If You Can Plead It, Can You Prove It? The Supreme Court Shrugs Off Answering Questions About Escobar Materiality

As mentioned in a previous entry, the Supreme Court’s 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar, et al. has caused quite a commotion among False Claims Act practitioners and in the courts as they try to apply the Court’s pronouncements about “materiality” in practice.  Four cert petitions seeking clarification of Escobar were filed between January 2018 and February 2019.  The Supreme Court declined to grant any of them, leaving the a patchwork of approaches to the materiality requirement at the pleading and evidentiary stages.

Allegations Of Materiality May Survive A Motion To Dismiss – But Beware The DOJ

The issue presented to the Court in Gilead Sciences, Inc. v. United States ex rel. Campie was whether the relator’s complaint could withstand a motion to dismiss when some allegations “admitted” that the underlying violation of law was not material.  In responding to the cert petition, the Justice Department agreed with the 9th Circuit’s reasoning that materiality turns on a number of case-specific factors such that an otherwise adequately pled complaint should not be dismissed based on a single fact that may bear upon materiality but is not dispositve.  The government went on, though, to contend that Gilead Science was “a poor vehicle for deciding the issue presented,” and announced that it would affirmatively seek to dismiss the case upon remand to the district court.  Not surprisingly, the Supreme Court denied the cert petition.

On March 28, 2019, the United States filed its motion to dismiss with the district court in California; the relator plans to oppose.  This case remains one to watch, as the assigned judge became the first in the country to deny a government motion to dismiss a qui tam case in 2018.  As discussed elsewhere, even as the Justice Department started to exercise its dismissal authority over qui tam complaints more aggressively over the last year, the district courts have articulated that there are some limits to the government’s discretion.

Also in March, the Supreme Court declined another opportunity to examine the pleading requirements for materiality when it denied the cert petition filed in Brookdale Senior Living Communities, Inc., et al. v.  United States ex rel. Prather.  Similar to the 9th Circuit’s approach in Gilead Sciences, the 6th Circuit held in Brookdale Senior Living that materiality is a fact-dependent issue that generally is not appropriate for decision at the pleadings stage.  That case now heads to litigation before the district court.

Based on these two cases, it seems that the Court is satisfied – at least for now – that pleading materiality is a fairly low bar in False Claims Act cases.  The battle will be joined only after the parties develop the factual record and present competing evidence about materiality on summary judgment or at trial.

Materiality Evidence Can Kill A Jury Verdict – But Might Not Win Summary Judgment

In addition to punting on the appropriate pleading standards for materiality, the Court also refused to consider how the materiality element should play out on a fully developed factual record.  Indeed, the case of United States ex rel. Harman v. Trinity Industries, Inc., et al. was thoroughly litigated through discovery and trial.  A jury found the defendants liable, and the district court entered a judgment of $663 million.  The 5th Circuit vacated the judgment based on evidence that the government continued to pay for the defendant’s products even after it learned about the underlying facts creating falsity.  In seeking Supreme Court review, the relator raised a number of issues, including whether the facts that the appellate court relied upon were determinative of materiality and whether Escobar’s materiality analysis applies at all when the false certifications at issue are express, rather than implied.  The Supreme Court rejected the petition without comment

By contrast, the 9th Circuit in Stephens Institute d/b/a The Academy of Art University v. United States ex rel. Rose et al. upheld the trial court’s decision to deny summary judgment to defendants in a case involving alleged violations of federal funding to schools.  Stephens Institute asked the Supreme Court to intervene, arguing that under Escobar’s rigorous materiality standard, the courts below should have disposed of the case in light of evidence that the government continued to fund financial aid programs even when schools failed to comply with certain program obligations.  Once more, the Supreme Court demurred, forcing the parties to march back to court and, presumably, a trial

What, if anything, might be gleaned from the Supreme Court’s treatment of these cases?  While it may mean nothing more than these particular cases were not sufficiently compelling, it could also be that the Court sees Escobar as hitting exactly the right note.  Plaintiffs will be provided a fair amount of leniency in pleading materiality (subject to the usual Rule 8 and Rule (b) pleading standards), with discovery allowing the parties to develop a fulsome factual record and arguments about all the circumstances around the issue.

This approach is consistent with Escobar’s rejection of the idea that labels or statutory language can be dispositive of materiality; rather, the materiality – or the lack thereof – is dependent on a number of factors, including (but not limited to) what the defendant understood might happen if the government were to learn about its noncompliance, how widespread or egregious the misconduct was, and what the government actually did in similar circumstances.  The Trinity Industries and Stephens Institute cases may simply provide early examples of how that matured factual record can play out.  Time will tell whether these two apparently inconsistent results represent a truly different approach to materiality, or if the lower courts are able to reconcile their holdings into a consistent body of law.

April 23, 2019