U.S. District Court Dismisses FCA Case Under Escobar’s Materiality Standard

On June 8, 2018, the U.S. District Court for the Eastern District of Virginia granted summary judgment for a defendant company in a False Claims Act (FCA) case, finding that the relator failed to satisfy the materiality standard articulated by the U.S. Supreme Court in its landmark Universal Health Services, Inc. v. United States ex rel. Escobar decision.

The relator alleged that the defendant—a company that performs security services for government agencies—submitted false claims to the State Department related to its contract to provide security services at the United States Embassy in Iraq.  The relator claimed that the company had falsified necessary weapons inspections and inspection records.

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 relator claimed that by failing to disclose alleged inspection irregularities and records issues prior to its submission of claims for payment to federal agencies, the company implicitly made misrepresentations about its services’ compliance with material contractual requirements, and thus, misled the government.

The company moved for summary judgment, arguing that the relator had not demonstrated that these inspection records were material to its payment and that the relator had not shown that the records were a factor in the government’s decision to pay the contract.  The court agreed with the company, explaining that the specific services that the relator complained of only accounted for three-tenths of one percent of the total labor invoice to the government and were the “kind of ‘minor or insubstantial’ noncompliance that Escobar advises are not material.”  Lastly, the court emphasized the Supreme Court’s reasoning in Escobar that the Government’s payment of a claim despite its actual knowledge that certain requirements of the contract were violated is “strong evidence” that the requirement is “not material.”  The State Department paid the claim and renewed its contract with the defendant even though the Department had continuous, real-time access to inspection records and had conducted its own investigations regarding the activities raised in this complaint.  The court concluded that based on the evidence, “no reasonable jury could conclude” that the nondisclosure of the inspection record issues were material to the government’s decision to pay the defendant.  The court granted the defendant’s motion for summary judgment.

The case discussed above is United States ex rel. Bachert v. Triple Canopy, Inc., Case No. 1:16-cv-456 (E.D. Va. 2018).