Tenth Circuit Rejects False Claims Act Theory About Falsified Records on Materiality Grounds

In Short 

The Situation: The Supreme Court's ruling in Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016), opened the door to more materiality defenses under the False Claims Act ("FCA"), but without making clear when such arguments should succeed. 

The Result: In U.S. ex rel. Janssen v. Lawrence Memorial Hospital, the Tenth Circuit affirmed a grant of summary judgment on materiality grounds under Escobar for a theory alleging that the defendant falsified medical records. The court emphasized that the government continued to pay the defendant's claims, even after learning of the allegations, and that the defendant's alleged misconduct was not "sufficiently widespread." 

Looking Ahead: The Tenth Circuit's decision sets forth a helpful framework for successfully asserting a materiality defense under Escobar, particularly at summary judgment.

The False Claims Act can impose liability upon a defendant who receives government funds after misrepresenting its compliance with a legal requirement that is material. The Supreme Court's landmark ruling in Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016), made clear that the materiality element is "rigorous" and "demanding"—and, importantly, not too fact-intensive to be enforced at summary judgment or even on the pleadings. But Escobar—despite noting the relevance of factors like the government's payment history—left much unsaid about how exactly courts should apply the materiality standard with dispositive motions. The Tenth Circuit's recent decision in U.S. ex rel. Janssen v. Lawrence Memorial Hospital, 2020 WL 594508 (10th Cir. Feb. 7, 2020), provides a helpful framework for this critical inquiry. 

Janssen concerned a hospital's alleged falsification of patient arrival times in order to increase its Medicare reimbursement rates (which were partly based on how quickly patients received care). Affirming a grant of summary judgment, the Tenth Circuit unanimously held that this falsification was not material to the government's payment decisions. Building on Escobar, the court set forth a three-part test for assessing materiality that (as Escobar instructs) focuses on the government's "likely reaction" to the misconduct.

First, the Tenth Circuit found that the government's prior conduct weighed against materiality. The court emphasized that the relator had reported her allegations through a whistleblower hotline before filing suit, and that a contractor investigated the allegations and flagged a "quality issue" for the government, but that the government nonetheless kept paying the defendant's claims—even as the lawsuit proceeded. Even though the government never "independently verified" the allegations, the Tenth Circuit reasoned that such "inaction in the face of detailed allegations from a former employee suggests immateriality." Notably, the court focused on the government's awareness of allegations. In Escobar itself, the First Circuit held on remand that such awareness did not cut against materiality, because knowing about allegations is different from "knowledge of actual noncompliance." But the Tenth Circuit noted that Escobar involved a motion to dismiss, not the more demanding summary judgment standard, and also that Escobar did not involve continued payments after the suit commenced. (Separately, the Tenth Circuit gave "little weight" to the government's decision not to intervene in the suit.)

Second, the Tenth Circuit considered whether the falsification went to the "essence of the bargain" (suggesting materiality) or was only "minor or insubstantial" (suggesting immateriality). The court held that the Medicare statutory and regulatory requirements' "broad appeals to the importance of accurate reporting cannot clear the rigorous materiality hurdle." Instead, the Tenth Circuit looked for "sufficiently widespread deficiencies that … would likely affect the Government's payment decision." But the court "conclude[d] that relatively few records" were affected—only about 16% of inpatient records and 4% of outpatient records, just "a subset of a subset" of the reported data, with "little evidence" on the falsification's overall impact. This was not enough "to raise a fact issue with respect to materiality."

Even for misconduct that had only "minor effects," the Tenth Circuit noted that "evidence of a cover-up" could still suggest materiality. But the court found no such evidence in the "boilerplate compliance documents" that the defendant had signed.

Finally, the Tenth Circuit asked whether the government had "expressly required accurate reporting as a condition of payment" for the programs at issue. But the court found no program-specific requirements, and instead just "generic regulatory requirements" that could not establish materiality "in a complex regulatory system with separate administrative remedies."

The Tenth Circuit also rejected a separate theory concerning the defendant's allegedly false certifications of Deficit Reduction Act compliance. Despite noting "concerns" over the defendant's compliance, the Tenth Circuit emphasized that the FCA "is not a tool to police everyday regulatory noncompliance"—and especially with "complex regulatory schemes [that] are managed by specific agencies with extensive technical experience." Because the defendant at most had "limited compliance issues, not a wholesale failure" of compliance, the Tenth Circuit held that the alleged misconduct was not material as a matter of law.

Janssen is an important ruling that could significantly bolster materiality challenges—particularly when the alleged misconduct affects only some of a defendant's claims. In addition to providing a framework for applying Escobar at summary judgment, Janssen underscores the need to seek discovery on the government's awareness of allegations of misconduct, including through third-party investigations. More generally, Janssen illustrates how, after Escobar, the FCA's materiality standard has teeth at summary judgment.

Three Key Takeaways 

  1. The government's continued payment of claims during the pendency of an FCA suit can weigh against materiality, as can the fact that the alleged deficiencies are not widespread. 
  2. Attempting to cover up deficiencies can signal materiality even for minor violations. 
  3. Obtaining discovery on the government's awareness of a relator's allegations will often be essential to an FCA defense strategy.
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