October 31, 2016

Eighth Circuit Applies Escobar Materiality Test

By Rosie Dawn Griffin

The Supreme Court’s June 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar—which unanimously endorsed the FCA’s implied false certification theory of liability, but reframed the Act’s materiality standard—left open questions as to how lower courts would interpret the high court’s holding that material noncompliance with an applicable statute, regulation, or contract provision is required to support an FCA action.

Much remains to be determined in the wake of Escobar, and courts will continue to hash out the case’s impact on FCA cases for the foreseeable future, but at least for those litigating in the Eighth Circuit, some clarity has been provided. The U.S. Court of the Appeals for the Eighth Circuit applied Escobar’s materiality standard in United States ex rel. Miller v. Weston Educational Inc., d/b/a Heritage College, a case in which two whistleblowers alleged for-profit institution Heritage College falsified student grade and attendance records to maintain the students’—and thus the school’s—federal aid eligibility. The federal funding at issue included grants, loans, and scholarships paid to Heritage pursuant to a Program Participation Agreement (PPA) between Heritage and the U.S. Department of Education (DOE).

The whistleblowers premised Heritage’s liability on fraudulent inducement, alleging institutional actors knew at the time they signed the college’s PPA that the college did not intend to keep accurate records, and that the knowingly false statement the college would maintain accurate records was material to the government’s decision to enter into the PPA.

Heritage argued the statements were not material, as the PPA did not explicitly require accurate maintenance of grade and attendance records, no such requirement existed in regulations, and none of the altered records directly impacted government payments.

Considering materiality, the Eighth Circuit made three main findings:

  • Though not dispositive of materiality, the government expressly conditioned Heritage’s participation in the relevant funding program on compliance with the recordkeeping requirement at issue.
  • A reasonable person would attach importance to a promise to do what is necessary to ensure funds go where they are supposed to go.
  • The government’s actions confirm it cares about the promise at issue: DOE relies on school-maintained records to monitor regulatory compliance.

Guided by this evidence, and cautioning against conflation of harm and materiality, the Eight Circuit determined that because the whistleblowers’ theory of liability turned on fraudulent inducement, Heritage’s promise to maintain accurate records—made at the time it signed the PPA—was a material misrepresentation that could form the basis of an FCA violation. Based on this conclusion, the appeals court reversed the district court’s grant of summary judgment to Heritage and remanded the case, reviving the whistleblowers’ claims.

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