One of the basic elements the government or whistleblower plaintiffs must establish in an FCA case is that the alleged misrepresentations were “material,” which the statute defines as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” Despite the statutory definition, the meaning of materiality — a crucial issue in defending FCA cases — was for many years a source of conflicting court decisions.
Materiality, as that term is used in the FCA, was clarified somewhat by the Supreme Court’s decision in United Health Services v. United States ex rel. Escobar (2016). That case held, first, that even “implicit” misrepresentations about compliance with a statutory, regulatory, or contractual requirement may be actionable under the FCA. Many FCA claims are brought under this theory, as in Escobar itself, where the claims implicitly, but falsely, represented that the clinic defendant had complied with specific state Medicaid requirements. As applied to such misrepresentations, materiality, the Court held, depends not necessarily upon whether the particular requirement at issue was expressly designated by the payor as a condition of payment, but rather upon “the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” In other words, Escobar placed the emphasis on the government’s actual prior practice in paying or rejecting claims for noncompliance with the requirements rather than on whether those requirements were express conditions of payment.
The Supreme Court suggested several factors that defendants may cite under Escobar to demonstrate a lack of materiality, notably evidence that the government had previously paid particular claims or regularly pays particular types of claims despite actually knowing that certain requirements were violated. Escobar made clear that, contrary to prior court rulings, the mere unenforced ability of the government to refuse payment when it was aware of the violation would not alone establish materiality. In the years since Escobar was decided, defendants have successfully defended FCA claims on these materiality grounds, including by providing anecdotal evidence that the government knowingly paid claims despite their noncompliance with relevant requirements.
The proposed legislation — which would apply to any new or pending cases — aims to scale back the efficacy of this materiality defense by imposing a new burden-shifting mechanism for materiality in FCA cases. Under the proposed FCA amendments, while the government or whistleblower plaintiff may still prove materiality by the typical preponderance of the evidence standard, an FCA defendant can only “rebut” that showing of materiality with “clear and convincing evidence” — a far more demanding and difficult standard to meet. Prior cases in which defendants were able to prevail based upon a finding of lack of materiality may now reach a different result, as courts may find that evidence of prior government practice fails to meet the new exacting standard. Sen. Grassley’s press release issued along with the introduction of the legislation makes clear that the bill is an effort to roll back the defense of materiality as interpreted in Escobar.
The remainder of the proposed legislation would further shift the landscape of FCA litigation in favor of the government and whistleblowers. This includes provisions (1) requiring parties to an FCA action where the government does not intervene to pay the government’s expenses for responding to the party’s discovery requests absent certain conditions; (2) increasing the procedural and substantive hurdles for the government to dismiss a relator’s claim; and (3) resolving a circuit-split by clarifying that FCA anti-retaliation provisions apply even to post employment retaliation.
Sen. Grassley’s press release regarding the proposed legislation can be accessed here.
We will continue to monitor this legislation and report on further developments.