Sixth Circuit Rejects Attempt to Dismiss False Claims Act Case For Not Proving Materiality In Complaint

September 15, 2018

In U.S. ex rel. Marjorie  Prather v. Brookdale  Senior Living Communities, Inc., the Sixth Circuit Court of Appeals recently provided yet another repudiation of the now all too common defense tactic of attempting to dismiss False Claims Act cases on the basis that defendant has not sufficiently “proven” materiality in the complaint.

Since the Supreme Court’s 2016 decision in Universal Health Services., Inc. v. United States ex rel. Escobar, ––– U.S. ––––, 136 S.Ct. 1989 (2016), defendants have sought to deploy False Claims Act materiality as a means to dismiss cases at the pleading stage, a topic our colleague Suzanne Durrell recently discussed with the Federal Bar Association.

Background: The Prather Whistleblower Discovered that Claims Lacked Physicians Certification

Prather involved a home health care company that had hired the relator to review claim documentation it intended to submit to CMS.  After reviewing numerous claims, the relator discovered that many lacked required physicians’ certifications of medical necessity. In response to relator’s concerns, the defendant claimed it could “just argue in our favor if we get audited.”

The relator filed a False Claims Act case, alleging that the defendants’ practice violated regulations requiring that the certifications “be obtained at the time the plan of care is established or as soon thereafter as possible.” 42 C.F.R. § 424.22(a)(2).

The District Court dismissed the claim.  It found that the relator had not established the materiality of compliance with the regulation.  The District Court found that the government had identified the certifications as conditions of payment.  But, the Court determined that the relator did not establish that the government regularly withheld payment for their violation.  Therefore the Court concluded that the complaint did not establish materiality.

The Sixth Circuit Reaffirms the Test for Pleading Materiality In False Claims Act Cases

The Sixth Circuit recognized that “the analysis of materiality is ‘holistic,’” and that

1. “the Government’s decision to expressly identify a provision as a condition of payment”;
2. whether “the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement” or if, with actual knowledge of the non-compliance, it consistently pays such claims and there is no indication that its practice will change; and
3. whether the “noncompliance is minor or insubstantial” or if it goes “to the very essence of the bargain,

are relevant but not dispositive or exclusive factors in determining materiality.  Prather, at *10.

Escobar Does not Require Plaintiffs To Plead Past Examples of Government Non-Payment

The Sixth Circuit disagreed with the district court’s materiality analysis.  The appeals court explained that government payment decisions are merely facts relevant to materiality in a False Claims Act case.  Therefore, “it would be illogical to require a relator (or the United States) to plead allegations about past government action in order to survive a motion to dismiss.” Prather, at *9.  The Sixth Circuit also quoted two post-Escobar appeals court decisions to the same effect:

The First Circuit’s decision in Escobar on remand. “We see no reason to require Relators at the Motion to Dismiss phase to learn, and then to allege, the government’s payment practices for claims unrelated to services rendered to the deceased family member in order to establish the government’s views on the materiality of the violation. Indeed, given applicable federal and state privacy regulations in the health care industry, it is highly questionable whether Relators could have even accessed such information.” U.S. ex rel. Escobar v. Universal Health Services, 842 F.3d 103, 112 (2016).

And the Ninth Circuit’s decision in Campie. Whether “the government regularly pays this particular type of claim in full despite actual knowledge that certain requirements were violated, such evidence is not before us.” U.S. ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890 (2017).

Finally, the Court recognized that at dismissal stage, it must interpret all elements of a False Claims Act complaint, including materiality, in the light most favorable to the plaintiff.  Prather, at *9. 

Anti-Fraud Regulations Go to the Essence of the Bargain And Are Material under the False Claims Act

The defendant attempted to argue that the regulations in Prather did not go to the “essence” of the bargain because they merely governed “timing.”  The court rejected that argument, holding that a requirement that certifications of medical necessity be completed promptly is designed to ensure that the government pays only for needed services and “[w]hether the party on the other side of a transaction complied with the regulations aimed at preventing unnecessary or fraudulent certifications is a fact that a reasonable person would want to know before entering into that transaction.” Prather, at*10.

The Government’s Intervention Decision In a False Claims Act Case is Irrelevant to Materiality

Finally, the court rejected the defendants’ argument that the DOJ’s declination in the case is somehow relevant to the materiality.  The Court noted that  “In  Escobar  itself, the government chose not to intervene, and the Supreme Court did not mention this as a relevant factor in its materiality analysis.” Prather, at *11.