Effort to Revive Dismissed Implied Certification Claims Based on Escobar Fails on Materiality Grounds
The Supreme Court's June 2016 decision in Universal Health Services v. U.S. ex rel. Escobar was widely read as providing new support for the theory of "implied certification" liability in cases brought by Government prosecutors and qui tam relators under the federal False Claims Act (FCA), as it held that a contractor that requests payment without disclosing "violations of statutory, regulatory, or contractual requirements" may be making a false claim against the Government.
A federal judge in the District of Columbia, however, recently reaffirmed the prior dismissal of "implied certification" FCA claims brought against a materials supplier over body armor durability issues that the company allegedly kept hidden, saying the Supreme Court's holding in Escobar was not a sufficient basis to amend the previous findings.1 The District Court stated that Escobar had not changed the "strict" requirement that any violations be "material to the Government's payment decision."2
The Government filed suit against Toyobo Co. Ltd. in 2007, accusing the company of violating the FCA by falsely representing information about its vests, which allegedly contained Zylon, a plastic fiber manufactured by Toyobo. The Government alleged that Toyobo knew of degradation issues with Zylon but concealed this information from vest manufacturers, who sold the vests to the Government while guaranteeing their durability. Toyobo argued that the Government contracting agency did not list "durability or degradation resistance" as a specific requirement in the published solicitation for the contract, and thus any alleged misstatements were immaterial to the purchase decisions.
The Government replied that various expectations were implied by the contracting process, pointing to various external documents and regulations. In its original dismissal, the District Court ruled that such statements did not create FCA liability unless they related to "material" terms of the contract, and that only one of these examples—a guarantee in a reseller catalog provided to the Government in 2002—created a genuine issue of fact for trial.3 The court thus dismissed all claims relating to sales prior to 2002, and limited the issues going forward to only the catalog guarantee.4
Following the Supreme Court's holding in Escobar, the Government sought to revive the dismissed implied certification claims, arguing that Escobar allows for the kind of "implied certification" of regulatory compliance claims that were being pursued against Toyobo.
District Court Judge Paul L. Friedman granted the Government's motion to reconsider the dismissal of the implied certification claims, but found that Escobar did not alter the original legal basis for dismissal. Judge Friedman agreed that in theory, Escobar could allow FCA claims not based on explicit contractual terms. However, he cited the D.C. Circuit's recent guidance in United States ex rel. McBride v. Halliburton Co. that Escobar should be read by lower courts as "mak[ing] clear that courts should continue to police expansive implied certification theories 'through strict enforcement of the Act's materiality and scienter requirements.'"5
Applying this guidance, Judge Friedman found that the dismissed claims presented nothing material to the contracting or payment decisions of the Government, or created a guarantee that the vests would function perfectly during the duration of the contract. He concluded that, because there was no evidence that the degradation issues were material to the parties' decision to enter into the contract, the claims could not be resuscitated under Escobar:
This record led Judge Roberts [to whom the cases were previously assigned] to find that 'there is no evidence that these extra-contractual considerations were a part of, or otherwise informed, the actual contracting.' Escobar again offers no reason to alter that holding, especially because the Supreme Court in Escobar directed courts to emphasize the FCA's materiality requirement in their analysis.6
Judge Friedman further held that:
The Supreme Court in Escobar did not change the legal principle on which Judge Roberts relied—as articulated in United States v. Science Applications Int'l Corp.—that 'noncompliance with material contractual requirements' is a basis for an implied false certification claim under the FCA. 626 F.3d at 1269. Instead, Escobar expanded that principle beyond express contract terms[.]7
Judge Friedman's narrow focus on the materiality requirement implies that Escobar may not open the door for such theories as wide as many observers initially thought. This case is likely to be one of many pending or newly filed FCA cases in which both sides closely analyze the specific contractual terms at issue and marshal evidence of the parties' intent in order to argue that Escobar supports their position on the viability of an implied certification claim.
The cases are U.S. v. Toyobo Co. Ltd. et al., case no. 1:07-cv-01144, and U.S. ex rel. Westrick v. Second Chance Body Armor Inc. et al., case no. 1:04-cv-00280, both in the US District Court for the District of Columbia. The Opinion and Order can be found here.