When a company lies to the government and they receive government funds, they can be held accountable under the False Claims Act. However, bringing a successful claim is not always as simple as it may seem or as it should be. Due to the materiality standard under the False Claims Act, certain misrepresentations and misreporting may not qualify for a whistleblower claim.
The scope and limitations of the materiality standard can bring complications to an otherwise straightforward qui tam case. With a False Claims Act attorney by your side, you can successfully navigate questions of materiality, and ensure that you have the strongest possible case for blowing the whistle on fraud, waste, and abuse.
Definition of Materiality Under the False Claims Act
Under Section 3729(b)(4) of the False Claims Act, materiality is defined as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” This definition has been applied since the passage of the Fraud Enforcement and Recovery Act of 2009 (FERA) resolved a split in the circuit courts. Materiality essentially means that the fraud or deceit must be relevant to the funds received and how the government is making financial decisions.
Examples of False Claims Act Materiality Requirements
One example of a material false claim might be a government contractor who promises the government that a job building a highway overpass can be completed with safe disposal of the waste and chemical hazards generated by the process. It turns out, however, that the contractor simply dumps the trash, chemicals, and leftover construction materials into a nearby river. The government has paid the contractor for a bid that involves appropriate cleanup, and the contractor does not follow through on what they said they would deliver. In this way, their false claim is material to the completion of the job and the payments that they received. Even though the cleanup is not part of the construction, it was part of the initial bid. Likely the government would have chosen another contractor had they known that this business lacked the ability to dispose of waste appropriately.
One example of a false claim that might not be considered material is a contract for a fixed price, where the contractor claims that they worked a different number of hours than was expected to bring the job to completion. If the contractor estimated the job would take 20 hours, and they were able to accomplish it in 15, this difference in reporting is immaterial to the government’s decision to pay for the finished work. In fact, they may still report that they spent 20 hours of labor, and this false claim may not be material to the government’s decision to pay. The contractor is being compensated a previously agreed-upon fixed price, not hourly, for his or her work, and the job was completed successfully. Therefore the hours spent and how they are reported would likely be considered immaterial.
Relevance of the Escobar False Claims Act Materiality Standard Today
In 2016, the US Supreme Court issued a groundbreaking and unanimous decision that substantially shifted the understanding of materiality under the False Claims Act. The case Universal Health Servs., Inc. v. U.S. ex rel. Escobarheld that misrepresentation must meet a “rigorous” and “demanding” materiality guideline in order to invoke liability under the False Claims Act.
The following standards are now considered in the post-Escobar landscape as to whether or not a misrepresentation can be considered material:
- Whether or not the government specified that compliance with a statute, rule, or contractual requirement was a condition of payment
- Whether or not the government generally refuses to pay claims that have similar violations
- Whether or not the government would likely have refused to pay if it had known about the violations
- Whether or not the noncompliance goes against “the very essence of the bargain”
Additionally, Escobar established an important and controversial test for materiality, that, while not dispositive, has been influential in many cases since the decision. Under Escobar, the government’s continued payment of claims despite knowledge of noncompliance should be considered as “very strong evidence that those requirements are not material.”
Tort Law and Materiality in Escobar
The Supreme Court’s understanding of materiality in Escobar is tied to tort law and contract law, as well as anti-fraud law. For example, in tort law as well as in contract law, a detail can be considered material under two circumstances, as identified by the Supreme Court:
- “[If] a reasonable man would attach importance to [it] in determining his choice of action in the transaction” or,
- If the defendant knew or should have known that the recipient would consider compliance with the standard important “in determining his choice of action,” even though a reasonable person would not.
In linking anti-fraud materiality to tort and contact law, the Supreme Court both provided more examples of ways to prove materiality, as well as limited the scope of certain fraud claims.
Recent Applications of Materiality and Critique
Some lawmakers, including one of the initial authors of the False Claims Act, Sen. Chuck Grassley (R-IA), have spoken out about how this post-Escobar materially standard has been applied too liberally, causing some fraud cases to be dismissed unfairly. For instance, in one recent case involving hidden fees charged to veterans, the VA continued payments to the fraudulent mortgage company, because the loans both helped veterans despite the prohibited fees, and because a previous law prevents the VA from declining funds to a previously approved loan guarantee. The fraud case against the mortgage company was then dismissed by the courts, despite the lender charging illegal and hidden fees, because the VA had continued payments.
Additionally, some courts have attempted to take a more holistic approach to proving materiality, citing multiple concerns of the Supreme Court, and not simply the presence of continued payments, as important in establishing materiality.
Recent Cases in False Claims Act Materiality
The following are some recent cases in the wake of Escobar that have continued to refine the legal understanding of materiality under the False Claims Act:
- United States ex rel. Brown v. Pfizer, Inc.: In this case against pharmaceutical giant Pfizer, a court in the Eastern District of Pennsylvania held that “mere knowledge of allegations regarding noncompliance is insufficient to prove actual knowledge of noncompliance.” Therefore, the presence of continued Medicare payments for the drug Vfend while the case was under investigation should not be considered dispositive of materiality. Additionally, the case involved a clearcut example of fraud’s influence on reasonable decision making, since the drug Vfend was denied by the FDA in 2002 when it was shown to be less effective than others. Then, in 2004, Pfizer misrepresented the study’s findings and won approval. Therefore, the fraud was clearly material to the government’s decision to include Vfend for reimbursement.
- United States v. Triple Canopy, Inc.: In 2017, military contractor Triple Canopy was ordered to pay $2.6 million to settle allegations that the company hired unqualified security guards in Iraq while submitting for reimbursements from the government. Triple Canopy allegedly concealed the security guards’ ineptitude with their firearms and inability to pass the contractually required firearms proficiency tests by creating false scorecards. While marksmanship was not an express condition for payment, the fraud was considered material as a reasonable person would have hired security guards who could handle firearms, a fact that the company clearly knew given their attempt to cover up the firearms proficiency test results.
- United States ex. rel. Wood v. Allergan: This case involving medical kickbacks held that non-compliance with the Anti-Kickbacks Statute is inherently material to payment because the law is “designed to influence providers’ independent medical judgment in a way that is fundamentally at odds with the functioning of the system as a whole.”
How a Whistleblower Lawyer Can Ensure Claims Meet the Materiality Standard
Working with an experienced qui tam attorney has always been important when filing a whistleblower complaint, but in the current FCA landscape, it is imperative. A whistleblower lawyer can help prevent your claim from being rejected for failing to meet the materiality standard through a number of legal considerations, including:
- Fact finding: A number of courts have deferred questions of materiality during the early stages of litigation until facts about the case have been more clearly established. For this reason, building a comprehensive case has become all the more important. A qualified qui tam lawyer can help ensure that your disclosure cites all of the relevant information, including how and when payments were issued, and whether or not facts of fraud had been established or were merely allegations.
- Legal knowledge: Whether or not the government regularly refuses other claims based on noncompliance has become increasingly important post Escobar. For this reason, working with an experienced qui tam attorney can help your case pass the materiality threshold. Our attorneys have a deep knowledge of other anti-fraud cases, and the resources to build up context around what kinds of similar fraud claims have been considered material to payment.
- Terms of contract: Cases of express misrepresentation, especially in the field of healthcare, tend to be much clearer cut in establishing materiality. For instance, if a healthcare provider misrepresented the services rendered, their qualifications, or their compliance with Medicare regulations while submitting for reimbursement, this kind of fraud would be much easier to illustrate materiality with than a case involving implied certification theory.
Questions About the Materiality Standard? Contact a Whistleblower Attorney Today
Working with an experienced whistleblower attorney can make the process of reporting and proving fraud, as well as filing a False Claims Act lawsuit, much easier. With experts by your side, you can be assured that your whistleblower claim as well as your professional reputation are in the best hands possible. For a complimentary consultation, contact the law firm of Tycko & Zavareei LLP.