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.

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