Since the 2016 Supreme Court decision in Universal Services Inc. v. United States ex rel. Escobar, courts have wrestled with exactly how to apply the unanimous decision. This post highlights developments across the country in numerous substantive areas addressed in the Escobar decision. If you need a refresher on the Escobar decision, see our previous post explaining the major elements of the case.
On August 24, 2018, the Ninth Circuit addressed the Supreme Court’s decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar, holding that Escobar sets forth the exclusive test for establishing FCA liability under the theory of implied false certification. In that case, U.S. ex rel. Rose v. Stephens Institute, the Ninth Circuit also grappled with Escobar’s materiality requirement, providing further guidance on how the past government action factor of the materiality analysis should be applied.
Following the recent high-stakes trial in U.S. ex rel. Ruckh v. Salus Rehabilitation, LLC, a federal district court overturned the $350 million verdict handed down against the owners and operators of 53 skilled nursing facilities who were accused of “upcoding” patient Resource Utilization Group scores, “ramping up” treatment during assessment periods and failing to maintain comprehensive plans of care for their patients.
As set out in a previous post, in overturning the verdict, the district court held that the relator failed to offer sufficient evidence at trial to satisfy the “rigorous and demanding” requirements of materiality and scienter as set forth in the Supreme Court’s landmark decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar.
As highlighted in a previous post, the $348 million judgment against the owners and operators of skilled nursing facilities in U.S. ex rel. Ruckh v. Genoa Healthcare, LLC, made serious waves in the FCA world. The judgment, which included a trebling of the jury’s damages verdict and fines of $5,500 for each of over 400 claims, far surpassed any settlement or judgment previously entered in a long-term care or skilled nursing case. However, on January 11, 2018, nearly a year after entering the landmark judgment, the Middle District of Florida overturned it. In doing so, the court reiterated some of the more stringent requirements a relator must meet in order to prevail on an FCA claim.
In U.S. ex rel. Poehling v. UnitedHealth Group, Inc., the U.S. District Court for the Central District of California partially granted UnitedHealth’s motion to dismiss the government’s FCA claims, which were based on the allegation that UnitedHealth’s attestations as to the truth and accuracy of the risk adjustment data submitted were false because the district court found that the government had failed to plead the attestations were material to the payment decision, as required by the Supreme Court’s decision in Escobar. The district court declined to dismiss the remaining claims, including an FCA claim added by the government after its complaint in the similar Swoben case was dismissed (which we discussed here), which alleged a violation of the reverse false claims provisions due to failure to delete invalid diagnosis codes without reference to the attestation. The district court did grant the government leave to amend, with the second amended complaint to be filed by February 26, 2018.
The U.S. Court of Appeals for the Fifth Circuit vacated a $663 million judgment, concluding that the Supreme Court’s opinion in Escobar doomed the plaintiff’s FCA claims on the issue of materiality.
FCA Allegations: Highway Guardrail Systems Had Unapproved Design Modifications
Trinity Industries, a manufacturer of highway guardrail systems, faced FCA allegations brought by a former competitor based on the theory that federally subsidized purchases of Trinity’s guardrail systems resulted in false claims as a result of unapproved design modifications. Prior to the filing of the relator’s qui tam lawsuit, the relator met extensively with Federal Highway Administration (FHWA) officials during which he presented his allegations regarding the design modifications and his assertions that those modifications rendered Trinity’s guardrail systems ineligible for federal reimbursement. FHWA met separately with Trinity to discuss the relator’s allegations. Following those meetings, FHWA confirmed that state purchases of the Trinity guardrail system were eligible for federal reimbursement notwithstanding the design modifications.
The FCA continues to be the federal government’s primary civil enforcement tool for investigating allegations that healthcare providers or government contractors defrauded the federal government. In the coming weeks, we will take a closer look at recent legal developments involving the FCA. This week, we examine the Supreme Court’s opinion in Escobar and its impact on the question of the FCA’s materiality requirement.
In addition to tackling the viability of the implied certification theory of liability in Escobar, the Supreme Court also held that the FCA does not restrict liability to noncompliance with express conditions of payment, stating that “[w]hether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.” The Supreme Court explained that any concerns about fair notice or open-ended liability without such a restriction on liability can be addressed through “strict enforcement” of the FCA’s “demanding” and “rigorous” materiality requirement, as well as the FCA’s scienter requirement.
U.S. ex rel. Badr v. Triple Canopy, Inc., an intervened case arising out of the Fourth Circuit, has been one of the more closely-watched recent FCA cases. Previously, the Fourth Circuit held that the government’s complaint properly alleged an FCA claim and could survive Triple Canopy’s motion to dismiss. That ruling was subsequently vacated by the Supreme Court following its decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar, which we covered here and here. On May 16, 2017, the Fourth Circuit issued its opinion on remand, finding that the complaint satisfied the pleading standards set forth in Escobar and re-affirming its conclusion that the complaint adequately stated an FCA claim.
In June, the Supreme Court issued Universal Health Services, Inc. v. U.S. ex rel. Escobar, a landmark opinion in which the Supreme Court addressed the standard for pleading materiality in FCA implied certification cases. The Supreme Court ultimately remanded the case to the First Circuit to resolve in the first instance whether the alleged violations met that standard, and last week, the First Circuit gave its answer: the violations were material.
The United State District Court for the Eastern District of New York recently dismissed an FCA complaint for failing to plead materiality under the standard announced in Universal Health Services, Inc. v. U.S. ex rel. Escobar, the Supreme Court’s landmark FCA opinion issued in June of this year. The case, U.S. ex rel. Lee v. Northern Adult Daily Health Care Center, 13-cv-4933, 2016 WL 4703653 (E.D.N.Y. Sept. 7, 2016), becomes one of the first to substantively apply Escobar and highlights the barrier the FCA’s materiality requirement poses to FCA relators in the wake of the Supreme Court’s ruling. It also suggests ways in which courts already are divided in their interpretation of Escobar.