7th Circuit Applies Escobar Standards in Upholding Dismissal of FCA Case
The Seventh Circuit recently upheld a district court’s dismissal in a False Claims Act (FCA) case, finding that the relator failed to sufficiently plead the elements of an FCA claim as interpreted under the U.S. Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar.
The relator alleged, based on an implied false certification theory, that the defendants—9 companies that hold a General Services Administration (GSA) schedule contract allowing them to sell products to government agencies—submitted false claims to the United States by knowingly selling products from non-designated countries, such as China or Thailand, to the government in violation of the Trade Agreements Act. The relator claimed that the companies had offered and sold such products even though they had filed Trade Agreements Certificates affirming they would only sell products from designated countries. The district court granted the companies’ motion to dismiss the complaint for failure to state a claim, and the relator appealed.
In Escobar, the Supreme Court addressed the implied false certification theory of liability under the FCA, which may impose FCA liability on those who impliedly certify compliance with laws associated with a claim submitted for payment and make specific representations about the goods or services provided, but fail to disclose those goods or services’ “noncompliance with material statutory, regulatory, or contractual requirements.” The Supreme Court explained that a statutory, regulatory, or contractual requirement is “material” only if it affects “the likely or actual behavior of the recipient of the alleged misrepresentation,” and that materiality does not occur “where noncompliance is minor or insubstantial.”
The Seventh Circuit affirmed the district court’s decision, finding that the relator had failed to plead the elements of an FCA claim with particularity, as required in connection with allegations of fraud or mistake under Rule 9(b) of the Federal Rules of Civil Procedure. Specifically, the court stated that, although the Escobar decision requires a plaintiff to show the defendant made specific representations about the goods or services provided, the relator’s complaint had failed to allege any specific facts demonstrating what occurred at the individualized transaction level and did not contain the underlying details of the alleged fraud scheme. Without any such specific allegations, the relator could not satisfy the requirements of Rule 9(b).
The court also noted in passing that the relator’s claims were unlikely to be able to satisfy the materiality requirements of the implied certification theory because the government had allegedly paid millions of dollars for the non-compliant products even after sending notices directing some of the defendants to remove non-compliant products from their inventories. Along these lines, in Escobar, the Supreme Court held that the government’s payment of a particular claim in full despite its actual knowledge that certain requirements were violated is strong evidence the requirements were not material.
