Triple Canopy and Evolving Standards of Materiality Under the Civil False Claims Act (FCA)

By Joan H. Krause

[Cross-posted from L3: Long Leaf Law Blog]

In Universal Health Services v. United States ex rel. Escobar (UHS), the Supreme Court upheld the Civil False Claims Act (FCA) theory of “implied certification,” under which the submission of a claim for reimbursement “implies” that the claimant is in compliance with the statutes, regulations, and contract provisions necessary for that claim to be paid. Escobar was filed by the parents of a young woman who died after receiving Medicaid-covered mental health treatment from a Massachusetts clinic that violated state licensing and supervision regulations. Her parents alleged that the clinic’s claims were fraudulent because they implicitly (and falsely) represented that the facility was in compliance with the relevant provisions. A district court dismissed the suit, but the First Circuit reversed. In a unanimous opinion written by Justice Thomas, the Supreme Court held that where a defendant “makes specific representations about the goods or services provided, but knowingly fails to disclose . . . noncompliance with a statutory, regulatory, or contractual requirement[,] . . . liability may attach if the omission renders those representations misleading.”  But cautioning that such misrepresentations must be “material to the Government’s payment decision,” the Court reversed and remanded because the First Circuit had applied an impermissibly broad test.

Escobar was not the only federal appellate case to grapple with implied certification in recent years. In 2015, the year the First Circuit considered Escobar, no fewer than four federal appellate cases confronted the theory. Arguably the most important of these cases, at least from the standpoint of national security, was United States ex rel. Badr v. Triple Canopy, Inc., a Fourth Circuit case reversing the dismissal of a suit alleging that a military contractor had falsified marksmanship scores for Ugandan security guards hired to protect Al Asad Airbase in Iraq. Noting that the contract did not expressly condition payment on marksmanship, the district court had concluded that the claims did not contain any factually false statements. The Fourth Circuit disagreed, upholding the allegations under the theory of implied certification. Perhaps due to the tragic facts and sympathetic plaintiffs, or perhaps in recognition of the important role Medicare and Medicaid FCA cases now occupy, the Court instead chose to review Escobar rather than Triple Canopy. Nevertheless, in light of Escobar, Triple Canopy was reversed and remanded for further proceedings. On May 16, 2017, the Fourth Circuit issued its long-awaited decision on remand.

The differences between the Supreme Court’s opinion in Escobar and the initial Fourth Circuit opinion in Triple Canopy were subtle. Both courts recognized the validity of implied certification, and both limited the theory to significant misrepresentations that may affect government payment. Where the Fourth Circuit faltered, however, in the eyes of the Supreme Court, was in defining the types of misrepresentations that are “material” to the payment decision. The Fourth Circuit drew heavily on the definition of materiality in the Fraud Enforcement and Recovery Act of 2009 (FERA), which applies to several provisions of the FCA (but not implied certification itself):  “having a natural tendency to influence, or be[ing] capable of influencing, the payment or receipt of money or property.” The Fourth Circuit also was aided by the facts, which suggested that Triple Canopy had undertaken a detailed scheme to create fraudulent records to hide the marksmanship fraud. As the judges wryly noted, “common sense strongly suggests that the Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight.”

As it turned out, however, the Supreme Court in Escobar adopted a more demanding standard of materiality than many observers had anticipated – or that either the First Circuit or the Fourth Circuit had utilized. The Justices cautioned that the materiality inquiry was a “demanding” one, rejecting the argument that a misrepresentation is material simply because the government designates compliance as a condition of payment, or because the government would have the option to decline payment if it knew of the violation. Instead, “[u]nder any understanding of the concept, materiality ‘look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.’”  The Justices took pains to clarify that materiality requires more than the mere potential for harm. In describing materiality, the opinion explicitly mentioned factors such as whether the defendant knew that the government refused to pay similarly noncompliant claims, or whether the government in fact paid a claim despite knowing of the violations. As a result, the test crafted by Escobar is a highly fact-intensive one, rather than a theoretical one based on legal entitlement alone.

Whether this more robust materiality test would change the Fourth Circuit’s view of Triple Canopy remained to be seen. Not surprisingly, on remand, the Fourth Circuit once again found that the complaint properly alleged a violation of the FCA. The judges noted that Triple Canopy’s representations fit squarely into Escobar’s description of “half-truths – representations that state the truth only so far as it goes, while omitting critical qualifying information.”  Emphasizing both common sense and the extensive cover-up (a factor the judges previously had considered as evidence that the company realized the importance of marksmanship proficiency), the judges had little trouble concluding that these half-truths were material. The judges analogized Triple Canopy’s actions to a hypothetical mentioned in Escobar, in which a defendant may be aware that the government expects guns that it purchases to be able to shoot even if that is never specified as a condition of payment. Moreover, the fact that the government subsequently failed to renew Triple Canopy’s contract suggested that the marksmanship misrepresentations were indeed highly relevant to the government’s decisionmaking process.

Despite the rather predictable result, the recent Triple Canopy decision does leave open some important questions. For example, the opinion appears to equate the Fourth Circuit’s “capable of influencing” standard with the more robust materiality standard adopted by the Supreme Court in Escobar, a curious assumption given that the Supreme Court explicitly declined to adopt the FERA standard containing that language. Under different, less compelling facts, the difference between the two standards may become relevant. Moreover, the Escobar Court explicitly declined to resolve the question of whether all claims “implicitly represent that the billing party is legally entitled to payment,” instead limiting its discussion to implied certification cases in which a defendant makes specific representations about the goods or services provided. The Fourth Circuit, however, answered that question in the affirmative, reading an implied misrepresentation regarding marksmanship into Triple Canopy’s general invoices, which merely listed the number of guards and the hours they worked. By implying that all claims include representations of legal entitlement, rather than only those that make “specific” representations, the Fourth Circuit potentially opened the door for another split in the circuits.

The more important question, however, may be what will happen to implied certification cases in the district courts. While Triple Canopy suggest that materiality may not be a high bar at the motion to dismiss or summary judgment stage, proving “Escobar materiality” at trial should be a more difficult undertaking. That analysis may well require detailed proof regarding the government’s actual payment practices, proof that ordinarily is available only after extensive discovery. In light of the increased FCA penalties in effect as of August 2016, however, defendants such as Triple Canopy will face enormous pressure to settle – suggesting that few materiality disputes will survive long enough to be vetted fully in a courtroom.

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