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FCA Qui Notes
April 12, 2019

April Fool's: Two Notable Certiorari Denials, Two Different Takes on Materiality

Qui Notes: Unlocking the False Claims Act

It's no April Fool's trick—The Supreme Court once again declined to clear up confusion about the post-Escobar materiality standard by denying two petitions for writ of certiorari on April 1, 2019. The cases are U.S. ex rel. Rose v. Stephens Institute and United States ex rel. Berg v. Honeywell Int'l, Inc., but they are only the most recent to be passed on by the Court. The Supreme Court also denied certiorari in the last two cases asking it to address materiality (Gilead Sciences, Inc. v. U.S. ex rel. Campie and Brookdale Senior Living Communities, Inc. v. United States ex rel. Prather).

In Rose, a non-intervened qui tam, the relators alleged that the art school defendant violated the False Claims Act when it obtained funding from the US Department of Education by falsely certifying compliance with Title IV of the Higher Education Act, which prohibits universities that receive federal funding from providing incentive payments to staff for recruiting students. The Ninth Circuit decision held that compliance with the Title IV incentive compensation ban was material, and found that the government's failure to limit, suspend, or terminate any school's access to federal student aid in 32 instances even where it knew the schools had violated the incentive ban did not negate materiality. The defendant sought certiorari on the question of whether allegations that the Department of Education "cared" about compliance with the Title IV incentive compensation ban was sufficient to establish materiality even in the face of continued payments from the same entity.

The Honeywell decision reached the opposite conclusion based on similar facts. That case concerned Honeywell's Energy Savings Performance Contract to overhaul the energy production systems at Fort Richardson and Fort Wainwright in Alaska. This included installing energy-efficient lighting and converting certain buildings from central heating to commercial natural gas and electricity. The whistleblowers alleged that Honeywell made false statements regarding its energy savings calculations and fraudulently induced the US Army to enter into the contract, thus rendering Honeywell's claims for payment false. Just like the Department of Education in Rose, the US Army had paid Honeywell's claims from 2003 to 2008, despite being aware of relators' fraud allegations since 2002 and having conducted its own audit in 2003. Given this history and relators' failure to present evidence on materiality to the contrary to create a triable issue of fact, the Ninth Circuit found that the relators' claim failed under Escobar's "demanding" materiality requirement. The relators sought certiorari, arguing that the Ninth Circuit had improperly applied Escobar's demanding materiality standards when there was only the "mere existence of evidence of 'government knowledge'" of the allegedly false claims.

The existence of such glaring inconsistencies between circuits may feel like a practical joke, but the punchline remains to be seen. The April denials of certiorari confirm that the Supreme Court is in no mood to weigh in on materiality anytime soon. In the meantime, courts very well may continue to reach different conclusions about the impact of the government's decision to pay—and that's no laughing matter.

© Arnold & Porter Kaye Scholer LLP 2019 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.