Category: Materiality

Tenth Circuit: Escobar’s Rigorous Materiality and Knowledge Requirements Must Be Met


In a recent case out of Kansas, the Tenth Circuit reiterated the importance of the FCA’s materiality and knowledge requirements that the Supreme Court set forth in Escobar:


  1. FCA claims must satisfy materiality and knowledge requirements—both of which are rigorous and strictly enforced.


  1. A whistleblower must prove knowledge in an implied certification case—it cannot be presumed.


In U.S. ex rel. Coffman v. The City of Leavenworth, KS, a whistleblower alleged that Leavenworth fraudulently billed federal agencies for wastewater services by falsely implying compliance with environmental laws. The District Court granted the city’s summary judgment motion, holding that the whistleblower failed to demonstrate that the allegedly false certifications were material to the government’s payment of monthly invoices for wastewater treatment services or that the city knowingly submitted false claims.


The Tenth Circuit affirmed, amplifying the continued trend that courts will hold relators responsible for proving both materiality and knowledge in FCA actions. The Tenth Circuit echoed Escobar, holding that the whistleblower needed to prove that the city knowingly presented a false claim to the government for payment or approval. The Tenth Circuit noted that while the whistleblower argued that she showed the city flouted environmental laws, evidence of a violation wasn’t enough. Instead, she needed to prove—and could not prove—that the city knew it was violating those laws. This was true, at least in part, because the city introduced unrebutted evidence that the Kansas Department of Health and Environment was aware of the whistleblower’s allegations but did not consider them material.


Whistleblowers cannot rely on technical violations to skate past the FCA’s materiality and knowledge requirements. They must show that a defendant knowingly presented a false claim for payment and that the claims were material to the government’s decision to pay.


The Tenth Circuit’s opinion joins a growing body of case law across the country applying Escobar to whistleblower allegations that continue to reinforce the demanding knowledge and materiality standards under the FCA.


If you have any questions, please contact:


Ripping the Veil Off the Government’s Qui Tam Investigations


On May 10, 2018, United States Senior District Judge for the Central District of Illinois, Joe Billy McDade, issued an order that should form the template for all courts asked to keep the Government’s False Claims Act extension motions under seal.[1] Far too often courts simply grant the Government’s ex parte motions without considering the matters to be sealed, the public’s interest in transparency, or the defendants’ interest in rebutting the Government’s or a qui tam relator’s accusations.

The False Claims Act[2] calls for the Government to decide whether it will intervene in a qui tam lawsuit within 60 days,[3] but allows the Government extensions with a showing of good cause.[4] In most cases, the Government files its intervention decision and includes a motion to unseal the complaint but to keep the remainder of its filing under seal. See, e.g. Order Regarding the United States’ Notice of Election to Decline Intervention:[5]

ORDERED that all other contents of the Court’s docket in this action remain under seal and not be made public or served upon the defendant, except for this Order and The United States’ Notice of Election to Decline Intervention, which the relator will serve upon the defendant with the complaint.

ORDERED that the seal in this case is lifted as to all other matters occurring in this action after the date of this Order.[6]

Judge McDade was asked to issue a similar order. He refused to do so. Instead, the court reviewed the law and the Government’s filings. After doing so, he unsealed the entire docket.

First, the Court ordered the Government to show good cause to keep its filings under seal. This is consistent with the statute, which states, “(t)he Government may, for good case shown, move the court for extensions of time during which the complaint remains under seal under paragraph (2).”[7] The Government responded that the motions and supporting documents should remain under seal “because in discussing the content and extent of the United States’ investigation, such papers [were] [] provided by law to the Court alone for the sole purpose of evaluating whether the seal and time for making an election to intervene should be extended.”[8]

The Court found that the Government’s position was not supported by the statute. While the FCA clearly requires that qui tam cases be filed under seal, it does not state that extensions are to remain under seal.[9] Further, even upon a showing of good cause, the Court must balance the Government’s interest in keeping the information under seal against the public’s interest in access to the record and the defendant’s interest in the information the Government hopes to conceal.[10] The information should remain under seal “if unsealing would disclose confidential investigative techniques, reveal information that would jeopardize an ongoing investigation, or injure non-parties.”[11]

The Court conducted a review of the Governments’ filings and found “(n)one of the Government’s motions provided specific or identifying information about its ongoing investigation into Defendants’ activities.”[12] The Government’s motions and reports, since unsealed, show utterly mundane information and activities. These include:

“(t)he government’s ongoing investigation is necessary for the United States to decide whether to formally intervene in this qui tam case;”[13] “(t)he Government intends to use this extension to continue to interview potential witnesses and review Medicare records and compare those records to other records received in the case;”[14] “(t)he Government intends to use this extension to continue to investigate the Medicare claims submitted to the government against records concerning the whereabouts of the therapist allegedly performing the physical therapy services;”[15] “(t)he government intends to use this extension to conduct interviews in response to new information revealed through investigation;”[16] “(t)he government intends to use this extension to send and receive responses to subpoena requests in response to new information through investigation;”[17] and “to investigate responses to subpoena requests that authorized access to new information.”[18]

The Government’s last motion stated the AUSA previously assigned to the matter left the US Attorney’s Office and the new AUSA knew nothing about the case.[19] It also stated the claims, which had been under investigation for five years at that point, “could possibly be legitimate claims.”[20]

The tale told by the Government’s extension motions is one of a very typical investigation, including subpoenas, witness interviews, and record reviews, without revealing any confidential government investigative tools or techniques.

What the Government knew about a qui tam relator’s False Claims Act allegations, and when the Government knew it, is crucial to an essential element of the FCA—materiality. The Supreme Court made clear that the materiality element of the statute went to whether it would pay a claim if it knew of the alleged fraud, and from the time a qui tam complaint is filed under seal the Government is on notice of that alleged fraud. The extent of its knowledge, and its continuing payments while the matter is under investigation, are crucial to the question of materiality. As the Supreme Court stated in 2016:

if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.[21]

Once the Government receives a qui tam complaint it is on notice of the relator’s allegations. Depending upon the details of the allegations, and upon what the Government learns in its investigations, its continued payment of the claims goes directly to the question of whether the alleged falsity is material to the Government’s payment decisions. The Government should not be permitted to conceal facts directly relevant to this essential element of an alleged FCA violation behind motions to seal its motions and other evidence of its knowledge.

Judge McDade’s ruling in Morgan, particularly in light of the Supreme Court’s decision in Escobar, should be a template for all courts considering the Government’s motions to unseal only a qui tam complaint and to keep all of its other pleadings under seal.

If you have any questions, please contact:

David Honig at (317) 977-1447 or; or

Your regular Hall Render attorney.


Government Traps, Zaps and Zingers


In an opinion loaded with linguistic hooks, the United States District Court for the Middle District of Florida recently reinforced the Supreme Court’s holding in Escobar, enthusiastically highlighting the importance of materiality and scienter in FCA cases.


In U.S. ex rel. Ruckh v. Salus Rehabilitation, LLC, et al., Relators were successful in a qui tam action against Defendants, who own and operate 53 specialized nursing facilities.[1] Relators brought their case based on a theory of upcoding and a failure to maintain care plans.[2] After Defendants received a verdict against them for almost $350 million, they moved for judgment as a matter of law and requested a new trial under Federal Rules of Civil Procedure 50 and 59, respectively.[3] Defendants argued that Relators failed to offer evidence of materiality as required by the United State Supreme Court’s holding in Universal Health Services, Inc. v. Escobar.[4] Defendants also argued that Relators failed to prove that Defendants submitted claims for payment with knowledge that the governments would refuse to pay the claims had they known about the disputed practices.[5]

The Court granted Defendants’ requests stating that the evidence shows that “the federal and state governments regard the disputed practices with leniency or tolerance or indifference or perhaps with resignation to the colossal difficulty of precise, pervasive, ponderous, and permanent record-keeping in the pertinent clinical environment.”[6]


The Court’s order emphatically states, “Escobar is the unquestionably controlling and guiding authority on materiality and scienter under the False Claims Act” and diligently examines key holdings from the Supreme Court’s opinion.[7] The Court dramatically articulates Escobar’s purpose, stating, “Escobar rejects a system of government traps, zaps, and zingers that permits the government to retain the benefit of a substantially conforming good or service but to recover the price entirely – multiplied by three – because of some immaterial contractual or regulatory non-compliance.”[8]

This rejection of the system of “traps, zaps, and zingers” is accomplished through Escobar’s requirement of materiality and scienter. Specifically, the False Claims Act requires the relator to prove both that a misrepresentation (or form of non-compliance) was material to the government’s payment decision and that the defendant knew at the moment the defendant sought payment that the misrepresentation was material to the government’s payment decision. Worded another way, a misrepresentation (or non-compliance) subjects a defendant to liability under the False Claims Act only if it is knowingly “material to the other party’s course of action.”[9]

In upholding the importance of this analysis, and examining what the government believes to be material, the Court stated, “…the government that continues to pay full fare for a product or service despite knowledge of some disputed practice, some non-compliance, or some other claimed defect, relentlessly works itself into a steadily tightening bind that at some point becomes disabling because the government…must prove that had the government known the facts the government would have refused to pay.”[10] Stated more succinctly, the government’s continued payment, despite knowledge of some claimed defect, evidences a lack of materiality.

Moving on from materiality and scienter, and tucked away near the end of the Court’s order, is another holding beneficial to system-wide defendants of qui tam actions. The order holds that a “scattering of claims in a smattering of facilities is a wholly insufficient basis from which to infer the existence of a massive, authorized, cohesive, concerted, enduring, top-down, corporate scheme to defraud the government.”[11]

Practical Takeaways

  • The Supreme Court’s holding in Escobar continues to be reinforced by various courts throughout the United States. Relators in FCA cases must prove both that a claimed defect was material to the government’s payment and that the defendant knew that the claimed defect was material to the government’s payment.

  • The government’s continued payment for goods and/or services, despite knowledge of some sort of non-compliance, strongly supports an argument that the non-compliance is not material to the government’s payment decision.

  • In actions against systems or corporations, cherry-picked evidence is insufficient to evidence the existence of system-wide or corporate schemes. There needs to exist some corporate knowledge with a directive relating to the submission of a specific false claim.


If you have any questions, please contact:


Second Circuit Falls in Line for FCA Pleading Requirements


On September 7, 2017, the Second Circuit realigned its stance on false certifications under the False Claims Act (“FCA”) in light of the Supreme Court’s decisions in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S.Ct. 1989, 195 L.Ed.2d 348 (2016).


In the initial action, relators brought a qui tam action under the FCA against Wells Fargo alleging the company falsely certified its compliance with banking laws in order to borrow money at favorable rates from the Federal Reserve System.[1] In Bishop v. Wells Fargo & Co., 823 F.3d 35 (2nd Cir. 2016), the Second Circuit relied on its previous holding in Mikes v. Straus, 274 F.3d 687 (2nd Cir. 2001) in upholding the district court’s dismissal of the relator’s complaint.[2] The court’s rationale for dismissing the complaint rested on two separate points: (1) an implied false certification is appropriately applied only when the underlying statute or regulation relied upon by the relator expressly states the provider must comply in order to be paid; and (2) an expressly false claim is a claim that falsely certifies compliance with a particular statute.[3] The Supreme Court granted certiorari, vacated and remanded the matter back to the Second Circuit in light of its opinion in Escobar.[4]


The Supreme Court’s holding in Escobar nullifies the Second Circuit’s holding in Mikes. In Escobar, the Supreme Court held that “a statement that misleadingly omits critical facts is a misrepresentation irrespective of whether the other party has expressly signaled the importance of the qualifying information.[5] This directly contradicts the Second Circuit’s holding that an express statement of compliance must be included in the underlying statute or regulation.

The Supreme Court also indicated that limitations on liability under the FCA must be grounded in the text of the FCA, including the well-settled meaning of common-law terms the FCA uses but does not expressly define.[6] In vacating the previous holding, the Second Circuit stated “we detect no textual support in the FCA for Mikes’s particularity requirement.”[7] The Second Circuit also acknowledged that the Escobar holding addressed Mikes’s particularity requirement in other ways.[8] Specifically, Escobar states, “Instead of adopting a circumscribed view of what it means for a claim to be false or fraudulent, concerns about fair notice and open-ended liability can be effectively addressed through strict enforcement of the FCA’s materiality and scienter requirements.”[9]

The Supreme Court’s holding in Escobar not only nullified the Second Circuit’s holding in Mikes, it created a new standard.[10] The Supreme Court stated, “A misrepresentation about compliance with statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable under the FCA.”[11] The Supreme Court further refined this standard stating, “materiality…cannot be found where noncompliance is minor or insubstantial.”[12]] Perhaps most significantly, the Supreme Court noted, “…if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”[13]


The Supreme Court’s new “materiality” standard in Escobar replaces the Second Circuit’s previous holding in Mikes. The practical effect of Escobar’s holding requires that qui tam actions brought on the basis of a false certification, whether expressed or implied, must be material to the government’s decision to pay a provider. However, if a provider can show that the government made a payment knowing that a provider was violating certain requirements, those requirements may not be considered material.

If you have any questions, please contact:


[[12]] Id. at 2003.[[12]]

Third Circuit Issues Decision Explaining Pleading Standards and Materiality After Escobar


On May 1, 2017, the United States Court of Appeals released an important decision interpreting the False Claim Act’s (“FCA’s”) materiality requirement in light of the Supreme Court’s 2016 decision in Universal Health Services Inc. v. United States ex rel. Escobar. The case, United States ex rel. Petratos v. Genentech, revolved around allegations regarding the cancer drug Avastin. According to the relator, Genentech allegedly conducted a “formal campaign” to suppress and conceal clinical data that would have revealed that side effects in certain patient populations were more common and severe. As a result of the campaign, the relator alleged, Genentech avoided the requirement to file adverse event reports with the FDA and avoided more-restrictive FDA labeling.  As a result, according to the relator, the use of Avastin was not reasonable and necessary in these patient populations and “the standard of care would have been to prescribe a lower dose of Avastin, a lower frequency of doses, or no dose at all.” Essentially, the relator argued, doctors would have altered their of use and prescribing practices for Avastin. The district court dismissed the case for failure to state a claim, reasoning that whether a drug is reasonable and necessary is a determination for the FDA and not individual physicians.


Although the circuit court rejected the district court’s reasoning, noting that a physician’s actions can be relevant in determining whether a service or item billed to the government is reasonable and necessary, the Third Circuit affirmed the district court decision on the grounds that relator could not establish materiality.

As noted by the court, an FCA violation involves four elements: falsity, causation, knowledge and materiality. Materiality is defined by the FCA as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money.” 31 U.S.C. § 3729(b)(4). Last year, in the groundbreaking Escobar case, as explained more fully in a previous post, the Supreme Court expounded upon the FCA’s materiality requirement, describing the requirement as “demanding” and “rigorous.” As cited by the circuit court, Escobar  stands for the proposition that “a material misrepresentation is one that goes to the ‘very essence of the bargain.'” The circuit court continued, “[m]ateriality may be found where ‘the government consistently refuses to pay claims in the mine run of cases based on noncompliance with statutory, regulatory, or contractual requirement’…On the hand it is ‘very strong evidence’ that a requirement is not material ‘if the government pays a particular claim in full despite its actual knowledge that certain requirements were violated.'” Where noncompliance is “minor or insubstantial,” materiality will not be found.

Applying Escobar to the matter before it, the Petratos Court held that the relator could not prove materiality for several reasons. First, there were no factual allegations showing that the government would not have reimbursed claims for Avastin if the alleged reporting deficiencies been cured. Indeed, the relator conceded that the government would have paid the claims with full knowledge of the noncompliance. As noted by the court, “where a relator does not plead that that knowledge of the violation could influence the government’s decision to pay, the misrepresentation likely does not have a natural tendency to influence payment.” Second, the relator failed to plead that CMS consistently refuses to pay claims like those alleged. Rather, the relator’s allegations established that CMS would continue to reimburse the claims at issue with full knowledge of the alleged noncompliance. In fact, the relator had reported Genentech’s actions to the FDA and neither the FDA nor the Department of Justice had taken any actions against Genentech as a result. In sum, the court held, the allegations were the type of minor or insubstantial noncompliance that the Supreme Court had noted would not be material and that the circuit court held are “not appropriate for a private citizen to enforce through the False Claims Act.”

The court soundly rejected the relator’s arguments that the campaign was material because “if physicians would have prescribed no or less Avastin, the government would have paid less claims” and that “the relevant question is whether Genentech’s fraudulent misrepresentations were material to the physicians’ determination,” finding that the relator had conflated the FCA’s materiality and causation requirements. According to the court, the relator’s arguments were essentially a “but for” causation argument. In response, the court wrote:

The alleged fraud’s effect on physicians is relevant to the extent that it caused claims eventually to reach CMS. That is, evidence of how the claim makes its way to the government should be considered under the causation analysis, while the materiality analysis begins after a claim has been submitted. The materiality inquiry, in asking whether the government’s payment decision is affected, assumes that the claim has in fact reached the government.

Here, the Third Circuit firmly held, citing several sister circuits, that “it is the government’s materiality decision that ultimately matters…the alleged fraud must affect the United States’ payment decision to be actionable.”

Practical Takeaways

  • It is the government’s materiality decision that is dispositive. This does not change when an alleged misrepresentation flows through an intermediary in an indirect causation case.
  • A relator’s proof of causation, or proof that a claim reached the government, is irrelevant to establishing materiality.
  • FCA defendants should examine a relator’s pleadings carefully. If a relator fails to plead that knowledge of the alleged violation could influence the government’s decision to pay or that the government consistently refuses to pay claims like those alleged, the allegations will likely be susceptible to dismissal on the grounds that the relator cannot meet the FCA’s materiality requirement.
  • Federal Circuit Courts continue to consistently apply a “heightened” materiality standard in light of Escobar, rejecting the government’s arguments that Escobar represented little change.

If you have any questions, please contact:

Federal District Court Opines on Revised Stark Law Writing Requirement

On March 15, 2017, the U.S. District Court for the Western District of Pennsylvania provided the first federal court interpretation of the writing requirements affecting several regulatory exceptions in the federal physician self-referral statute (“Stark Law”) and its implementing regulations since the Centers for Medicare & Medicaid Services (“CMS”) provided sweeping revisions and clarifications to the Stark Law in 2016.1 This court opinion provides an in-depth interpretation of the recently implemented changes to the Stark Law writing requirements and how they relate to cases brought pursuant to the False Claims Act (“FCA”).


Dating back to 1998, a private cardiology and internal medicine group practice (“Practice”) provided exclusive cardiology services to an Ohio-based medical center (“Medical Center”). In the early 2000s, the two parties joined to form a heart institute, which involved entering into six agreements for the Practice physicians to provide medical director services (“Medical Director Agreements”). These Medical Director Agreements automatically terminated on December 31, 2006. However, the two parties continued their relationship with no change and did not formally renew the agreements until November 29, 2007 via addendums that were backdated to January 1, 2007. This scenario played out again in 2008 and in 2009, with the addenda expiring and the parties later entering into backdated addenda until the agreements were eliminated altogether in March 31, 2010 due to a restructuring plan. Further, in 2008, one of the Practice’s physicians began performing administrative duties and receiving pay as a Chairman for the Medical Center’s Department of Cardiovascular Medicine and Surgery (“CV Chair Arrangement”). However, this position was never documented in a formal arrangement.

A cardiologist who was formerly employed by the Practice (“Relator”) filed a qui tam complaint against the Practice, the Medical Center and four individual physicians (collectively “defendants”). The Relator alleged that the defendants violated the FCA by submitting false claims for payment to the United States Government under the expired and missing agreements in violation of the Stark Law and the Anti-Kickback Statute. The defendants countered the allegations by arguing that the agreements were protected by three exceptions to the Stark Law: the personal services arrangements;2 the fair market value;3 and the isolated transaction4 exceptions. Although the government declined to intervene, the Relator continued to pursue the action.

The opinion from March 15, 2017 deals with cross-motions for summary judgment and specifically addresses whether the Stark Law writing requirements were satisfied for the above discussed agreements during the periods of time when the agreements lapsed. The court evaluates these issues under the clarified and modified view of the requirements promulgated by CMS.

CMS Revisions and Clarification

In the CY 2016 Medicare Physician Fee Schedule Final Rule (for a summary of the Final Rule, click here), CMS clarified that the Stark Law writing requirement does not require an arrangement to be documented in a single, formal contract and that a collection of documents could satisfy the writing requirement as long as they are contemporaneous and one of those documents bears the signatures of the parties to the arrangement. CMS provided a non-exhaustive list of the types of documents that could on their own or together constitute satisfactory contemporaneous documents:

Board meeting minutes;Hard copy and electronic communications;
Fee schedules for services;
Check requests or invoices containing details of items or services along with relevant dates and rates;
Timesheets with details regarding services performed;
Call coverage schedules;
Accounts payable or receivable; and
Checks issued.

Relator’s Motion – The Writing Requirement

As to the plaintiff’s first claim that the Medical Director Agreements when lapsed did not meet the “in writing” requirement of the various Stark exceptions, the court began by outlining the requirements for the fair market value and personal service arrangement exceptions, stating the writing requirement is not a “mere technicality,” but instead is essential to the transparency demanded by the Stark Law. The court then acknowledged that the writing requirement must be satisfied at all times by a “document or collection of documents that ‘permit a reasonable person to verify that the arrangement complied with an applicable exception at the time a referral is made.'”5 With these considerations in mind, the court determined the critical question of “whether sufficient documentation ‘evidencing the course of conduct of the parties’ exists for the periods of time in between the expiration of the agreements and the execution of the addenda.”6

In applying the standards to the facts at hand, the court determined the Medical Director Agreements and addenda, when coupled with a collection of documents detailing the ongoing relationship, could persuade a reasonable jury that the necessary evidence was presented to show a course of conduct consistent with the writing requirement of the exceptions. The collection of documents the court found evidencing the Practice and the Medical Center’s course of conduct included invoices and corresponding checks that coincided with the services, timeframe and compensation described in the Medical Director Agreements and subsequent addenda. Thus, with respect to the Medical Director Agreements, the Relator’s motion for summary judgment was denied.

The court ruled differently in regards to the CV Chair Arrangement that was not formalized in any signed document. Instead, the defendants attempted to meet the collection of documents requirement with “undated, unsigned memoranda,” a letter with a passing reference to the position, meeting minutes and bylaws, none of which described the positions in any specific details or contained the signatures of any involved parties. The court found that at minimum to satisfy the writing requirement, the document or collection of documents must describe identifiable services, a timeframe and a rate of compensation. The court also reiterated the signature requirement and made clear that regardless of the sufficiency of the “collection of documents,” at least one contemporaneous document must contain the signatures of the parties. The defendants attempted to bring the CV Chair Arrangement under the isolated transaction exception, but the court found that exception typically only applies to “uniquely singular transactions” and does not apply in this instance where the payments were not singular, but instead the first in a series of payments. Thus, because the CV Chair Arrangement failed to meet each of the Stark exceptions, the Relator’s motion for summary judgment was granted.

Defendants’ Motion – FCA: Scienter and Materiality

The defendants’ motion for summary judgment also argued that the Relator failed to establish the scienter and materiality requirements of the FCA. The court rejected both arguments and denied the defendants’ motion.

Scienter. Under the FCA’s scienter requirement, the Relator was required to show that the defendants: (i) had actual knowledge of the information; (ii) acted in deliberate ignorance of the truth or falsity of the information; or (iii) acted in reckless disregard of the truth or falsity of the information. In analyzing the scienter requirement, the court noted that there was ample evidence that the physicians of the Practice and the Medical Center believed all of the agreements to be in compliance with the Stark Law. However, the court opined that there was also ample evidence in the record to suggest that the Practice and the Medical Center may have knowingly violated the Stark Law in at least one manner by submitting claims for payment arising from medical directorships that were not covered by a written agreement. The court noted that a Senior VP and Medical Director of the Medical Center issued a memorandum expressly acknowledging that the parties continued to operate under expired contracts. There was also additional evidence, including solicited legal advice, engagement of a Stark consultant and retroactive addenda to cover the lapse of time that showed the Practice and the Medical Center were aware the documents relating to the agreements were not at all times in compliance with Stark and yet they continued to act upon those agreements. This evidence, the court determined, could lead a reasonable jury to conclude that the Practice and the Medical Center continued to submit claims for payment despite knowing that the underlying arrangements may not have been properly documented for purposes of Stark compliance.

Materiality. In order to be actionable, the FCA also requires a misrepresentation or false claim to be “material to the Government’s payment decision,” and the defendants argued that even if they were found to have violated the Stark Law, those violations would not hold up under the materiality requirement of the FCA. Relying upon the 2016 standard outlined in United States ex rel. Escobar v. Universal Health Services, Inc., the court considered the following factors: whether compliance with a statute is a condition of payment; whether the violation goes to “the essence of the bargain” or is “minor or insubstantial”; and whether the government consistently pays or refuses to pay claims when it has knowledge of similar violations.

In applying these factors, the court determined that the alleged violations at issue were material because the Stark Law “expressly prohibits Medicare from paying claims that do not satisfy each of its requirements, including every element of any applicable exception.” Because compliance with each element is required, the writing requirement is not “minor or insubstantial.” Rather, it is crucial to the transparency demanded by the Stark Law and goes to the very “essence of the bargain.” The court also acknowledged that there was a lack of evidence suggesting the government refuses to pay or pays when they have actual knowledge of these violations but recognizes that providers who do violate these provisions are required to pay penalties when those violations are brought to light. Balancing all of these factors, the court determined summary judgment was not appropriate because the writing requirements contained in several Stark exceptions “are important, mandatory, and material to the government’s payment decisions.”

Practical Takeaways

Even in light of the clarified Stark Law writing requirements, providers must exercise caution in documenting physician arrangements. As noted by the court in this case, any “collection of documents” relied upon must contain at least one contemporaneous writing, signed by the parties. The collection of documents must also describe: 1) identifiable services; 2) a timeframe; and 3) a rate of compensation. Therefore, mere checks alone will not be sufficient to satisfy the writing requirement. Providers should attempt to document all physician arrangements and obtain signatures wherever possible. This case also illustrates that a failure to satisfy the writing requirements may subject a provider to increased liability under the FCA. Further, the holding in this case demonstrates that awareness that some claims may not be covered by a written agreement may be enough to satisfy the scienter requirement under the FCA.

If you have any questions about this case, or related issues, please contact:

Allison Emhardt at (317) 429-3649 or;

Brad Taormina at (248) 457-7895 or; or

Your regular Hall Render attorney.

Special thanks to Megan Culp, law clerk, for her assistance with the preparation of this article.

1 U.S. ex rel. Tullio Emanuele v. Medicor Associates

2 42 C.F.R. § 411.357(d)(1).

3 42 C.F.R. § 411.357(l).

4 42 C.F.R. § 411.357(f).

5 U.S. ex rel. Emanuele v. Medicor Associates (citing 80 Fed. Reg. 70886, 71316).

6 Id.

Escobar, Back at the First Circuit


Yesterday, the First Circuit Court of Appeals issued a new opinion in Universal Health Services, Inc. v. United States ex rel. Escobar.  Applying the materiality test enunciated by the Supreme Court in June, the First Circuit reaffirmed its previous decision that the whistleblowers’ complaint sufficiently stated a claim under the False Claims Act (“FCA”) to survive the defendants’ motion to dismiss.


The whistleblowers in Escobar originally filed a FCA suit against Universal Health Services, Inc. (“UHS”) on July 1, 2011 in the United States District Court for the District of Massachusetts.  The whistleblowers alleged that UHS had failed to disclose that certain of its personnel did not comply with applicable licensing and supervision requirements, and therefore claims submitted to the government for services provided by such personnel were false under the “implied certification theory.”  The whistleblowers uncovered information that 23 UHS employees had obtained National Provider Identification numbers that misrepresented their licensure status.  The district court originally dismissed the claims for failure to state a claim, finding that the licensing and supervision requirements were conditions of participation, rather than conditions of payment, and therefore could not establish falsity under the FCA.  The First Circuit reversed, finding that the licensing and supervision requirements were conditions of payment, and therefore could establish falsity.

The Supreme Court granted certiorari to resolve a circuit split regarding the viability of the implied certification theory under the FCA.  As explained in a previous post, while the Supreme Court upheld the implied theory of certification, it placed the emphasis on whether compliance with the requirement that was violated was “material to the Government’s payment decision….”.  The Supreme Court then remanded the case to the First Circuit Court of Appeals.

First Circuit’s Opinion

The First Circuit stated that the fundamental inquiry under the materiality standard is “‘whether a piece of information is sufficiently important to influence the behavior of the recipient.'”  Applying this test, the Court found that the defendant’s alleged failure to meet the applicable licensing and supervision standards was material to the government’s decision to pay.  The Court provided the following support for its determination:

  • • Compliance with the applicable requirements was a condition of payment, which is “relevant” even if not “dispositive” to materiality; and
  • • The licensing and supervision requirements go to the “very essence of the bargain” regarding the government’s relationship with healthcare providers.

UHS argued that the government was aware of the alleged violations and yet continued to pay for related claims, which the Supreme Court listed as evidence against a finding of materiality.  In response, the First Circuit stated that it saw no evidence of the government’ actual knowledge of the defendant’s non-compliance, and furthermore that mere awareness of allegations concerning noncompliance “is different from actual knowledge” when considering materiality.


Given the First Circuit’s previous ruling and its previous broad interpretation of the implied certification theory, this outcome is not unexpected.  However, it does provide additional insight into how courts will apply the Supreme Court’s materiality standard.

The First Circuit continued to emphasize the fact that the regulations at issue were a condition of payment, which indicates that the condition of payment vs. condition of participation distinction will continue to be important in future FCA cases.  The court’s discussion regarding the impact of the government’s actual knowledge of violations on materiality could also have interesting implications on self-disclosure.

Although the First Circuit specifically declined to review this point, the opinion indicates that self-disclosing a violation to the government could potentially cut off FCA liability for future claims, or even for all implicated claims, if the government continues paying for such claims after the self-disclosure, as such violation might not be considered material.

Practical Takeaway

While likely the end of the road for Escobar, this opinion demonstrates how a circuit that had adopted one of the broader interpretations of the implied certification theory can use the materiality standard to continue to support that broad interpretation.  It is also interesting to contrast the First Circuit’s application of Escobar‘s materiality standard in support of its previous broad interpretation to the Seventh Circuit’s application of that same standard in support of its previous narrow interpretation, discussed here.

If you have any questions, please contact:

David B. Honig at or (317) 977-1447; or
Your regular Hall Render attorney.

The Eighth Circuit Applies Escobar Materiality Test


The Eighth Circuit Court of Appeals yesterday applied the materiality standard enunciated by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar to a False Claims Act (“FCA”) case alleging fraudulent inducement.

In United States ex rel. Miller v. Weston Educational Inc., d/b/a Heritage College, two whistleblowers alleged Heritage College altered grade and attendance records to falsely demonstrate satisfactory academic progress. Satisfactory progress is required for a student to be eligible for specific federal grants, loans and scholarships, pursuant to Heritage College’s Program Participation Agreement (“PPA”) with the Department of Education. Satisfactory progress is measured by the students’ cumulative grade point average.

The whistleblowers’ case was based upon an allegation of fraudulent inducement, that Heritage College knew at the time it signed the PPA that it did not intend to keep accurate records and that the knowingly false statement that it would keep accurate records was material to the government entering into the agreement that led to disbursements.

Heritage College responded that the PPA does not explicitly require the maintenance of those grade and attendance records and that there are no regulations that do so either. More important, none of the altered records actually impacted government disbursements or led to refunds, and, therefore, the alteration was not material.

The Court began its analysis with a restatement of materiality from Escobar:

A false statement or record is “material” for FCA purposes if either (1) a reasonable person would likely attach importance to it or (2) the defendant knew or should have known that the government would attach importance to it.[1]

Heritage College’s argument, that there was no link between the false records and disbursements, missed the point of the allegation – that it fraudulently induced the government to enter the contract when it signed the PPA, though it did not intend to comply with the PPA requirement that it maintain accurate grade and attendance records. That promise, at the time the contract was signed, was the material misrepresentation that could form the basis for a False Claims Act violation, the court determined.

The court specifically rejected Heritage College’s argument that the false statements were not material because they did not cause any actual harm. It did so relying upon a line of cases that state a party may be subject to FCA civil penalties, even where there is no monetary injury.

Practical Takeaway

Courts will continue to explore the full meaning of the ruling in Escobar for years to come. At its core, though, it stands for the proposition that a false statement that a defendant should know the government would find important in making decisions to enter into a contract or to make a disbursement will be material, even if there is no direct connection between the false statement and injury to the government fisc.

If you have any questions, please contact:

7th Circuit Rules “Usual and Customary Pricing” Can Include Discount Programs


A recent whistleblower case could have a significant impact on Medicare Part D charge limits and corresponding reimbursement and could have ripple effects for aspects of other Medicare programs. The Seventh Circuit Court of Appeals ruled that reduced prescription prices offered by a large retail pharmacy (here Kmart) to participants enrolled in a popular discount program constitute the pharmacy’s “usual and customary” pricing for purposes of Medicare Part D prescription drug program claims. In US ex rel. Garbe v. Kmart Corp., the court ruled that Kmart’s discount drug program could not be distinguished from its non-discount pricing and excluded for determination of its “usual and customary” pricing, which functionally lowers the floor for Part D plan payments.

Many Medicare Part D plans require that aggregate pharmacy provider charges to not exceed the “usual and customary price.” The court notes that the term “usual and customary price” is generally understood to be the “cash price offered to the general public.” The question addressed here by the court was whether Kmart’s membership discount program, called the “Kmart Maintenance Program” (“KMP”), offering discounted prices to KMP members while charging higher prices to non-program insurers and cash customers was available to the “general public” and therefore considered the pharmacy’s usual and customary pricing.

In administering the KMP, Kmart hired a third-party processor to maintain the discount program. Kmart then determined its “usual and customary” price exclusive of the prices offered in the KMP, arguing that members of its discount programs were not part of the “general public.” The court disagreed with Kmart’s position and found that KMP pricing representing the usual and customary price. First, the court noted that the barriers to joining the discount programs were almost nonexistent and that members of the “general public” could easily become members of the discount programs by paying a small fee. Second, the court found that Kmart was not selective in who it permitted to join the program given that membership was offered to anybody who purchased prescription drugs. Third, the members of the programs were unlikely to consider themselves as belonging to any particular group because of their membership in the discount programs.

Going forward, the court affirmed the trial court’s denial of Kmart’s request for summary judgement with regard to calculation of Kmart’s “usual and customary” price, affirmed that the False Claims Act applies to almost all of the plaintiff’s claims and remanded the case to the district court for further proceedings.  The ultimate implications of the trial court’s holding on “usual and customary” meaning “cash price to the general public” will be fact-specific and must take into account specifically defined terms contained in individual state statute and PBM/administrator contracts/payor sheets in determining if there is False Claims Act liability with regard to various Medicare Part D claims.

Health Care Takeaway

Providers should carefully monitor the progress of this case. Pending a final resolution, they should consider whether their discount programs are structured such that they might be construed as being offered to the general public and whether such programs must be considered in determining “usual and customary pricing.” While it is by no means clear that all discount programs must be considered when calculating usual and customary pricing, discount programs that might affect usual and customary pricing should be carefully evaluated in coordination with claims processing and prescription drug plan contracting activities.

If you have any False Claims Act questions, please contact David B. Honig at or (317) 977-1447 or your regular Hall Render attorney. David is in our Indianapolis office.

If you have any pharmacy questions or specific questions about pricing, please contact Todd Nova at or (414) 721-0464, Rachael Ream at or (216) 513-1314 or Stephen Rose at or (425) 278-9337. Todd is in our Milwaukee office, and Rachael and Stephen are in our Seattle office.

Materiality and Government Knowledge in the Sixth Circuit


Written by David B. Honig and Steven H. Pratt.

On February 2, the Sixth Circuit Court of Appeals ruled on a case from the Southern District of Ohio, US ex rel American Systems Consulting, Inc. v Mantech Advanced Systems International. At issue was whether a court may determine whether a knowingly false statement in a proposal for a government contract was a material misrepresentation under the FCA or if that issue was reserved for a jury. The court ruled that the trial court properly concluded the statement was not material, and the grant of summary judgment was affirmed.

Mantech and ASC were competitors. Each responded to a Defense Information Technology Contracting Organization RFP with a proposal. ManTech, as required by the RFP, identified a specific individual as the prospective Program Manager and addressed his skills and qualifications. After the initial proposal was submitted, that individual resigned from ManTech. ManTech did not advise the government and did not modify its proposal, even as it submitted subsequent information in support of its proposal.

ASC, in its own proposal, identified a prospective Program Manager but did not address his skills and qualifications.

Based upon the higher score received because of the experience of ManTech’s proposed Program Manager, ManTech received the contract. ASC filed its FCA action against ManTech, alleging ManTech fraudulently induced the government into awarding it the contract by misrepresenting the identity, skills and qualifications of the person who would act as Program Manager.

During discovery, government contracting managers testified ManTech would have received the contract, even if they had known of the man’s resignation. The designation of an individual, they explained, was to show the type of personnel the company could attract and retain; it was not to approve the qualifications of a specific individual. The government considered it in this way because it knew that people change jobs, retire and leave employers for other reasons.

It was also revealed during discovery that the government continued to work with ManTech after it learned of the alleged misrepresentation.

The trial court found, and the Court of Appeals affirmed, that the government’s testimony that the alleged misrepresentation had no tendency to influence their decision-making, along with the fact that the government continued to work with ManTech after it learned of the proposed Program Manager’s resignation, left ASC without evidence upon which a jury could reasonably find that the alleged misrepresentation was material to the government’s decision-making.

The Court of Appeals did reject the trial court’s finding that the government’s continued work with ManTech after it learned of the resignation necessarily precluded a finding of materiality. Rather, the court stated, it could preclude such a finding in the absence of evidence of other reasons the government might continue with the contract, such as investments in reliance upon the agreement, additional costs to find a replacement or unavailability of other contractors.

Health Care Takeaway

Government health care programs are incredibly complicated. Guidance from the government, and acts taken with the full knowledge and approval of the government, can help ensure compliance with both regulations and expectations. Based upon ManTech and similar cases from other circuits, receiving and following guidance from the government can also limit risk and costs in FCA cases, reducing the chances of being a defendant in such a case and allowing for earlier and less expensive pretrial dismissal.

Should you have any questions regarding the False Claims Act or defense against whistleblower actions, please contact:

Should you have any questions regarding contracting, compliance or government advice and assistance, please contact: