Determining the Appropriate Reach of Escobar's Materiality Standard: Implied and Express Certification

• Publication year: 2022

Determining the Appropriate Reach of Escobar's Materiality Standard: Implied and Express Certification

Jake Summerlin
jsummerlin3@student.gsu.edu

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DETERMINING THE APPROPRIATE REACH OF ESCOBAR'S MATERIALITY STANDARD: IMPLIED AND EXPRESS CERTIFICATION

Jake Summerlin^*

Abstract

In 2016, the Supreme Court altered the landscape of the False Claims Act by recognizing implied certification as a viable theory of liability. Before the Court decided Universal Health Services, Inc. v. United States ex rel. Escobar, courts disagreed over the scope and legitimacy of the theory, arguing that it could create runaway liability if not held in check. The Court, although recognizing that implied certification expanded the reach of the False Claims Act, reassured itself and government contractors by reinforcing the common law antecedents of fraud, namely, that misrepresentations and omissions must be material to the government's decision to pay a claim. Moreover, Justice Thomas, writing for the unanimous Court, characterized the law's materiality standard as "demanding."

In Escobar, the Court sought to provide clarity for highly complex False Claims Act litigation. Instead, the decision created even more confusion as courts have attempted to apply the "demanding" standard for materiality. Specifically, some courts across the country have applied the new materiality standard to other theories of liability, including the express false certification theory which was not at issue in Escobar. Others have limited Escobar strictly to cases arising under implied certification. The two theories of liability, although similar, have vastly different implications for what constitutes fraud under the False Claims Act. Courts that apply Escobar to express certifications overlook this crucial, albeit subtle, difference.

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This Note argues that the "demanding" materiality standard articulated by the Court in Escobar should be limited to the implied false certification theory of liability. This argument relies on the history, text, and purpose of the False Claims Act, as well as the appropriate role of the courts in determining what legislative and administrative actions are considered material. In doing so, this Note hopes to provide clarity as to when Escobar's "demanding" materiality standard should be applied and, more importantly, when it should not.

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CONTENTS

Abstract................................................................................571

Introduction.........................................................................574

I. Background......................................................................578

A. Liability Under the False Claims Act........................580
B. Implied Certification Before Escobar ........................ 585
C. The Court Finds a Balance: Universal Health Services, Inc. v. United States ex rel. Escobar...........................586

II. Analysis...........................................................................589

A. The End of the "Garden-Variety" Breach: Escobar Applied Broadly Across the FCA...............................592

1. Express Certification Claims Failing Escobar's Test ..............................................................................593
2. Condition of Payment: Relevant or Irrelevant? ... 595
3. United States ex rel. Bibby v. Mortgage Investors Corp.: A Case Study.............................................598

B. The Formal Approach: Escobar Limited to the Implied Certification Context .................................................. 600

1. Express and Implied Certifications Treated as Separate and Distinct Inquiries............................602
2. Escobar Limited to Presentment Claims Under Section 3729(a)(1)(A)...........................................603

C. The FCA's Materiality Standard Before and After Escobar ....................................................................... 605

1. Before Escobar: Materiality under the Fraud Enforcement and Recovery Act (FERA)...............607
2. The Materiality Standard Post-Escobar...............610
3. Post-Escobar Materiality and United States ex rel. Badr v. Triple Canopy, Inc. ...................................611

III. Proposal.........................................................................614

A. Express Certifications Satisfy the Existing FCA Materiality Standard..................................................615
B. Separation of Powers Requires that Express Certifications Imposed by Congress Are Material as a Matter of Law.............................................................620

Conclusion............................................................................625

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Introduction

Consider a hypothetical. The United States government contracts with a private company to construct a government office building with a requirement that all contractors and subcontractors must use American-made nails.¹ The contractor must complete the project in ten phases and must submit an invoice for payment at the end of each phase. If the nails used in the final phase of the project were in fact imported from China, would submitting an invoice to the government without disclosing the fact that the building was finished with imported nails make the contractor's claim for payment fraudulent? Is the use of imported nails enough to entitle the government to seek one of the harshest civil remedies warranted under federal law?² The law of contracts suggests not.³ Although such may be true of the law between private parties, it has been said that people must "turn square corners when they deal with the Government."⁴ The False Claims Act (FCA) makes it illegal to submit false or fraudulent claims to the government for payment or approval.⁵ So, in the case of the hypothetical construction company, at what point does the apparent breach of contract become fraudulent?

This question was hotly debated in the world of government contracting before the United States Supreme Court's 2016 decision in

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Universal Health Services, Inc. v. United States ex rel. Escobar, and given the ambiguity in that decision, it remains unsettled to this day.⁶ In Escobar, the question was whether the so-called implied false certification theory of liability under the FCA was viable as recognized by some but not all circuit courts.⁷ Under the implied false certification theory, a defendant's submission of an invoice to the government while knowing that it is not in compliance with one or more statutory, regulatory, or contractual requirements makes the otherwise factually accurate claim for payment a false claim and therefore actionable under the FCA.⁸ The plaintiffs in Escobar alleged that a healthcare provider seeking payment for its services to government healthcare beneficiaries while in breach of personnel licensing regulations constituted an implied false certification under the FCA.⁹ Although the unanimous Court ultimately agreed that implied false certification is a viable theory of liability, it set boundaries on when this type of statutory or regulatory violation may subj ect a party to FCA liability.¹⁰ According to the Court, a defendant's implied certification of

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compliance is actionable under the FCA only where the certification is material to the government's payment decision.¹¹

After Escobar, the imported nails might not translate to FCA liability for the hypothetical company.¹² But what if the United States and China are in a trade war? What if Congress enacts a law that requires all construction contracts with the government to include a provision that all nails must be American-made in an effort to boost domestic steel production? What if the contractor must promise on every invoice submitted to the government that "I certify, in recognition of the United States' effort to boost domestic steel production, that only American-made nails have been used in the construction of this office building"? How does Escobar's materiality standard stack up against Congress's constitutional authority to legislate?¹³

These questions were unfortunately left unresolved by Escobar.¹⁴ Many of the unresolved issues stem from the Court's analysis regarding what conduct is considered material under the Act.¹⁵ Although the Court recognized that the FCA defines material as having the "natural tendency" to influence the government's payment decision, the Court went on to characterize the FCA's materiality

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standard as "demanding."¹⁶ The opinion has led to much litigation as courts attempt to apply the "demanding" standard for materiality to other theories of liability under the Act, including express false certifications of compliance not at issue in Escobar.¹⁷ The debate is the result of the Court failing to articulate whether its materiality analysis for determining liability in cases involving implied false certifications extends to the express false certification theory of liability.¹⁸ The answer to this question depends on who you ask.¹⁹

This Note addresses whether the Court's limits on implied false certifications apply equally to express false certifications under the FCA. Part I offers a brief history of the FCA, the basics of liability, and the context of the Court's decision in Escobar.²⁰ Part II analyzes the post-Escobar jurisprudence and its application in cases brought under both implied and express false certification theories of liability.²¹ Part III revisits Escobar with a proposal that its application should be applied narrowly to the implied certification context because of the text and intent of the FCA as well as the fundamental separation of powers principle.²²

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I. Background

Congress enacted the FCA in 1863 in response to the rampant fraud and abuse that took place during the Civil War.²³ High wartime demand caused the federal government to accept almost any offer for war supplies at any price offered by private contractors.²⁴ As a...