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FCA Qui Notes
October 18, 2018

Materiality Under the California FCA: Our Money Is on Escobar over Contreras

Qui Notes: Unlocking the False Claims Act

Since it was implemented in 1987, California's version of the False Claims Act (FCA) has been a tool for qui tam and government plaintiffs alike to try to hold any party doing business with the large state of California—or one of its political subdivisions, including the University of California—accountable for fraud on the public treasury. While the California False Claims Act (CFCA) is modeled on the FCA, when it comes to the materiality requirement under the CFCA, the impact of the materiality requirement announced in Universal Health Services v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016), so far has been uncertain. The leading California precedent, San Francisco Unified School District ex rel. Contreras v. First Student, Inc., predates Escobar and had not yet been unseated in state court. 224 Cal. App. 4th 627, 638 (2014). California state courts have yet to directly address the issue, but we think it likely that Escobar will ultimately guide the materiality analysis under the CFCA as well.

The CFCA's materiality standard was first defined by City of Pomona v. Superior Court, 89 Cal. App. 4th 793 (2001). This was just two years after the materiality standard was codified in the federal FCA with FERA. In City of Pomona, California's Second Appellate District adopted the federal Fourth Circuit's test for materiality under the FCA: "whether the false statement [had] a natural tendency to influence agency action or [was] capable of influencing agency action." 89 Cal. App. 4th at 802. Roughly a decade later, California's First Appellate District applied the "natural tendency" test in San Francisco Unified School District ex. rel Contreras v. First Student, Inc., 224 Cal. App. 4th 627, 638 (2014). In Contreras, the court held that the CFCA's materiality test "focuses on the potential effect of the false statement when it is made, not on the actual effect of the false statement when it is discovered" and, consequently, that the government's actual reaction cannot be dispositive on the issue of materiality. Id. at 642 (citing federal cases).

Since Escobar, both federal district courts in California that have considered the CFCA's materiality requirement have cited Escobar as the standard governing materiality for the purposes of both the FCA and the CFCA. See U.S. v. Gatan, Inc., No. 2:12–cv–00106–MCE–CKD, at *4–5 (E.D.C.A. Nov. 27, 2017), appeal docketed sub nom., Bailey, et al v. Gatan, Inc., No. 17-17530 (9th Cir. Dec. 22, 2017); U.S. v. Somnia, Inc., No. 1:15–cv–00433–DAD–EPG, at *1–2, 8–9 (E.D.C.A. Feb. 2, 2018). But in California state court cases, the Attorney General of California has twice submitted amicus briefs taking the position that Contreras is still controlling under the CFCA.

The only California Court of Appeal to consider the matter appeared to reject the Attorney General's argument in an unpublished opinion in Los Angeles County Metropolitan Transportation Authority v. Parsons-Dillingham, No. B255450, 2018 WL 1044921, at *6, 7, 9 n. 16 (Cal. App. 2 Dist. Feb. 26, 2018) (noting that CFCA is based on federal FCA and finding that defendant's failure to adjust billings—even if viewed as technical breach of contractual obligations—could not have been material under Escobar because, "in the end, [defendant] owes nothing on MTA's breach of contract claims"). Although unpublished opinions have no precedential effect and may not be cited to California courts as persuasive authority, the case may nonetheless provide a preview of how California courts will rule on this issue in the future.

In spite of the California Attorney General's urging, the logical conclusion of this debate is for California courts to adopt Escobar's materiality analysis for the CFCA. Contreras relies on federal case law that has been abrogated by the US Supreme Court's unanimous decision in Escobar and by subsequent lower federal court decisions. And—as seen in Pomona and Contreras—California courts have repeatedly looked to federal FCA decisions when construing the CFCA. Because Contreras is founded on now-abrogated federal case law, it would take a truly contrarian state court to hang on.

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.