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The Supreme Court’s Escobar Decision and the Impact on False Claims Act Cases (Part I of IV)

This week I am running a series of posts on healthcare fraud enforcement and the False Claims Act.

With all the controversy swirling around the Mueller investigation and prosecutions, the Justice Department continues its aggressive pursuit of healthcare fraud.  The Justice Department’s machinery and resources are producing a steady stream of False Claims Act cases and settlements.

Just like other enforcement areas, companies in the healthcare industry cannot afford to risk losing a False Claims Act case for fear of being excluded from federal healthcare programs.  As a result, companies are frequently drawn to the settlement table in order to resolve a government investigation into healthcare practices.

Years ago, the government prosecutors also secured a round of legislative changes to the False Claims Act which strengthened their hand in prosecuting cases.

Against this trend, however, the Supreme Court’s decision, two years ago, in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. ____ (2016) (here) has complicated False Claims Act cases.  In Escobar, the Supreme Court cut back on the False Claims Act by ruling that the false certification theory of liability required that a claim, “does not merely request payment, but also makes specific representation about the goods or services provided; and the defendant’s failure to disclose “material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”  In applying this standard, the Supreme Court directed lower courts to apply a “rigorous” and “demanding” materiality standard, suggesting that plaintiffs have to show that the government would have refused to pay if it knew of the alleged misrepresentations.

To state the obvious, Escobar is a landmark case in False Claims Act litigation.  The lower courts are struggling with applying Escobar and drawing fair and practical lines.  Of course, the decisions are fact focused and hard to categorize into general principles.

In a significant post-Escobar case, US ex rel. Ruckh v. CMC II LLC et. al, No. 8:2011cv01303, Document 468 (M.D. Fla. 2018)(here), a trial court vacated a nearly $350 million False Claims Act verdict against a group of nursing home operators emphasizing the Escobar standard for “rigorous” and “demanding” materiality and scienter requirements.  The nursing homes failed to maintain a comprehensive care plan required by Medicaid regulations and submitted defective paperwork which showed the defendants never provided the therapy billed to Medicare.

The lower court ruled that the plaintiffs did not offer any evidence of materiality, and specifically noted that such a showing that the defendants’ non-compliance materially and adversely affected the government’s willingness to pay reimbursement for the services.  The trial court stated that it was the plaintiff’s burden to establish materiality, and that had the government known, it would have refused to pay.  In fact, the lower court noted that the government knew about the deficiencies but continued to pay the claims.

The lower courts have been struggling with this line of thinking relating to the plaintiff’s burden to demonstrate materiality, and the issue of government knowledge of non-compliance with regulatory or contractual requirements as an indication that the violation is not material.  Whether the Supreme Court intended this result, it has developed into a controversy, legally and politically.

In an interesting development, the Supreme Court sought the Solicitor General’s views on a petition for certiorari filed in United States ex rel. Campie v. Gilead Sciences. Inc., 862 F.3d 890 (9th Cir. 2017).  The case presents an opportunity for the Supreme Court to address the interplay of the government knowledge and materiality requirement.  I expect the Supreme Court will grant the petition and address the issue.

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