A smart and strategic choice of venue can set the stage for triumph, and in a Philadelphia False Claims Act Whistleblower case, that selection may make all the difference.
"Circuit Split on Materiality Standard in FCA Cases and Choosing the Right Venue," by Edward T. Kang, was published in The Legal Intelligencer on November 10, 2022.
In wars throughout history, most people agree that the "high ground" is the best place to put an army. Even though there are no swords or horses in court, plaintiffs still want their cases to be heard on the "high ground." A good choice of venue is one that has a good track record of letting cases go to trial. This means that it has a history of letting cases go to trial. In cases brought under the False Claims Act (FCA), the choice of venue can make or break a case. A key part of any FCA claim is figuring out if the misrepresentation or fraud committed by the person or group getting government money was "material" to the money being given. So, in FCA actions, materiality can turn a venue into either a sunny hilltop where a plaintiff can win or a muddy bog where a plaintiff has to give up and leave the fight.
Most of the time, fraud involves taking money from government programs or contracts without permission. The person who reported the fraud sues the fraudster because the person who got government money used false claims to get those funds. The "implied certification" theory is part of the "explicitly certified" FCA liability theory, which says that a person can be held responsible for an FCA violation if they have broken any obligation they agreed to by taking part in a government reimbursement or payment program. This is called the "explicitly certified" theory. For example, under the "implied certification" theory, a doctor who received reimbursement from Medicaid could be in violation of the FCA if she did not follow the Medicaid program's tax rules, even though her request for reimbursement did not contain any false claims (e.g., she submitted a request for payment to Medicaid for a medical procedure that was medically necessary). When deciding if a defendant has actually broken the FCA, courts look at how important the broken obligation was to see if the defendant made a false statement that makes the claim a fraudulent one.
In 2016, the U.S. Supreme Court ruled in Universal Health Services v. Escobar. This decision has had a big effect on FCA litigation because it gives lower courts a number of factors that they can use to decide if an alleged misrepresentation was "material." In Escobar, the Supreme Court gave lower courts four main things to look at when deciding whether something is "material": whether the government has made meeting a specific statutory, regulatory, or contractual requirement a condition of payment; whether the government generally refuses to pay claims that don't meet the specific statutory, regulatory, or contractual requirement; and whether the government has continued to pay claims despite having actual knowledge that they weren't meeting the specific statutory, regulatory, or contractual requirement.
The U.S. courts of appeals have come to different conclusions about how to use the materiality factors from the court's opinion in the Escobar case. This has caused a split among the circuits. Most of the differences come from "false certification" cases, in which an entity submits a claim for payment and falsely certifies that it is following a law, rule, or regulation, either directly or indirectly. See Rose v. Stephens Institute, 909 F.3d 1012 (9th Cir. 2018). In these kinds of cases, the defendants often say that the violation of the law, rule, or regulation at issue is not important, and they point out that the government has continued to pay the requested funds even though the violation happened.
Circuits have come to different conclusions about what is important, with stricter courts requiring the relator to show that the violation of the obligation affected or would have affected the government's payment decision for the violation to be considered important. Other courts have a less strict rule, requiring only that the person bringing the case show that the government could have chosen not to pay if it had known about the violation. In line with this, courts that use a more relaxed standard are more likely to find that a government organization explicitly tying payment to compliance with a law, rule, or regulation is strong evidence of materiality, while courts that use a stricter standard are more likely to find that such tying is not convincing. See, for example, Petratos v. Genentech, 855 F.3d 481 (3d Cir. 2017); Miller v. Weston Educational, 840 F.3d 494, (8th Cir. 2016).
Circuit courts have different rules about what is important, so FCA relators should choose their venue carefully if they have the choice. The Ninth Circuit is the "high ground" of U.S. circuit courts. The Ninth Circuit, which covers most of the western United States, is good for relators who want to bring claims under the FCA when it's not clear what's "material." The Ninth Circuit has said that the Escobar decision "puts a 'gloss' on the analysis of what's important." See Rose v. Stephens Institute, 909 F.3d 1012, 1016 (9th Cir. 2018). For example, in Campie v. Gilead Sciences, 862 F.3d 890 (9th Cir. 2017, the relator said that Gilead bought a key ingredient for three of its HIV drugs from an unapproved Chinese supplier while telling the Food and Drug Administration that the substance came from an approved South Korean manufacturer. Gilead tried to get the suit thrown out, saying that because the government kept paying for the drugs even after learning that the company used Chinese ingredients, the alleged violations were not "material" to the government's decision to pay the claims and were therefore not subject to an FCA claim. Even though the FDA kept paying Gilead, the Ninth Circuit said that the relators had shown "more than a mere possibility" that the government could refuse payment if it knew about Gilead's alleged violations. In the Ninth Circuit, the fact that a government agency kept getting paid through a program or contract usually doesn't stop a claim from saying that the defendant's fraudulent actions were important.
Because of the facts of their claim, some plaintiffs may not be able to go west. When plaintiffs have to file their case in one of the northeastern circuits (the First, the Second, or the Third), it is important to know the lay of the land and find the best place to set up camp. The Second Circuit is a little bit stricter than the Ninth Circuit when it comes to materiality, but FCA claims have still often been found to have materiality. The First and Third Circuits, on the other hand, take a strict view of materiality that is not good for relators.
United States v. Strock, 982 F.3d 51 (2d Cir. 2020), is a good summary of the court's position in the Second Circuit. In Strock, the government said that the defendants lied about being a service-disabled veteran-operated small business (SDVOSB) to trick the government into giving them a contract that was only for SDVOSBs. Even though the government kept paying the defendants, it said that the important "payment decision" was the initial decision to enter into the contract, not the final decision to pay claims, and that the defendants' false statements were important to that initial award decision. The Second Circuit interpreted the Supreme Court's decision in Escobar to include liability for "misrepresenting compliance with a condition of eligibility to... participate in a federal program and held that both the initial decision to enter into the contract and the later decisions to pay claims under it must be taken into account when assessing materiality." In the Second Circuit, a misrepresentation at the beginning of a government contract is likely to be important, which is good for people who want to bring fraud claims about government contracts.
If a plaintiff wants to file a claim because someone lied to a government agency, they shouldn't file in the First or Third Circuit. The First Circuit has said that the fact that the government kept paying claims even though it knew that certain rules were broken is "very strong evidence that those rules are not material." Nargol v. Depuy Orthopaedics, 865 F.3d 29 (1st Cir. 2017). Both plaintiffs and defendants can lose in the Third Circuit. The Third Circuit has said that a misrepresentation alone is not enough to show that an FCA action is about something important. In Petratos v. Genentech, 855 F.3d 481 (3d Cir. 2017), the court found that the relator could not prove materiality under Escobar. The court said that a misrepresentation is not material "simply because the government requires compliance with certain statutory, regulatory, or contractual requirements as a condition of payment" or "because the government would have the option to not pay if it knew that the defendants were not complying." Instead, something is important if "the government consistently refuses to pay claims" because of this kind of noncompliance.
Given how important the materiality standard is, the person who wants to file a claim should carefully think about where to do so after weighing his options. After Escobar, different circuit courts have set different standards for what is "material." Until the Supreme Court sets a national standard, plaintiffs can still get the "high ground" in their court cases. A smart and strategic venue selection can set the stage for victory, and in a False Claims Act case, that choice may make all the difference.