Last week, the Fourth Circuit and First Circuit heard oral argument in two separate cases dealing with key False Claims Act (“FCA”) issues. First, the Fourth Circuit Court of Appeals heard oral arguments for the interlocutory appeal in United States ex rel. Michaels v. Agape Senior Community Inc., Nos. 15-2145 and 15-2147. Second, in the wake of the U.S. Supreme Court’s endorsement of “implied certification” liability and discussion regarding materiality, the First Circuit Court of Appeals recently heard oral arguments in United States ex rel. Escobar v. Universal Health Services, Inc. The following reports on comments and questions raised in the course of those oral arguments, as the courts’ decisions in these matters could have significant repercussions for FCA litigants going forward.
Fourth Circuit Arguments in Agape
The appeal in Agape focused on two FCA issues: (1) whether the district court erred in concluding that the Government has an unqualified power to veto a settlement agreement reached by a relator and a defendant when the Government did not intervene in the case; and (2) whether the district court erred in concluding that the relators could not engage in statistical sampling to prove liability or calculate damages.
In Agape, the relators had alleged that the defendant had certified patients that were ineligible for Medicare’s hospice benefit in violation of the FCA. During the proceedings, the relators filed a motion requesting that the district court allow statistical sampling to be used to establish liability and damages. The district court rejected the relators’ request and agreed to a bellwether trial to manage the matter due to the large number of potential claims at issue. Prior to the start of the bellwether trial, the relators and Agape reached a settlement agreement in exchange for a complete release of all claims set forth in the relators’ complaint. The Government was not involved in the settlement negotiations and informed that parties that it would not consent to the settlement the parties had reached.
In its order, the district court ruled that it did not have the authority to review the Government’s refusal to provide consent to the settlement agreement. In addition, the court concluded that the relators would not be allowed to use statistical sampling to determine liability and damages in the case. In addition to the court’s decision, the order included language stating that both issues were appropriate for interlocutory appeal before the Fourth Circuit. The parties filed for an interlocutory appeal of the issues, and the Fourth Circuit agreed to hear the interlocutory appeal on both issues, which occurred before a three-judge panel on October 26th.
Government Veto of Settlement
The first issue before the court was whether the district court erred in concluding that the Government has an unqualified power to veto a settlement agreement reached by a relator and a defendant when the Government has not intervened in the case. During oral argument, the Fourth Circuit panel questioned the parties on the scope of the Government’s power to veto a settlement agreed to by the parties in an FCA case. Both the relators and the defendant argued that the decision of the Government to veto a settlement reached by the parties should be subject to a “reasonableness” standard. Specifically, the relators argued that without such standard, the court would be unable to manage its dockets and make dismissals because the Attorney General would have all of the power over settlements in FCA cases. The defendant further stressed that without a “reasonableness” standard, the Attorney General has the authority to veto a settlement for any reason, no matter how “sinister or small.” In addition, the defendant highlighted many situations where courts have read a reasonableness standard into certain statutes and implored the court to do so in this situation as well.
The Government, however, argued that the language of § 3730(b)(1) was unambiguous and compared it to the language found in § 3730(c)(2)(B) of the statute. There, the statute provides the Government with authority to settle an FCA case with a defendant despite a relator’s objections “if the court determines, after a hearing, that the proposed settlement is fair, adequate, and reasonable under all circumstances.” The Government highlighted the fact that Congress clearly included a “reasonableness” standard in § 3730(c)(2)(B) but not in § 3730(b)(1). The judges appeared to strongly consider this textual evidence and alluded to the fact that it may agree that the district court does not have the authority to read in a “reasonableness” standard and review the Government’s decision to veto a settlement reached by the parties in an FCA case. The Government further argued that it should not be required to sign off on a settlement agreement reached by the parties for a release of the Government’s claims if the Government does not believe it to be a fair settlement just because the parties do not want to incur the expense of litigation.
Statistical Sampling and Extrapolation
With respect to the relator’s and Government’s arguments regarding the importance of statistical sampling and extrapolation in FCA cases with a large number of claims, the Fourth Circuit did not consider the substantive arguments for using such methodology to prove liability or damages in FCA cases. Instead, the court focused on the fact that it did not believe it had appellate jurisdiction to review the issue because the statistical sampling issue was a question of fact rather than a question of law. During the parties’ and Government’s arguments, the court continued to express its view that the issue was fact-driven and not appropriate for consideration on this interlocutory appeal. It is therefore unlikely that the court will decide whether relators may use statistical sampling and extrapolation to prove FCA liability or calculate damages at this time, a decision that was long anticipated by both relators and defendants.
First Circuit Arguments in Escobar
Oral arguments in Escobar focused on whether the relators had sufficiently plead materiality, as explained in the Supreme Court’s recent ruling, to survive a motion to dismiss their FCA allegations. During oral arguments, a panel of the First Circuit actively engaged with counsel as it expressed uncertainty over the proper showing of materiality necessary to survive dismissal at the pleading stage. Ultimately, the arguments provided little information to suggest the outcome of the First Circuit’s forthcoming decision.
Background on the legal theory and facts of the case
In this case, the relators are family members of a woman who allegedly died as the result of a seizure at a Massachusetts mental health clinic. The relators alleged that the clinic failed to adequately hire and supervise its staff, as required by MassHealth regulations, and that noncompliance with these regulations resulted in FCA liability. The district court dismissed the case by distinguishing conditions of payment from Medicare conditions of participation, and ruled that “implied certification” liability will only attach when there is noncompliance with a condition of payment, which is the common distinction drawn by courts when determining whether to impose FCA liability. The First Circuit reversed, holding that state Medicaid regulations governing licensing and supervision for psychiatric care were, in fact, conditions of payment.
The Supreme Court granted certiorari to determine whether, and in what circumstances, implied certification is a viable theory of legal falsity under the FCA. In a decision with sweeping consequences for FCA litigation, the Court unanimously endorsed a version of implied certification that may give rise to FCA liability. In addition, the Court’s opinion sought to clarify the FCA’s materiality standard. The Court made clear that “[t]he materiality standard is demanding.” Further, the Court provided examples of situations in which a claim would not be material to the Government’s payment decision. For instance:
[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full 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.
Despite this lengthy analysis of the materiality requirement, the Supreme Court provided no actual test of materiality for the lower courts to apply and vacated the judgment of the First Circuit, which had found that the materiality standard was satisfied when the alleged fraud violates a condition of payment, and remanded the case back to that court for further proceedings. On October 25, 2016, a three-judge panel of the First Circuit heard oral argument from counsel for the relators, defendants, and the United States (as amicus curiae) as it considered whether the Relators satisfied this materiality standard for purposes of Rule 12(b)(6).
Arguments before the First Circuit
On remand, the First Circuit appeared to struggle with the issue of materiality as it seeks to determine whether the relators in Escobar adequately pleaded a violation of the FCA. During more than an hour of oral argument, a panel of the First Circuit expressed uncertainty over the proper showing of materiality necessary to survive dismissal at the pleading stage. In particular, the court focused on the Supreme Court’s statement that “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”
Relators and the United States argued that the Supreme Court did not announce a new or heightened standard of materiality in Escobar, but rather embraced what it characterized as the “familiar” pre-existing standard of materiality. They argued that other considerations may lead the government to pay claims, or not seek to claw back funds—despite having actual knowledge of the claims’ legal falsity—while nevertheless viewing that falsity as material. For example, the government might want to avoid disrupting revenue streams or bankrupting small health care providers. In the view of Relators and the United States, equating these decisions with a finding of immateriality risks infringing upon a valid exercise of agency discretion.
Defendants, on the other hand, emphasized that information must be material to the payment decision, and not merely important in an abstract sense. They highlighted the Supreme Court’s statement that government’s decision to make payments, without ever seeking to recover or claw back any of the funds, amounts to “strong evidence” that the information was immaterial to the payment decision. By way of analogy, Defendants argued that if an individual advertises a green car, and instead provides a blue car, that would constitute a misrepresentation. But if the buyer sees the blue car and decides to purchase it anyway, the misrepresentation was not material to the payment decision. In a similar fashion, Defendants contended that the government cannot pay a claim for reimbursement, despite actual knowledge of its legal falsity, and then later claim an FCA violation.
Ultimately, the First Circuit provided little indication of how it might rule. At the conclusion of the argument, one judge appeared to capture the tenor of the hearing as he remarked, “we’ll do the best we can with it.” We will continue to cover future developments on both cases as they develop.