As we discussed in a previous post, FCA changes have been proposed which will potentially affect several aspects of the FCA, including cost-shifting in discovery.
Today, we are going to talk about the proposed amendment’s effect on one of the most debated elements of an FCA claim: materiality.
What Is the “Materiality” Element of the FCA?
To better understand what “materiality” means, let’s do a brief review of how everything fits together.
The False Claims Act imposes civil liability on “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” or “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim” paid by the government – 31 U.S.C. § 3729(a)(1)(A) & (B).
The basic elements of a False Claims Act claim are:
(1) A false statement or fraudulent course of conduct that was (2) knowingly made or carried out (called “scienter” in legalese), (3) that was material, and (4) caused the government to pay out money or not collect money due to it.
Since the 2016 Supreme Court case of United Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), materiality has become one of the most litigated elements of an FCA claim. The False Claims Act itself defines “material” as something that has a “natural tendency to influence or be capable of influencing” the government’s decision to pay a claim (31 U.S.C. § 3729(a)(4)). Escobar held that a false certification is material only if (1) “a reasonable man would attach importance to [it]” or (2) “the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter ‘in determining his choice of action,’ even though a reasonable person would not.” Escobar, 136 S. Ct. at 2002-03.
The Supreme Court in Escobar made clear that no one factor can determine whether the false certification is material. Instead, courts should consider all of the facts to determine “the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” Id. at 2002.
The Proposed FCA Amendments’ Attempts to Solve Escobar’s Materiality Problem
The problem with Escobar is that its ambiguous language regarding materiality has made it a darling of the defense bar. One of the frequent defense-side refrains has been the “continued payment = no materiality” argument. The gist of this argument is that if the government somehow knew of the potential fraud and kept paying for the goods or services at issue, the fraud must not have been material to the government’s decision to pay.
Courts have split on this issue, which resulted in materiality-related changes becoming the centerpiece of the proposed FCA Amendments, which enjoy rare bipartisan support.
The False Claims Amendments Act of 2021 (S.2428) clarifies the current law following confusion and misinterpretation of the Supreme Court decision in United Health Services v. United States ex rel. Escobar, which has “made it all too easy for fraudsters to argue that their obvious fraud was not material simply because the government continued payment.”
It also ensures that anti-retaliation provisions from the False Claims Act apply to post-employment retaliation and makes fraudsters liable for reimbursing the government for costs associated with a burdensome discovery process.
The bill is co-sponsored by Sens. Patrick Leahy (D-Vt.), John Kennedy (R-La.), Dick Durbin (D-Ill.), and Roger Wicker (R-Miss.).
“The False Claims Act is an important tool for combating fraud against the federal government and American taxpayers, in addition to providing incentives for whistleblowers to come forward with knowledge of wrongdoing. In 2016, the Supreme Court weakened this critical tool by making it more difficult for plaintiffs and whistleblowers to succeed in lawsuits against government contractors engaged in fraud. I am proud to join Senator Grassley again in amending the FCA to address the fallout from that decision. Strong FCA enforcement is vital to ensuring that those who defraud the federal government are held accountable. I hope that our bipartisan False Claims Amendments Act of 2021 moves swiftly through the Senate,” Sen. Patrick Leahy (D-Vt.) said.
So, how do the proposed FCA amendments attempt to solve the Escobar-related materiality problems? They appear intended to help relators (i.e. whistleblowers) survive materiality-based dismissals by shifting the burden of proof to defendants to prove by “clear and convincing evidence” that the alleged false claims act violation was not, in fact, material to the government’s payment of the claims.
To do this, the proposed FCA amendments state that “the Government or relator may establish materiality by a preponderance of the evidence,” but “[a] defendant may rebut an argument of materiality…by clear and convincing evidence.” Although the relator-friendly intentions of the proposed FCA amendments are good, there are some ambiguities in the statutory language that one hopes will resolve as the amendments progress towards passage.
One of the central issues is that it is unclear how the purported burden-shifting framework will occur and how it would help relators. In a normal case, the burden shifts to the defendant to rebut the plaintiff’s claims once the plaintiff has made out a prima facie case.
For those who don’t speak Latin or “lawyer,” prima facie (Latin for “at first sight” or “at first look”) refers to the relatively low standard of proof under which plaintiffs need only present enough evidence to create a rebuttable presumption that the matter asserted is true. A prima facie showing is much less rigorous than what is in the proposed FCA amendments, which appear to require a relator to prove materiality by a “preponderance of the evidence” before the burden shifts to the defendant.
In a normal civil case, if a plaintiff had proven an element of the claim (such as materiality) by a “preponderance of the evidence,” there would be no opportunity for a defense rebuttal—unlike in the proposed FCA amendments. Thus, an unintended consequence of the proposed FCA amendments may be to allow defendants another shot at defeating the relator’s materiality proof which defendants would not have in a normal case.
Other ambiguities in the current statutory language include that the proposed FCA amendments (1) do not define materiality or (2) change the existing framework for establishing materiality under Escobar.
Contact Bracker & Marcus LLC for More Information
We anticipate that this bipartisan effort will continue to move through Congress and hope that its various ambiguities are resolved so that it can accomplish its reform of the current materiality landscape.
If you have questions about the FCA amendments of 2021 or any other whistleblower matter, please contact the Atlanta whistleblower attorneys at Bracker & Marcus LLC.