A Split Decision By The Ninth Circuit Highlights The Courts’ Continuing Uncertainty Over The Proper Standard For “Materiality” In False Claims Act Cases After Escobar

In a split decision announced on August 24, 2018, the Ninth Circuit added another layer to the ongoing debate about “materiality” under the False Claims Act (FCA) in the wake of the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). United States ex rel. Rose v. Stephens Institute, No. 17-15111 (9th Cir. Aug. 24, 2018). In Escobar, the Supreme Court effectively shifted the focus in FCA cases from questions of falsity to questions of materiality – without providing a clear standard for assessing materiality. The split among the Ninth Circuit judges in Rose underscores the difficulties the courts have faced in the two years since Escobar in determining whether alleged false statements were material to the government’s decision to pay claims.

The Rose relators, former admissions representatives for Stephens Institute, filed their action in 2010, claiming that, from 2006 through 2010, Stephens had violated the incentive compensation ban that was part of its program participation agreement with the Department of Education. Stephens filed a motion for summary judgment, which was denied on May 4, 2016. Escobar was decided on June 16, 2016, and Stephens filed for reconsideration in light of Escobar, which the district court also denied, while granting in part Stephens’ motion for interlocutory appeal.

While the panel agreed on the question of falsity, they split on the question of Escobar’s effect on the court’s previous opinions regarding materiality. In United States ex rel. Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir. 2006), the court had relied on the fact that the statute, regulation, and program participation agreement all explicitly conditioned payment on compliance with the incentive compensation ban, and noted, with regard to materiality, that “the question is merely whether the false certification . . . was relevant to the government’s decision to confer a benefit.” Id. at 1173. The Rose majority, in effect agreeing with the more lax standard urged by the relators and the government, viewed Escobar “as creating a gloss’ on the analysis of materiality,” without having overruled Hendow, and affirmed the district court’s pre-Escobar denial of the motion for summary judgment.

Arguing that, under Escobar, the analysis “focuses not on whether payment is conditioned on compliance, but whether the Government would truly find such noncompliance material to a payment decision,” the minority concluded that Escobar had “explicitly overruled Hendow’s materiality standard and imposed a new materiality analysis that we must follow and apply.” Noting that the Escobar Court stated four times that the materiality test was “rigorous” or “demanding,” the dissent emphasized language in the opinion that the primary inquiry “looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” (emphasis added). The minority, therefore, would have reversed the district court’s denial of Stephens’ motion for summary judgment, and remanded for additional discovery on the question of whether the government would have considered the Stephens’ alleged actions material such that they would have influenced the Government’s payment decisions.

While the court’s split on an issue of such importance to the FCA argues in favor of an en banc hearing, the decision is, in fact, one of several instances in which it has become increasingly clear that further clarity on the question of materiality is likely to be required from the Supreme Court. The Court currently has petitions for certiorari pending in two cases, in which the courts of appeals reached different results on the issue of materiality, where the government knew of the alleged falsity, but continued to pay the underlying claims. In United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890, 901 (9th Cir. 2017), the Ninth Circuit rejected Gilead’s argument that the government’s payments for the drug products at issue, even though the government knew that FDA requirements had been violated, established the presumption that the alleged false representations were not material. In United States ex rel. Harman v. Trinity Industries, Inc., 872 F.3d 645 (5th Cir. 2017), however, the Fifth Circuit reversed a $663 million verdict against Trinity Industries for defrauding the Federal Highway Administration, finding a lack of materiality where the government paid the claims even after knowing that the design for the guardrails at issue had been changed.

The post-Escobar emphasis on the effect of the alleged falsity on the government’s decision to pay claims has shifted the courts’ focus to questions of materiality, specifically whether materiality is to be construed broadly to expand claims, or narrowly to restrict them. Whether the Ninth Circuit takes Rose en banc, and/or whether the Supreme Court recognizes a split between the Fifth and Ninth Circuits in Trinity and Gilead, FCA cases are likely to turn on evidence of the government’s intent in paying the claims, more than on the claimant’s intent in making false claims, for the foreseeable future.