One of the requirements for any False Claims Act case is that the falsity or fraud must be material. We explain what that term means, and how a whistleblower goes about proving the materiality of a fraud.
What is the Purpose of the False Claims Act Materiality Requirement
One of the elements or requirements of all fraud law (and contracts and torts for that matter), is that the subject of the the fraud be material. The purpose of the materiality requirement is to ensure that the “thing” that someone was defrauded about is important enough to justify legal action.
For example, imagine you purchase a car and the dealer tells you that the previous owner was a little old grandmother who only drove it 1,000 miles a year to and from church. Now, imagine that you later discover the dealer had lied to you and the grandmother actually drove 1,000 miles a week. That lie would be material. As a result, you would be justified in wanting your money back. Now, however, imagine that you discover the dealer had lied to you, and actually the car was only driven 1,000 miles a year, but it was by a little old grandfather drove it back and forth to church. That lie is probably not material, reasonable people wouldn’t care whether their car’s previous owner was a grandmother or a grandfather, so long as the condition of the car was as described.
It is the same with the False Claims Act. The materiality requirement ensures that the False Claims Act applies only when the false or fraudulent conduct was important enough that it would probably have influenced a government decision.
The False Claims Act Requires that The Fraud or Falsity Be Material
The False Claims Act prohibits seven specific fraudulent activities. 
They are laid out in the graphic to the right. In addition if you want to learn all about False Claims Act prohibitions, feel free to jump over to our explainer on that topic. If you look closely, you will notice that only two of those violations use the term material:
False Records or Statements – Making, using, or causing others to make or use, a false record or statement that is material to a false or fraudulent claim. 31 U.S.C. §§ 3729(a)(1)(B).
Reverse False Claims – Making, using, or causing to be made or used, a false record or statement material to an obligation to pay money to the government; or conceals, avoids, or decreases an obligation to pay money to the government. 31 U.S.C. §§ 3729(a)(1)(G).
But does that mean that the other five False Claims Act violations do not need to be material? The answer is no. Courts have long held that because the False Claims Act prohibits fraud, it incorporates the established elements of fraud. One of these is the requirement that the fraud be material.
The Supreme Court made this point clear in Universal Health Servs., Inc. v. United States ex rel Escobar:
The common law could not have conceived of ‘fraud’ without proof of materiality. We need not decide whether § 3729(a)(1)(A)’s materiality requirement is governed by § 3729(b)(4) or derived directly from the common law.
False Claims Act Materiality Means Having A Natural Tendency To Influence
Since 2009, the False Claims Act has defined the term material as having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. 31 U.S.C. § 3729(b)(4). This definition was used by Courts both before and after those amendments.
In Universal Health Servs., Inc. v. United States ex rel Escobar the Supreme Court held that the statutory definition of material was the same as that used elsewhere.
Section 3729(b)(4) defines materiality using language that we have employed to define materiality in other federal fraud statutes. . . See U.S. v. Neder, 527 U.S., at 16, (using this definition to interpret the mail, bank, and wire fraud statutes); Kungys v. United States, 485 U.S. 759, 770 (1988) (same for fraudulent statements to immigration officials).
The Supreme Court Looked to Materiality in Tort and Contracts
The Supreme Court then held that when deciding if something is material, a court should look to the ways courts have defined material in other contexts
Under any understanding of the concept, materiality “look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” 26 R. Lord, Williston on Contracts § 69:12, p. 549 (4th ed. 2003) (Williston).
The Court looked not to just to fraud law but to tort law.
In tort law, for instance, a “matter is material” in only two circumstances: (1) “[if] a reasonable man would attach importance to [it] in determining his choice of action in the transaction”; or (2) if the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter “in determining his choice of action,” even though a reasonable person would not. Restatement (Second) of Torts § 538, at 80.
and to the law of contracts.
Materiality in contract law is substantially similar. See Restatement (Second) of Contracts § 162(2), and Comment c, pp. 439, 441 (1979) (“[A] misrepresentation is material” only if it would “likely … induce a reasonable person to manifest his assent,” or the defendant “knows that for some special reason [the representation] is likely to induce the particular recipient to manifest his assent” to the transaction).
The Supreme Court also Provided Examples of Factors That Might Establish that a False Claim is Material
In Escobar, the defendants argued noncompliance with a regulation was not material unless the regulation stated that it was a prerequisite to payment. The Supreme Court said this is wrong.
when evaluating materiality under the False Claims Act, the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive.
136 S. Ct. 1989, 2003. The Supreme Court went on to identify other factors that were relevant, but not dispositive to materiality.:
- Evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement;
- 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
After Escobar Courts Take a Holistic View of When Fraud in a False Claims Act Case is Material
In the aftermath of Escobar, defendants have tried mightily to use the dicta in the case to argue that courts should dismiss False Claims Act cases on materiality grounds. For the most part, they argue that lack of evidence that the government refused to pay when it learned of identical fraud is a requirement for whistleblowers and the government. Escobar said no such thing and for the most part, courts have rejected these claims.
- In United States ex rel. Brown v. Pfizer, Inc., a court in the Eastern District of Pennsylvania rejected the argument that a case must be dismissed because the government continued to pay claims after reading the Complaint. The court held that “mere knowledge of allegations regarding noncompliance is insufficient to prove actual knowledge of noncompliance”
- In U.S. ex rel. Marjorie Prather v. Brookdale Senior Living Communities, Inc., the Sixth Circuit reversed a district court that had dismissed a case for lack of materiality. The Appeals Court made several points but several are notable. First: “the analysis of materiality is ‘holistic,’ and no single factor is dispositive. Second, a whistleblower need not plead examples in which the government refused to pay in the complaint. And third, regulations designed to stop fraud are material and not simple record-keeping.
- In United States ex. rel. Wood v. Allergan, a court in the Southern District of New York held that violations of the Anti-Kickback Statute are material because they are designed to influence providers’ independent medical judgment in a way that is fundamentally at odds with the functioning of the system as a whole.
Conclusion
Materiality is a requirement of all False Claims Act cases. It is designed to limit cases to frauds that would have reasonably influenced the government’s decision. While defendants have tried to argue that there are specific bright-line tests for materiality, courts reject this. Instead they take a holistic view of what it means for fraud to be material.
