Materiality and Whistleblowers

A nasty surprise concerning questions of materiality and whistleblowers

Naturally, it can pose a problem for plaintiffs across courtrooms and in a wide variety of suits, but materiality and whistleblowers is now a significant and unexpected hurdle.

In what at first seemed a serious win, whistleblowers received a hidden blow in the landmark case Universal Health Servs., Inc. v. United States ex rel. Escobar two years ago. Although the decision theoretically paved the way to an easier time prosecuting fraudsters, it also left the door wide open for defendants to prove that the claims were bogus, so long as the government had paid on them despite knowledge of misconduct.

This closely watched case at first promised to be the exact tool whistleblowers and governments representatives needed to fight fraud, demonstrating that if companies conceal noncompliance when filing, the claims are fraudulent.

Justice Thomas’s careful note that the government must not be aware of the concealment, however, complicates the matter significantly.

Thus, this new precedent – only a few years old and intended to help the government and whistleblowers deter and punish fraudulent claims on government funding – faces doubts in efficacy due to questions of whether or not the fraud itself was relevant to the government’s decision to pay the claims when filed.

Hospice care claims under the Affordable Care Act provide an illuminating example. The case against provider AseraCare, accused of filing false claims for Medicare payments, even though patients were not yet within the required window of 6 months of life or fewer remaining. It all comes down to materiality.

Here’s more about materiality and the various ways it potentially affects whistleblowers:

Big Verdicts Wiped Out

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,’’ Thomas wrote in Universal Health.

Reliance on this language has led to big victories for defendants in the past year:

  • The U.S. District Court for the Middle District of Florida tossed a $348 million jury verdict against a nursing home chain because the government continued to pay Medicare claims despite knowledge of alleged of recordkeeping deficiencies.
  • The U.S. Court of Appeals for the Fifth Circuit threw out a $663 million jury verdict because the Federal Highway Transit Administration always approved of and paid for Trinity Industries Inc.’s allegedly inferior highway guardrails. This Fifth Circuit ruling, United States ex rel. Harman v. Trinity Indus. Inc., is one of the biggest implied certification developments from the past year ‘‘because it demonstrated the strength of the materiality standard: even jury verdicts worth hundreds of millions of dollars will be wiped out on appeal if the whistleblower or government fails to establish at trial that the alleged statutory, regulatory, or contractual violations were material to the government’s decision to pay,’’ said Robert Rhoad and Matthew Turetzky, false claims defense attorneys with Sheppard Mullin Richter & Hampton LLP. It was an open question two years ago as to whether the Supreme Court’s decision benefited the government or defendants, but the Fifth Circuit’s decision shows lower courts are treating the materiality element as rigorously as the Supreme Court had intended, they added.

Deathblow in the Making?

Gilead Sciences Inc. contends the Ninth Circuit should have followed the Fifth Circuit’s rationale but instead misinterpreted Universal Health when it revived whistleblowers’ claims that Gilead made misrepresentations to the Food and Drug Administration about HIV drug ingredients.

The whistleblowers may have sufficiently alleged materiality because questions remain as to what the FDA knew about the drugs and when the Ninth Circuit said. Gilead’s petition to the Supreme Court says the agency’s continued payments in the face of misconduct allegations should be fatal to the case, and allowing the case to go forward could lead to a ‘‘supercharged’’ whistleblower suit industry imposing enormous costs on defendants.

The Supreme Court asked the government to provide a brief as to its views on Gilead’s case, which indicates at least some interest in resolving questions about continued payments.

‘‘It is surprising to me that the Supreme Court has expressed such interest in a relatively esoteric issue so quickly’’ after the 2016 decision, Mike Bothwell of Bothwell Law Group PC, Roswell, Ga., told Bloomberg Government.

‘‘The court might want to clean up some of the loose language or it might want to provide more of a deathblow to the entire area of litigation,’’ he said.

The Bottom Line

Ultimately, materiality represents the hottest topic in FCA law right now for a reason, and parties and courts are trying to sort it out. All look to cases such as the AseraCare suit, which is currently sitting in the 11th Court of Appeals, to enlighten future decisions and pave a clear path for future whistleblowers to punish wrongdoers without fear of dismissal.

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