December 27, 2017

The Evolution of Escobar in 2017 and How You Can Be Prepared in 2018

4 min

In the wake of the Supreme Court's False Claims Act (FCA) decision in United Health Services v. United States ex rel. Escobar (Escobar), which affirmed and constrained the implied certification theory based on the materiality of the subject of the implied certification, the end of 2017 has seen a number of appellate decisions grappling with the materiality standard. In particular, the Escobar decision, which Venable first reported on in June of 2016, held that the implied certification theory can create FCA liability when:

  • "the claim does not merely request payment, but also makes specific representations about the goods or services provided"; and
  • the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.

But the Court curtailed the scope of this theory by limiting material requirements to requirements that are not "minor and insubstantial" and provided additional guidance by noting that the parties' course of conduct (e.g., continued payment after knowledge of noncompliance) may indicate materiality. Consequently, 2017 has seen a number of appellate level decisions flushing out the difference between material and non-material requirements.

For example, billing full price without the proper certifications may be problematic. In United States v. Triple Canopy, Inc., 857 F.3d 174 (4th Cir. 2017), the Fourth Circuit found it material where a contractor billed full price for "marksmen" who did not have such qualifications, holding that it was material that guards shoot straight and that the government's decision not to renew a contract indicates a material violation. But where the requirement is not an express term of the contract and the Government continues payment notwithstanding the requirement, such requirement may not be material. Compare United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325 (9th Cir. 2017) (finding no violation of material requirement because compliance with cost reporting was not an express term of the contract and the government did not rely on the cost reports when paying a claim) with United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890 (9th Cir. 2017) (distinguishing Kelly and reversing summary judgment motion because the Government only made payments after the defendant had become compliant with the requirements).

Not surprisingly, the materiality standard is also becoming a procedural hurdle. For instance, where relators have not adequately pleaded materiality, courts have dismissed such complaints. See United States ex rel. Petratos v. Genentech Inc., 855 F.3d 481 (3d Cir. 2017) (holding that where relator concedes the government would have paid the claims with full knowledge of the noncompliance, the misrepresentation was not material); McBride v. Halliburton Co., 848 F.3d 1027 (D.C. Cir. 2017) (affirming summary judgment in favor of defendant where relator failed to "offer evidence that any misrepresentation regarding headcount data (if one existed) was material").

Irrespective of Escobar and its progeny, government contractors should prepare for the government to take aggressive positions on what is truly "material" by establishing effective internal controls to limit liability, which may include:

  • Establishing your intent to comply. Contractors should document all decisions, as well as the supporting rationale, to demonstrate their deliberate, good-faith efforts to comply with all statutory, regulatory, and contractual provisions.
  • Reviewing your certification process. Determine who will be charged with ensuring that the company is up-to-date on its certification requirements. Are they the right people? What representations are you making, and how could they be wrong, particularly as they relate to the core contract provisions? Do those chosen in the company have the appropriate knowledge to make the certification?
  • Maintaining a written dialogue with your government customer. Consider whether to obtain government buy-in for tricky compliance decisions. As specifically set out in Escobar, the government decision to pay with knowledge of potential noncompliances may negate materiality.
  • Developing a crisis mitigation plan. When you receive a report of noncompliance, document your response and work to resolve the issue.
  • Assessing your weaknesses. Ethical contractors and grantees seek not only to respond to issues as they arise, but to proactively determine where they are uniquely vulnerable to potential fraud and noncompliance. What are the red flags in your industry? In particular, revisit your ethics and compliance program on an annual basis, and if you have not established one, now is a good time to make that investment.

*Spencer Williams is admitted to the Virginia Bar only and is practicing under the supervision of Venable partners.