Sims PLC
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In June, the Supreme Court issued Universal Health Services, Inc. v. U.S. ex rel. Escobar, a landmark opinion in which the Supreme Court addressed the standard for pleading materiality in FCA implied certification cases.  The Supreme Court ultimately remanded the case to the First Circuit to resolve in the first instance whether the alleged violations met that standard, and last week, the First Circuit gave its answer: the violations were material.

Escobar arose when a patient died after receiving mental health treatment at a Massachusetts facility owned and operated by Defendant Universal Health Services (UHS). When the patient’s parents learned that the facility employed unlicensed and unsupervised personnel, in violation of state regulations, they filed a qui tam lawsuit under the FCA.

When the case eventually reached the Supreme Court, the Court held that the materiality requirement is “rigorous” and “demanding,” and “looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” The Supreme Court also provided evidentiary factors for courts to consider. Under the Supreme Court’s formulation, it is not enough that “the Government would have the option to decline to pay if it knew of the defendant’s noncompliance.” Similarly, whether the Government expressly identifies a provision as a condition of payment “is relevant, but not automatically dispositive.” Proof of materiality can include evidence that the Government consistently refuses to pay similar claims that violate the provision at issue. It is “very strong” evidence that a provision is not material if the Government paid the specific claims at issue in full despite actual knowledge of the noncompliance. We previously discussed Escobar’s materiality standard here, and analyzed how lower courts had applied that standard here.

Following remand, the First Circuit held that materiality requires a “holistic” analysis and that “the fundamental inquiry is whether a piece of information is sufficiently important to influence the behavior of the recipient.” While the First Circuit acknowledged that materiality looks “to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation,” it also considered whether the alleged violations were likely to “induce a reasonable person to manifest his assent.”

Applying this approach, the First Circuit “[had] little difficulty” finding that the alleged violations were material, and cited three reasons for its conclusion. First, compliance was a condition of payment. Second, beyond being a condition of payment, the licensing regime was “central to the state’s Medicaid program and thus material to the government’s payment decision.” Third, there was no evidence that the state agency that paid UHS’ claims had actual knowledge of the violations. On this last point, the court dismissed UHS’ argument that state regulators might have had “awareness of allegations concerning noncompliance,” reasoning that the regulators were not the entity that paid the claims and that awareness of allegations is not actual knowledge. The court also stated that the focus at the motion-to-dismiss stage was on the claims UHS submitted for services rendered to the deceased patient, and the court would not endorse a rationale that required the relators to investigate or allege information regarding “claims unrelated to [those] services.”

Ultimately, the First Circuit remanded the case for further proceedings in the district court.

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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