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

31 October 2016 Health Care Law Today Blog
Author(s): 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theory in the case United States v. Sanford-Brown, Ltd., 788 F.3d 696 (7th Cir. 2015), opinion reinstated in part, superseded in part by United States v. Sanford-Brown, Ltd., No. 14-2506, 2016 WL 6205746 (7th Cir. Oct. 24, 2016).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.

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