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Insight Center: Publications

Lessons From a Year of Escobar

Client Alert

Authors: Thomas M. Gallagher, Sara B. Richman, Kate A. Stanley and Allison DeLaurentis

Lessons From a Year of Escobar

This article was published in Law360 on June 20, 2017. © Copyright 2017, Portfolio Media, Inc., publisher of Law360. It is republished here with permission.

It has been one year since the U.S. Supreme Court’s landmark ruling in Universal Health Services v. United States ex rel. Escobar,1 which resolved a circuit split as to the validity of the implied false certification theory under the False Claims Act. In its highly anticipated decision, the Supreme Court upheld the theory but cautioned that courts should strictly enforce the FCA’s materiality requirement.2 Immediately following Escobar, it was unclear how defendants would be able to fend off implied false certification claims based on the Escobar standard. But the past year has shown that the heightened standard has teeth and that courts can, and will, dismiss FCA complaints on materiality grounds, even before discovery.

Escobar’s Focus on Materiality

In Escobar, the Supreme Court said the implied false certification theory can be a basis for FCA liability, at least where two conditions are satisfied: (1) the defendant’s claim for payment makes specific representations about the goods or services provided and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those representations misleading half-truths.3

The Supreme Court allayed concerns of open-ended liability for "garden-variety breaches of contract or regulatory violations" by calling for strict enforcement of the FCA’s "demanding" materiality standard.4 The court explained that "a misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable"5 and emphasized that the FCA is "not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations."6

Rather than providing a bright-line rule, the court identified goalposts for courts to consider when determining whether a statute, regulation or contractual provision is material to the government’s payment decision. First, whether the government labels a provision a "condition of payment" is relevant, but not dispositive.7 Second, proof of materiality may include evidence that the government consistently refused to pay claims in the "mine run of cases" based on noncompliance with the particular statutory, regulatory or contractual requirement.8 Third, if the government regularly pays a particular type of claim despite "actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material."9

Materiality and the Motion to Dismiss

Because FCA cases can be expansive and involve costly and burdensome discovery, defendants have a strong incentive to identify "insignificant regulatory or contractual violations" as early as possible. Significantly for FCA litigants, Escobar suggested that courts can dismiss FCA cases based on materiality at the pleadings stage:

We reject Universal Health’s assertion that materiality is too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment. The standard for materiality that we have outlined is a familiar and rigorous one. And False Claims Act plaintiffs must also plead their claims with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b) by, for instance, pleading facts to support allegations of materiality.10

In the year since Escobar, district courts have taken that guidance to heart and have granted motions to dismiss when FCA complaints fall short of the "demanding" and "rigorous" materiality standard described in Escobar. Below are some examples:

  • In United States ex rel. Schimelpfenig v. Dr. Reddy’s Laboratories Ltd.,11 the relators alleged that the defendants dispensed prescription drugs in violation of the Poison Prevention Packaging Act and the Consumer Product Safety Improvement Act.12 The court dismissed the complaint, in part, because it did little to allege the materiality of the cited provisions to the government’s reimbursement decisions.13 For example, the complaint did not allege that compliance with federal packaging requirements was a condition of government payment, did not allege a time when the government refused payment of a claim on the basis of noncompliance with federal packaging requirements, and did not allege an instance when the government initiated an action to recover money paid for goods that were noncompliant with federal packaging requirements.14

  • In Dresser v. Qualium Corp.,15 the relators alleged that the defendants violated various Medicare regulations by conducting sleep and titration tests in non-Medicare approved locations, employing unqualified personnel to conduct the tests, and dispensing durable medical equipment to Medicare patients based on those tests, from unapproved locations and/or by an unapproved provider.16 Moreover, the relators alleged that, in their Medicare enrollment forms, the defendants falsely certified that they would abide by Medicare laws, regulations and program instructions and that they understood that payment of a claim was conditioned on the claim being compliant with Medicare laws, regulations and program instructions.17 The court dismissed the relators’ implied false certification claim because, although the amended complaint alleged that the government would not have paid the defendants had it known of the alleged fraudulent conduct, it did not explain why and thus did not meet Escobar’s "heightened" materiality standard.18

  • In United States ex rel. Scharff v. Camelot Counseling,19 the court held that the relator failed to allege materiality because, aside from a conclusory assertion that the defendant "failed to comply with material Medicaid regulations that served as conditions precedent for [the defendant] to receive reimbursement through federal funds," the complaint contained no other allegations regarding the materiality of the alleged noncompliance. For example, the complaint did not "cite any express condition for reimbursement applicable to [the defendant], nor [] allege whether the government has refused to reimburse clinics that have engaged in conduct similar to [the defendant’s]."20

  • Other cases have been dismissed on similar grounds, including United States ex rel. Southeastern Carpenters Regional Council v. Fulton County ("Relators have not shown that Defendants mispresented matters ‘so central’ to the Contract that the government ‘would not have paid [the defendants’] claims had it known of these violations.’")21 and Knudsen v. Spring Communications Co. ("Without further details, such as allegations that the government consistently refuses to pay claims that violate [the relevant] terms or that the government did not know that it was not receiving the required price reductions, [the relator] fails to adequately plead materiality.")22

Cases that have survived a motion to dismiss nevertheless reflect a thorough vetting of the government’s allegations and demonstrate what kinds of facts might be sufficient to plead materiality post-Escobar. One example is:

  • In United States v. Quicken Loans Inc.,23 the government alleged that Quicken Loans falsely certified compliance with certain Fair Housing Administration requirements in connection with underwriting, approving and endorsing certain mortgage loans for FHA insurance.24 Quicken Loans filed a motion to dismiss, arguing that the alleged violations were not material to the FHA’s decision to insure the loans. The court disagreed, noting that — although many of the guideposts provided by Escobar, such as an allegation that the certification requirement was an express condition of payment or that Quicken knew that the government consistently refused to pay claims based on noncompliance with that requirement, were absent — Quicken’s certification with FHA requirements was a prerequisite to the endorsement of insurance, and, absent the certification, the loan would be ineligible for FHA insurance.25 Ultimately, these alleged facts led the court to conclude that rather than being "minor or insubstantial," the FHA underwriting requirements at issue went to the "essence of the bargain" between the Department of Housing and Urban Development and Quicken.26

Taken together, these cases suggest that courts are indeed taking a "rigorous" look at materiality and are willing to dismiss cases that offer no facts beyond merely citing the regulations at issue and asserting that they are material to the government’s payment decision.

Government Knowledge as a Potential Defense to Materiality

Relatedly, some post-Escobar cases have started to flesh out the role of "government knowledge" in determining whether materiality is adequately pled. Since the 1986 amendments to the FCA, defendants have asserted the so-called "government knowledge defense" to rebut the scienter element of FCA liability. The defense rests on "the principle that under some circumstances, the government’s knowledge of the falsity of a statement or claim can defeat FCA liability on the ground that the claimant did not act ‘knowingly,’ because the claimant knew that the government knew of the falsity of the statement and was willing to pay anyway."27

In Escobar, the Supreme Court not only signaled its approval of the government knowledge defense, but also suggested that government knowledge bears on materiality. Since Escobar, some courts have shown a willingness to dismiss FCA cases, at least in part based on government knowledge. Examples include:

  • Most recently, in United States ex rel. Petratos v. Genentech Inc.,28 the Third Circuit concluded that the FCA plaintiff’s allegations did not meet Escobar’s "demanding" and "rigorous" materiality standard, in part because of evidence relating to government knowledge of the defendant’s alleged fraud. The FCA plaintiff alleged that the defendant submitted false claims to federal health care programs when it suppressed data that allegedly would yield negative results related to its highly prescribed cancer drug.29 The Third Circuit noted that the plaintiff admitted that he disclosed "material, non-public evidence of [the defendant’s] campaign of misinformation" to the U.S. Food and Drug Administration and the U.S. Department of Justice, but, since that time, the FDA continued to approve the drug, did not initiate proceedings to enforce its adverse-event reporting rules, did not require a label change, and even granted three more indications for the drug.30 Likewise, the DOJ took no action and declined to join the lawsuit.

  • In United States ex rel. Kolchinsky v. Moody’s Corp.,31 the Southern District of New York dismissed the relator’s second amended complaint in part because government knowledge negated materiality. The second amended complaint alleged that the credit ratings issued by Moody’s Corporation and Investors Service Inc. were improperly inflated or deflated and that certain governmental entities were affected by the quality of those ratings.32 Though not pled specifically, the court interpreted the relator as proceeding under a theory of implied legal falsity — essentially that Moody’s implicitly promised that the credit ratings it issued were accurate representations of the risk of the financial products they rated.33 The court explained that well before the statute of limitations cut-off, credible public reports of inaccuracies in Moody’s ratings spawned inquiries by the federal government.34 As a result, the government and the public were on notice of the alleged fraud, but the government nevertheless continued to pay Moody’s for its credit rating products each year — strong evidence that the alleged violations were not material.35 Citing Escobar, the court explained that "materiality is absent at the pleading stage when the relator’s chronology suggests that the government knew of the alleged fraud, yet paid the contractor anyway."36

In Escobar, the Supreme Court was careful to note that government knowledge is one of many factors to consider when assessing materiality, and, since Escobar, some courts have emphasized that there may be good reasons for the government to pay claims after receiving notice of alleged noncompliance. Examples include:

  • In United States v. Public Warehousing Co.,37 the court declined to dismiss an FCA complaint on materiality grounds, cautioning that, even if the government were aware of the defendants' alleged fraud and continued to pay claims, there are "instances in which a government entity might choose to continue funding the contract despite earlier wrongdoing by the contractor."38 Indeed, the court reasoned that "the more essential the continued execution of a contract is to an important government interest, the less the government's continued payment weighs in favor of the government knowledge defense."39

  • In United States ex rel. Brown v. Pfizer Inc.,40 the court reasoned that the mere fact that the government continued to pay and approve claims after the plaintiff’s allegations surfaced was insufficient, on its own, to establish that the claims lacked materiality.41 Citing the First Circuit’s Escobar decision on remand from the Supreme Court,42 the court noted the difference between actual knowledge and knowledge of allegations, stating, "knowledge of allegations regarding noncompliance is insufficient to prove actual knowledge of noncompliance." The court concluded that "[a]bsent evidence that the government had actual knowledge of Defendant's fraud, we find the government's continued payments ... insufficient to establish that Relators' claims fail for lack of materiality."43

Given Escobar’s holistic approach to determining whether a statute, regulation or contract provision is material to a payment decision, defendants should explore all potential avenues for showing that the FCA claims in a complaint do not meet the "demanding" materiality standard, including whether the government had actual knowledge of the allegations and/or continued to pay claims even after receiving notice of the FCA complaint.

Key Takeaways for Defendants

  • Cases can and will be dismissed at the early stages, and before discovery, based on a failure to properly plead materiality.
  • Simply pleading materiality or even that compliance with a certain statute, regulation or contract term is a "condition of payment" is likely not enough to get the FCA plaintiff over the relevant pleading burden. Rather, the complaint must allege facts establishing materiality.
  • One tool to potentially defeat an implied certification claim at the motion to dismiss stage is to argue that the government knew of the alleged violation but continued to pay claims anyway.
  • If the case makes it past the pleading stage, defendants should try to develop a record that the government investigated, or was otherwise aware of, the alleged violations by defendant or other similarly situated parties but continued to pay claims as they were submitted.


1 136 S. Ct. 1989 (2016).

2 Id. at 2003-04.

3 Id. at 2001.

4 Id. at 2003.

5 Id. at 1996 (emphasis added).

6 Id. at 2004.

7 Id. at 2003.

8 Id. at 2003.

9 Id. at 2004.

10 Id. at 2004, n.6.

11 No. 11-4607, 2017 U.S. Dist. LEXIS 44064 (E.D. Pa. Mar. 27, 2017).

12 Id. at *2.

13 Id. at *22.

14 Id. at *23.

15 No. 12-01745, 2016 U.S. Dist. LEXIS 93248 (N.D. Cal. July 18, 2016).

16 Id. at *4-8.

17 Id. at *19.

18 Id. at *19-20.

19 No. 13-3791, 2016 U.S. Dist. LEXIS 133292 (S.D.N.Y. Sept. 28, 2016).

20 Id. at *24-25.

21 No. 14-4071, 2016 U.S. Dist. LEXIS 103054, at *22 (N.D. Ga. Aug. 5, 2016) (quoting Escobar, 136 S. Ct. at 2004).

22 No. C13-04476, 2016 U.S. Dist. LEXIS 118438, at *47 (N.D. Cal. Sept. 1, 2016).

23 No. 16-14040, 2017 U.S. Dist. LEXIS 33559 (E.D. Mich. Mar. 9, 2017).

24 Id. at *1.

25 Id. at *52-54.

26 Id. at *53.

27 United States v. Bollinger Shipyards, 775 F.3d 255, 263 (5th Cir. 2014).

28 855 F.3d 481 (3rd Cir. 2017).

29 Id. at 485.

30 Id. at 490.

31 No. 12-1399, 2017 U.S. Dist. LEXIS 29714 (S.D.N.Y. Mar. 2, 2017).

32 Id. at *2.

33 Id. at *12.

34 Id. at *16.

35 Id. at *17-18.

36 Id. at *16.

37 2017 U.S. Dist. LEXIS 37643 (N.D. Ga. Mar. 16, 2017).

38 Id. at *18.

39 Id.

40 2017 U.S. Dist. LEXIS 55656 (E.D. Pa. Apr. 11, 2017).

41 Id. at *35.

42 842 F.3d 103, 112 (1st Cir. 2016).

43 2017 U.S. Dist. LEXIS 55656, at *36.

Thomas Gallagher and Sara Richman are partners in Pepper Hamilton’s Health Sciences Department, a team of 110 attorneys who collaborate across disciplines to solve complex legal challenges confronting clients throughout the health sciences spectrum. Kate Stanley and Allison DeLaurentis are associates in the Health Sciences Department.

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