Recent decisions in the Fourth and Fifth Circuit Courts of Appeals demonstrate the central role that the Supreme Court’s Escobar decision continues to play in fraud litigation despite, or as a result of, continued uncertainty as to the application of the “rigorous” and “demanding” materiality standard endorsed in that decision. The decisions discussed below provide additional circuit-level guidance for litigants, but also raise additional questions as to the scope of the Escobar ruling and the efficacy of the implied false certification theory of FCA liability.
First, on September 29, 2017 the U.S. Court of Appeals for the Fifth Circuit issued a ruling in U.S. ex rel. Harman v. Trinity Industries, Inc., a complicated FCA case involving allegations of non-compliance with Federal Highway Administration (FHWA) requirements for highway guardrail systems subsidized by the FHWA. The relator alleged in part that Trinity failed to disclose design revisions to the FHWA affecting its previously-approved guardrail sold to states, and that Trinity’s receipt of state funds reimbursed by the FHWA thereafter gave rise to implied false certification liability under the FCA. In 2015, a federal district court awarded a final judgment against Trinity for over $600 million, which Trinity appealed to give rise to this decision.
The Fifth Circuit reversed the district court and rendered a judgment as a matter of law in favor of Trinity. The court determined that Trinity was entitled to judgment as a matter of law on the issue of materiality, largely on the basis of the Supreme Court’s Escobar decision. In support of its decision, the court noted that the FHWA had expressly rejected the relator’s claims against Trinity, and continued to reimburse state purchases of Trinity’s products after being notified of the relator’s claims. The court stated that its approach to FCA materiality follows the “natural tendency” standard, under which “a defendant’s false statements [that] ‘could have’ influenced” a governmental payment decision are sufficient to bring an FCA claim. The court found that the most importance guidance for this case was the Supreme Court’s statement in Escobar that where “the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.” The court thus concluded that a jury’s “determination of materiality cannot defy the contrary decision of the government, here said to be the victim, absent some reason to doubt the government’s decision as genuine.”
Second, on October 30, 2017 the U.S. Court of Appeals for the Fourth Circuit affirmed health care fraud convictions against two defendants who sought to use the heightened materiality standard endorsed by Escobar to overturn their convictions in United States v. Palin and United States v. Webb. This decision arose from a consolidated appeal of convictions of a husband and wife for health care fraud related to their operation of an addiction medicine clinic and affiliated laboratory that processed urine drug tests ordered by the clinic’s physicians. The defendants were convicted of criminal health care fraud (18 U.S.C. § 1347) and conspiracy to engage in health care fraud (18 U.S.C. § 1349) – not under the civil FCA (31 U.S.C. § 3729 et seq.) – for allegedly instituting procedures at the addiction clinic under which insured patients automatically received both an inexpensive “quick-cup” urine drug test and a more expensive “analyzer” urine drug test, without regard to medical necessity, whereas uninsured patients paid cash and only received the inexpensive “quick-cup” test. At trial, the court determined that performing the additional analyzer test on a weekly basis for insured patients only “was not medically necessary,” that the defendants hid this fact from insurers, and that the defendants sought payment for the drug tests from insurers despite knowing they had violated applicable reimbursement rules.
On appeal, the defendants sought to overturn their conviction on the basis that the trial court failed to directly address materiality in rendering its decision, and further that the Supreme Court’s decision in Escobar heightened the materiality standard for fraud and their alleged misrepresentations were not material under that new standard. In response, the Fourth Circuit found that any error by the trial court in failing to expressly address materiality was harmless, as the record indicates that insurers would not have paid for the analyzer drug tests had they known the tests were not medically necessary. Interestingly, the court then found that the defendants sought to stretch Escobar “too far,” and that the defendants’ misrepresentations “were material even under” the Escobar standard since insurers would not have paid for the expensive analyzer tests if they had known the tests were not medically necessary, and “no evidence even suggests that medical necessity was less than a critical prerequisite to payment.”