On November 16, 2017, the Third Circuit Court of Appeals affirmed the grant of summary judgment in favor of CVS Caremark, Corp. (“CVS Caremark”), finding that although the lower court’s reasoning was flawed, the whistleblower Anthony Spay failed to establish the requisite materiality element of a False Claims Act (“FCA”) lawsuit. In making its decision, the Third Circuit relied upon the U.S. Supreme Court’s 2016 ruling in Universal Health Services Inc. v. U.S. ex rel. Escobar and strengthened a defendant-friendly interpretation of the materiality requirement.

The dispute arose from a CVS Caremark technical workaround that allowed the company to submit reimbursement claims to the Centers for Medicare & Medicaid Services (“CMS”). In 2006, CVS Caremark discovered that its claim submissions to CMS for thousands of prescriptions triggered errors involving prescription identification numbers (“IDs”). In response, CVS Caremark created “dummy IDs” for the affected prescriptions to facilitate processing of those claims. Following a 2007 audit, Spay filed an FCA lawsuit based on the alleged discrepancies in CVS Caremark’s processing of claims for Medicare Part D. The federal district court granted CVS Caremark’s request for summary judgment, and Spay appealed.

Although the Third Circuit agreed with Spay that the lower court’s reliance on the government knowledge inference doctrine was misapplied, the Third Circuit nevertheless affirmed the federal district court’s ruling on the basis that the “dummy IDs were not material to CMS’s payment decision. Declaring that the case’s circumstances were “precisely the situation” alluded to in Escobar, the Third Circuit pointed at CMS’s continued payment of the pharmacy claims in full­–despite actual knowledge that “dummy IDs” were being used–as strong evidence that the “dummy IDs” were not material. Rather, the “dummy IDs”  were “a technical, formulaic way of preventing a computer program from denying legitimate claims for reimbursement and payment for prescriptions that were actually disbursed to Medicare recipients.”

The Third Circuit’s legal reasoning should sound familiar, as the Fifth Circuit Court of Appeals cited identical authority from Escobar when reversing a jury verdict in another FCA lawsuit against Trinity Industries Inc. (“Trinity”) in September. In that case, the dispute arose from Trinity’s federal reimbursement claims for allegedly defective highway guardrails. Ruling for the defendant, the Fifth Circuit noted that the government’s continued payment of the guardrail claims in full­–despite actual knowledge that the guardrails were not the agreed-upon versions–was strong evidence that the design change was not material.

Together, the Circuits’ rulings provide a formidable defense against findings of materiality in FCA lawsuits.


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