Seventh Circuit Applies Escobar’s Materiality Standard to (Again) Reject False Certification Claim

31 October 2016 Health Care Law Today Blog
Authors: Lisa M. Noller

The Escobar and Sanford-Brown Decisions

This summer, the United States Supreme Court undertook to resolve the long-running circuit split over the validity and scope of the implied false certification theory of liability under the False Claims Act (“FCA”). The theory treats a payment request to the Government as an implied certification of compliance with relevant statutes, regulations, or contract requirements for obtaining payment, and it renders a failure to disclose a violation as an affirmative misrepresentation making the claim “false or fraudulent.” In Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 2002 (2016) (“Escobar II”), the Supreme Court unanimously held implied false certification can, at least in some circumstances, provide a basis for liability, but the Court specified “a misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable under the False Claims Act.” Escobar II, 136 S. Ct. at 1999.

Prior to Escobar II, the Seventh Circuit Court of Appeals categorically refused to recognize the implied certification theory in the case United States v. Sanford-Brown, Ltd., 788 F.3d 696 (7th Cir. 2015), opinion reinstated in part, superseded in part by United States v. Sanford-Brown, Ltd., No. 14-2506, 2016 WL 6205746 (7th Cir. Oct. 24, 2016). There, the plaintiff-relator brought a qui tam suit in Wisconsin federal district court against Sanford-Brown College (“SBC”), a for-profit higher educational institution in Milwaukee. SBC allegedly engaged in recruiting and retention practices in violation of its Program Participation Agreement with the U.S. Secretary of Education for claiming federal subsidies under the Higher Education Act. As a consequence, SBC allegedly submitted thousands of claims for payment of subsidies that falsely implied compliance with institutional eligibility requirements for federal funding.

The district court dismissed the case, in part by “declin[ing] to expand FCA liability . . . as [the relator] and the government propose.” United States v. Sanford-Brown, Ltd., 30 F. Supp. 3d 806, 812 (E.D. Wis. 2014). So did the Seventh Circuit on appeal, ruling that, “[a]lthough a number of other circuits have adopted this so-called doctrine of implied false certification . . . we decline to join them[.]” Sanford-Brown, Ltd., 788 F.3d at 711-12.  The Supreme Court agreed to review and vacated the appeals court judgment, remanding the case for further proceedings consistent with Escobar II. U.S. ex rel. Nelson v. Sanford-Brown, Ltd., 136 S. Ct. 2506 (2016).

On October 24, 2016, the Seventh Circuit issued its post-Escobar II decision, which readdressed and again rejected the plaintiff-relator’s implied certification claim. After Escobar II, no longer “is it sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance;” rather, “materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” Escobar II, 136 S. Ct. at 2002, 2003. The Sanford-Brown relator “offered no evidence that the government’s decision to pay SBC would likely or actually have been different had it known of SBC’s alleged noncompliance with Title IV regulations. On the contrary, as we previously noted, the subsidizing agency and other federal agencies in this case have already examined SBC multiple times over and concluded that neither administrative penalties nor termination was warranted.” Sanford-Brown, Ltd., 2016 WL 6205746, at *1. (internal quotations omitted). Instead, said the Seventh Circuit, “even assuming [the plaintiff-relator’s] allegations are true, the most he has shown is that SBC’s supposed noncompliance and misrepresentations would have entitled the government to decline payment. Under Universal Health, that is not enough.” Id.

Is Sanford-Brown a Bellwether?

Monday’s Sanford-Brown opinion is significant, because it subjected an FCA claim premised on implied false certification to increased judicial scrutiny, as expressly called for by Escobar II. See Escobar II, 136 S. Ct. at 2002 (noting “concerns about fair notice and open-ended liability can be effectively addressed through strict enforcement of the Act’s materiality and scienter requirements. Those requirements are rigorous”) (citation and internal quotations omitted). Illinois, Indiana, and Wisconsin federal courts now have precedent to follow suit. Sanford-Brown also makes clear that relators will need to specifically allege, in good faith and with sufficient factual detail, that the government would have behaved differently based on annual certifications such as those submitted by SBC.

Sanford-Brown, however, did not squarely address whether the plaintiff-relator initially had pled materiality consistent with the heightened standard imposed by the Federal Rules of Civil Procedure, as Escobar II requires. See id. at 2004 n.6 (“False Claims Act plaintiffs must also plead their claims with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b) by, for instance, pleading facts to support allegations of materiality.”). The degree of detail required by Escobar II to survive the motion to dismiss stage currently is unclear and may vary from one jurisdiction to another.

What’s Next?

The Health Care Law Today team is actively monitoring how Escobar II is being applied at the pleading stage and will report on developments and trends emerging in the case law.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services