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FCA Qui Notes
December 12, 2018

The AKS Kicks Back at Escobar as Another Court Holds AKS Violations Are Inherently Material

Qui Notes: Unlocking the False Claims Act

In the wake of Escobar, courts have largely moved away from the categorical materiality rules that were so common before the Supreme Court rewrote the book on materiality. Now, consistent with Escobar's directions, courts generally employ a case-specific approach that looks at the government's actual conduct in paying claims. But according to several district courts, one federal statute—the Anti-Kickback Statute (AKS)—lends itself to categorical rules, even under the Escobar framework. The Northern District of Texas recently became the third district court to join this group, holding that an AKS violation is "inherently" material under the FCA.

The defendants in United States ex rel. Capshaw v. White, 2018 WL 6068806 (N.D. Tex. Nov. 20, 2018) (Westlaw login required) were a doctor and nurse who owned several hospice companies. The government's complaint-in-intervention alleged that the defendants transferred money and equity to a struggling home care company in exchange for Medicare referrals. The government alleged that this scheme violated the AKS and the resulting bills that defendants submitted to the government for Medicare reimbursement were false. After years of procedural wrangling, defendants moved to dismiss.

The district court denied the motion in its entirety, holding that the government adequately pleaded a violation of the AKS and that such a violation is "inherently" material under the FCA. Following in the footsteps of the Southern District of New York and the District of South Carolina, the court reasoned that every AKS violation is material for several reasons. See United States ex rel. Wood v. Allergan, Inc., 246 F. Supp. 3d 772, 818 (S.D.N.Y. 2017); United States v. Berkeley Heartlab, Inc., 2017 WL 6015574, at *2 (D.S.C. 2017). First, AKS violations are not "insubstantial" regulatory violations, but serious felonies that carry significant prison terms. Second, the AKS expressly states that "a claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim." Third, Medicare Part D Provider Agreements and most state Medicaid Provider Applications designate AKS compliance as a condition of payment. Fourth, defendants identified no evidence that the government has continued to pay claims despite knowledge of AKS violations, and in fact the government has a history of actively pursuing FCA actions and criminal proceedings to deter and punish AKS violations. As a result, the court held that AKS violations are "serious, consequential, felony transgressions of law," and not the type of breach that Escobar "sought to shield from the wrath of the FCA."

While the court framed this holding as a categorical one, it is arguably something less than that. The court recognized that even for AKS violations, a post-Escobar materiality inquiry must consider whether the government has continued to pay claims despite knowledge of AKS violations. While the defendants in Capshaw evidently could not cite any such examples, the decision leaves open the possibility that materiality could be defeated if continued payment could be shown. In fact, just as this post was scheduled to go live, the Southern District of New York in U.S. ex rel. Arnstein v. Teva Pharmaceuticals, No. 13-3702 (Dec. 11, 2018) [ECF No. 154] issued an order requiring supplemental briefing on materiality in a case involving alleged AKS violations. The court rejected relators' argument that AKS violations "are per se material under the FCA" as "no longer a good statement of the law." We here at Qui Notes will monitor that briefing and be watching closely as other courts take on this issue.

© 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.