In Universal Health Services v. U.S. ex rel Escobar, the United States Supreme Court emphasized the importance of the materiality standard in False Claims Act cases. Since that decision, litigants have anxiously awaited further guidance on how Escobar’s instructions would be applied by lower courts. In U.S. ex rel Ruckh v. Salus Rehabilitation, LLC et al., a District Court in the Middle District of Florida gave further insight into how the FCA’s materiality and the accompanying scienter requirements should be applied and, in doing so, vacated a $350 million judgment against the owners and operators of fifty-three nursing facilities.
Background on Materiality in Escobar
The Escobar decision impacted the way that FCA cases are litigated in two major ways. First, it endorsed a version of the “implied false certification theory.” Second, and central to the decision in the Ruckh case, the Supreme Court clarified that the FCA’s materiality element is “rigorous” and “demanding” and precludes FCA liability based upon a “minor or unsubstantial” or a “garden-variety” breach of contract or regulatory violation. The Court held that to impose liability for treble damages in all instances where “the government would have the option to decline to pay [a claim] if it knew of the defendant’s noncompliance” with any regulatory requirement applicable to that claim would result in an “extraordinarily expansive view of liability” under the FCA.
Although the Court provided lengthy analysis and examples of how the materiality requirement could be proven or disproven, the Court provided no precise test for lower courts to use. Accordingly, uncertainty remained regarding how lower courts would use this new clarification of materiality.
Applying Materiality in Ruckh
In Ruckh, the relator alleged that the owners and operators of 53 nursing facilities submitted false claims by failing to maintain a “comprehensive care plan” for each patient, an ostensible requirement of a Florida Medicaid regulation. Relator also alleged defendants submitted false claims to Medicare as a result of paperwork defects, e.g. unsigned or undated documents, that allegedly demonstrated that the defendants had not provided the therapy evidenced by the paperwork.
In his Order, Judge Steven Merryday provided a lengthy summary and analysis of the Escobar decision and reiterated that the defect in a claim must be so “fundamental” and the consequence of the defect is so readily perceptible that the law imputes to the seller-claimant the knowledge of the materiality of the defect.
The Court also acknowledged the severe penalties imposed by a violation of the FCA. Thus, the Court stated that liability under the FCA is not a remedy lawfully imposed on a supplier who delivers substantially compliant goods or services that are received and accepted by a government agency with knowledge of, or with indifference toward, some immaterial, formalistic, or technical non-compliance. At a minimum, the Court emphasized that the FCA requires proof that a vendor committed some non-compliance that resulted in a material deviation in the value received and requires proof that the deviation would materially and adversely affect the buyer’s willingness to pay.
After an examination of the Escobar decision, the Court reviewed the record and noted an utter absence of any evidence of materiality or scienter. Instead, all evidence pointed to the contrary. Specifically, defendants delivered the services for which the government agencies were billed, and the government paid and continue to pay to this day despite the disputed practices. The Court also pointed out that the record lacked any evidence of how the government behaved in comparable circumstances. The Court suggested that “one might expect evidence of whether record-keeping deficiencies have resulted in the sudden and indefinite discontinuation of payment to providers of health care services to elderly, disabled, dependent or other especially vulnerable patients . . .”
Even further, the Court held that the relator had the burden of proving materiality and “the required proof likely would need to exclude the governments’ choosing to resort to a more moderate, more proportional, more efficacious remedy, such as a delivery of a ‘notice of non-compliance,’ accompanied by a stern demand for, and a fair deadline for, compliance.” Because the record was barren of any evidence on how the governments might have addressed the disputed practices, the Court stated that the judgments effect an “unwarranted, unjustified, unconscionable, and probably unconstitutional” penalty which because of its disproportionality would likely deter any prudent business from providing necessary services to the public.
The Court ultimately stated the controlling question is whether on a large scale, the government agencies would refuse to pay the provider because of a dispute about the method or accuracy of payment after the government has permitted a practice to remain in place for years without complaint or injury. However, the record could not answer this question.
Finally, the Court, guided by Escobar, proclaimed that “every day that the government continues to pay for a good or service, notwithstanding some known or unknown non-compliance and, consequently, the greater the proposed repayment times three in the event of a successful False Claims Act action, the greater the impediment to proof of materiality.” In other words, the materiality burden grows incrementally each day that the government continues to pay claims and, at some point, the governments’ payments in light of non-compliance will render the materiality standard insurmountable.
The Ruckh opinion shows what a game-changer the Escobar decision really was. First, Ruckh makes clear that the burden of actually proving materiality is significant. Relators (and the Department of Justice in intervened FCA cases) must be prepared, for example, to prove what the government has done in similar cases of alleged non-compliance with contract provisions and regulatory requirements. Second, that burden may be very difficult to meet in cases where the agency has various administrative options to address the alleged non-compliance short of withholding payments to the defendant, such as warning letters, cease-and-desist authority or imposition of corrective action plans. Finally, when a government agency continues to pay a defendant after it has knowledge of the violations alleged by the relator, proving materiality may become increasingly and, with the passage of time, virtually impossible. This last factor could be particularly important in the large number of FCA cases where the Department of Justice (in conjunction with the relevant agency) has investigated the relator’s allegations and declined to intervene and the agency continues to pay claims submitted by the defendant.
For a detailed analysis of the Supreme Court’s decision in Escobar, please click here.