January 18, 2017

Ninth Circuit Applies Escobar, Dismisses Whistleblower Suit against Government Contractor

By Hallie Noecker

Last Thursday, the Ninth Circuit issued United States ex rel. Kelly v. Serco, Inc., the latest in a series of False Claims Act decisions—including in the First, Seventh, and Eighth Circuits—wrestling with the Supreme Court’s holding on materiality in Universal Health Services, Inc. v. United States ex rel. Escobar. Citing Escobar’s “rigorous” and “demanding” materiality standard, the Ninth Circuit affirmed the district court’s summary judgment dismissal of whistleblower Darryn Kelly’s FCA action against government defense contractor Serco, Inc.

Kelly, a former Serco, Inc. employee, alleged Serco submitted false claims for technology and project management services it provided pursuant to a contract with the U.S. Navy’s Space and Naval Warfare Systems Command. Serco’s work involved a project to upgrade wireless communications systems along the U.S.-Mexico border. Kelly said Serco failed to follow required billing processes, instead tracking costs manually using a single charge code, and falsifying monthly costs reports to match budgeted costs.

In analyzing whether Kelly’s claims, premised on implied certification liability, could survive as a matter of law, the court looked to Escobar, which concluded “implied certification can be a basis for liability at least where two conditions are satisfied:  first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material … requirements makes those representations misleading half-truths.” Without explicitly stating that the two conditions were threshold requirements, the Court nonetheless framed its analysis around the two issues. With respect to the first condition, the Ninth Circuit found no evidence that Serco’s claims made any specific representations about its performance, nor did it find evidence of false statements.

As for the second condition, the panel found Kelly had not satisfied Escobar’s materiality requirement. In so holding, it attached particular importance to the government’s knowledge, quoting Escobar’s guidance that, “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.” Thus the court’s materiality analysis focused on the fact that the government accepted Serco’s costs reports knowing Serco utilized a single task code and nonetheless paid Serco for its work.

The relative weight to afford government knowledge may become a battleground for post-Escobar FCA litigants. For instance, in reaffirming Escobar’s dismissal on remand, while the First Circuit pointed to the government’s knowledge of defendant’s regulatory noncompliance, it emphasized that this was not itself dispositive. And here, although the Serco panel appeared focused on government knowledge, it also noted in its materiality analysis that the government did not find the more detailed cost reports useful, had actually agreed to allow Serco to submit its manually tracked reports, and eventually eliminated the requirement at issue. Thus, it’s unclear whether the Ninth Circuit found government knowledge dispositive as to materiality, or, as in the First Circuit, merely a factor in a holistic analysis.

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