Article: July 2017: White Collar Litigation Update

Three Tips for Preparing an FCA Case for Trial, One Year After Universal Health. The stakes in False Claims Act cases have never been higher. Potential statutory penalties per claim doubled last year, and ten cases settled in the last twelve months for over $100 million each. Over the same period of time, courts began applying new materiality, falsity, and scienter standards following the Supreme Court’s seminal June 2016 false claims decision, Universal Health Services, Inc. v. United States ex rel. Escobar. Historically, with qui tam complaints remaining under seal while the government investigates and conducts one-sided discovery, defendants have been motivated to quickly settle false claims cases. Now, that settlement-favoring paradigm is beginning to shift. In the face of high settlement expectations from the government, with recent case law warranting potentially favorable jury instructions on each of three key elements (materiality, scienter, and falsity), the playing field can be tilted by those willing to litigate.

Collect Evidence of Government Payment Decision-Making to Prove Materiality Early.
It has always been the case that a false submission to the government in connection with a request for payment is not a false claim under the False Claims Act unless the subject matter of the falsity can be proven to be something that was material to the government’s decision to pay the claim. Universal Health, while permitting false claims in certain circumstances to be based on violations of statutes, regulations, or contractual requirements, simultaneously emphasized how “rigorous” the Act’s materiality requirement is, and held that no claim rooted in statutory, regulatory, or contractual noncompliance should proceed unless the noncompliance at issue would actually have affected the government’s decision to pay the claim. Before Universal Health, cases were rarely dismissed before trial on materiality grounds, and courts applied a more liberal “could have affected” standard to the question of whether the alleged conduct was material to the payment decision. Several Circuits in the last year focused on evidence of what the government actually did when they learned of the contractual or statutory violation at issue and found false claims cases to be materiality deficient pre-trial where there is evidence that the government had notice of the fraud but paid the claims anyway. As a result, where it’s available, evidence demonstrating that the government paid claims in full with knowledge of the alleged noncompliance likely establishes a defendant’s ability to negate the materiality element, and may dissuade government prosecutors and private whistleblowers. Wise litigants will collect evidence of government payment decision making at the first sign of a potential false claims case.

Document Lack of Contractual Clarity to Disprove Scienter in False Claims Cases. Courts following Universal Health in the last year have extrapolated from the premise that a false claim cannot be “knowingly” submitted if the claim is based on an alleged violation of an ambiguous regulatory, statutory, or contractual provision, to hold that a defendant’s objectively reasonable interpretation of such a requirement precludes a finding that the defendant “knowingly” submitted false claims in violation of that provision and may warrant early dismissal. Plaintiffs bear the burden of demonstrating that the defendant should have adopted a different interpretation of an ambiguous regulation. If courts will require plaintiffs to establish by a preponderance of evidence that the defendant was knowingly violating a non-ambiguous contractual provision before they can prevail on a false claim based on violation of a contract provision, it behooves defendants to maintain records of every contrary interpretation of a contractual term by the government in the course of fulfilling their contracts, and to document every admission by government inspectors that contract terms lack clarity.

Consider Bifurcating Falsity as a Trial Strategy.
In a sophisticated False Claims Act case involving complex issues, a court may be willing to bifurcate and first address the issue of whether or not the claim itself is false. The last year also saw the first bifurcation of trial proceedings in a false claims case, implemented so that the jury avoids the confusion and conflation of hearing evidence on whether the invoice was legally false simultaneously with hearing evidence on whether the ostensibly false invoice was knowingly submitted and other issues. In the year since Universal Health first recognized that a claim can be impliedly false, courts have struggled to apply its requirements on the element of falsity. On its face, Universal Health mandates that a claim based on an alleged material statutory, regulatory, or contractual violation is impliedly false if the claim contains a specific representation about goods or services provided and the defendant’s failure to disclose its noncompliance makes those representations misleading half-truths. But courts in the last year have not applied that rule to require the same degree of specificity, nor agreed as to what is and isn’t the “mere demand for payment” that Universal Health deemed insufficient to establish falsity. In false claims cases based on material statutory, regulatory, or contractual violations in particular, litigants should consider a trial strategy bifurcating the falsity issue.

Conclusion. In sum, in the last year, while settlement demands have remained stratospheric, in each of three key elements (materiality, scienter, and falsity) False Claims Act case law has developed to create potential advantages for defendants willing to litigate.