On January 12, 2017, the Ninth Circuit Court of Appeals affirmed summary judgment in favor of a government contractor defendant in a False Claims Act (FCA) lawsuit. The opinion relied heavily on the recent U.S. Supreme Court case, Universal Health Servs., Inc. v. U.S. ex rel. Escobar (2016), in which the Supreme Court ruled that an FCA lawsuit can succeed on an implied certification theory of liability but stressed that the falseness of a defendant’s claims must meet rigorous standards of materiality.
In Escobar, the Supreme Court resolved a split among the circuit courts over whether implied certification was a valid theory of liability under the FCA. While the Escobar court affirmed the viability of the implied certification theory, it also placed limits on it. The Court found that a successful FCA case must establish that a knowingly false claim for payment or approval is presented to the government at the time the claim for payment is made. A two-part test is applied and requires the plaintiff to show (1) the defendant’s claim for payment made “specific representations about the goods or services provided,” and (2) the defendant’s failure to disclose material, statutory, regulatory, or contractual requirements “made those representations misleading half-truths.” Escobar also emphasized the rigorous application of materiality and scienter standards to FCA claims.
Since Escobar’s issuance in June 2016, many district courts have weighed in on whether the Supreme Court’s language indeed requires specific representations on the claim form be made, or if statements may be implied by the mere submission of a claim for payment. In U.S. ex rel. Kelly v. Serco, the Ninth Circuit Court weighed in, adhering strictly to the language of Escobar and requiring specific representations on the claim for payment itself to be “false or misleading half-truths.” The qui tam relator worked for the defendant, a project management services provider, on a contract for the U.S. Department of Homeland Security, Customs and Border Protection. The relator alleged the contractor submitted fraudulent claims for payment to the government for work done under the contract. Specifically, the relator alleged the claims were fraudulent because they did not comply with a government-ordained cost and budget tracking program that is required for certain contracts.
The Ninth Circuit found that, despite the contractor’s technical noncompliance, there was no evidence that the defendant’s public claim forms made any specific representations about the goods or services provided. Further, there was no failure by the defendant to disclose anything in its claims that caused representations about the services provided to be misleading half-truths. Instead, the defendant’s claim form contained only one express certification—that the services billed were for services performed during stated time periods, and thus, the claim forms themselves contained no facially false or inaccurate statements.
Further, applying Escobar’s “rigorous” materiality standard, the Kelly Court found that defendant’s failure to follow particularized claim submission protocols was not material to the government’s payment decision because the government was aware of the non-compliance. It was undisputed that the government knew the contractor’s claims were submitted in technical violation of the reporting requirements related to the project cost and tracking program, but effectively waived those technical requirements. Thus any alleged falseness in the claim was immaterial. This lack of materiality was ultimately fatal to plaintiff’s argument that there was a still a false claim because the government was entitled to refuse payment at the time of claims submission based on technical violations of the reporting requirements, even though it did not.
Weiner Brodsky Kider PC regularly represents clients against False Claims Act investigations and actions.