A Civil War-era statute may become increasingly utilized in the wake of COVID-19. While the government and private plaintiffs have long relied on the False Claims Act (“FCA”), filings often spike after times of crisis and concomitant federal spending.[1]  While there are several different theories of liability under the FCA, at its core, the statute prohibits presenting a false claim for payment to the U.S. government, or causing such a claim to be made.[1]

In a speech before the U.S. Chamber of Commerce on Friday, June 26, 2020, the second-in-command of DOJ’s Civil Division, Ethan Davis, explicitly stated that DOJ “will deploy the False Claims Act against those who commit fraud related to the various COVID-19 stimulus programs, like the Paycheck Protection Program [the “PPP”] and the Main Street Credit Facility.”[2] While we have previously noted the likelihood of FCA claims based on these programs,[3] Davis’s speech confirms that the Department is focused on bringing FCA actions related to the COVD-relief programs and notes several specific areas of DOJ concern:

• As to the PPP, Davis highlighted three areas where a knowing false statement could expose a borrower to False Claims Act liability

• The “current economic uncertainty certification,” which requires borrowers to certify that “current economic uncertainty” makes the “loan request necessary to support the [borrower’s] ongoing operations[.]”
• The use of funds certification, which requires borrowers to certify that the “funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule.”
• Certifications the borrower has to make when seeking loan forgiveness, including that PPP funds were used for forgiveness-eligible purposes.

• As to the Main Street Lending Program, Davis was somewhat less specific, but noted “borrowers and lenders are required to abide by the programs’ requirements, including various eligibility requirements” and that DOJ will use the FCA “to hold accountable those who knowingly attempt to skirt those requirements.”

• As an example of another COVID-related relief fund that may see FCA activity, Davis cited the CARES Act Provider Relief Fund, specifically noting the requirements that providers certify they are providing care to patients with actual or possible COVID-19 cases and that providers agree to balance-billing restrictions.

• Davis also warned that “private equity firms that sometimes invest in companies receiving CARES Act” funds and “take[] an active role in illegal conduct” at a portfolio company, “can expose [themselves] to [FCA]” liability.”

• At the same time, Davis said DOJ will pursue “cases only where the borrower knowingly failed to comply with material legal obligations and certifications,” not where the company made inadvertent, technical, or good-faith mistakes.

• In addition, Davis highlighted DOJ’s authority to dismiss FCA suits brought by qui tam relators, noting DOJ “will continue to use [that] authority judiciously, to weed out cases that involve regulatory overreach or are otherwise not in the interests of the United States.” Further Davis reiterated DOJ’s “position that noncompliance with guidance documents cannot by itself form the basis of an FCA case.” (emphasis added)

The last two bullet points highlight the significance of two recent, pre-COVID developments in FCA practice: the development of the “materiality” standard following the Supreme Court’s 2016 decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar and guidance from the DOJ as to what types of agency guidance the Department can use to show a claim was knowingly false. 

Post-Escobar materiality developments

In Escobar, two parents claimed that the mental health facility where their daughter had received treatment violated the FCA by submitting Medicaid payment requests, even though certain practitioners at the facility were not properly licensed. The parents’ theory was that each time the facility made a payment request, it was impliedly certifying its compliance with all conditions of payment—particularly that medical providers were licensed and supervised.[2]  

In unanimously reversing the lower courts’ dismissal of the case, the Supreme Court reached two holdings. First, it endorsed the “implied false certification” theory of FCA liability where “liability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement.”[3]

However, second, the Court reiterated that the materiality element of FCA claims is a “demanding” standard, and that merely failing to comply with a condition of payment does not automatically render a false claim material—this is particularly significant, because it is applicable to all kinds of FCA claims, not just those brought under an implied false certification theory.

The Escobar Court clarified that, like materiality in other contexts, FCA materiality “looks to the effect” of a statement “on the likely or actual behavior” of the listener—in the FCA context, the government.[4]  For example, if the government “consistently refuses” to pay a claim because of non-compliance with a condition, the false statement connected to that condition is more likely to be material.[5] 

Since Escobar, lower courts have reached varying results on the relevance of a non-compliance with an explicit payment condition.

• On remand, the First Circuit in Escobar itself declined to require relators to plead facts regarding the government’s past payment practices (despite the Supreme Court suggesting that would be relevant), reasoning that a relator would not be able to access such information at the dismissal stage, particularly in the healthcare industry.[6]

• The Sixth Circuit held that pleading that an express condition is material was sufficient to survive dismissal.  Where the government makes payment without knowledge of non-compliance, the government’s payment decision is irrelevant to materiality and no related facts need to be pleaded.[7] 

• The Fifth Circuit overturned a $600 million jury verdict, holding that a condition of payment is immaterial where the government maintains it was not defrauded and unrebutted evidence shows the government paid the claims with full knowledge of non-compliance.[8]

• The Ninth Circuit held that questions concerning whether the government paid claims despite “actual knowledge” of non-compliance were “matters of proof, not legal grounds to dismiss relators’ complaint.”[9]

• The Ninth Circuit also held that non-compliance with administrative rules was not immaterial as a matter of law, even though the government regularly paid claims that did not comply with the rule. The court noted there was also evidence that the government required non-complying claimants to take at least some corrective measures if they did not comply.[10]

Thus, despite Escobar’s statement about the “demanding” nature of the materiality inquiry, courts have shown at least some willingness to allow plaintiffs leeway, particularly at the motion to dismiss stage. For defendants, it is critical to build a discovery plan that maximizes the chances of prevailing on the materiality issue at summary judgment.

FCA Enforcement Under the DOJ’s Recent Policy on Agency Guidance

An important related issue is what federal rules and regulations can form the basis of a false claim.

In January 2018, then-Associate Attorney General Rachel Brand issued a memorandum (the “Brand Memo”) directing that federal agency guidance not subject to notice-and-comment rulemaking “cannot create binding requirements that do not already exist by statute or regulation.”[11] 

The principles of the Brand Memo were then incorporated into a 2018 update to the Justice Manual, the DOJ’s official policy publication.[12] The Justice Manual now states that enforcement actions it brings “must be based on violations of applicable legal requirements, not mere noncompliance with guidance documents issued by federal agencies, because guidance documents cannot by themselves create binding requirements that do not already exist by statute or regulation.” 

There are, however, certain exceptions, such as that the DOJ may use evidence that a party read agency guidance to prove that the party had “the requisite scienter, notice, or knowledge of the law.” 

This exception is potentially significant because, although “the FCA does not reach an innocent, good-faith mistake about the meaning of an applicable rule or regulation,”[13] the scienter element may be satisfied if there is “sufficient evidence of government guidance that ‘warn[ed] a regulated defendant away from an otherwise reasonable interpretation’ of an ambiguous regulation.”[14] For example, one district court denied a motion to dismiss because the defendant had “fair warning,” via an agency’s handbook, that it could not seek specific property valuations from appraisers in order to confirm its eligibility for government insurance.[15] 

Other examples of permissible uses of guidance include: (1) “as probative evidence that a party has satisfied, or failed to satisfy, professional or industry standards or practices relating to applicable statutory or regulatory requirements”; and (2) when a party’s compliance with guidance is itself relevant to particular claims in a case, such as when a company “falsely certifies compliance with a guidance document.”

***

Given the numerous certifications required in connection with COVID-relief programs and the fact that agency guidance has been published in a number of cases via FAQ-type documents, Escobar’s materiality holding and the recent DOJ Guidance are likely to be particularly relevant in the post-COVID-19 FCA environment. At same time, PDAAG Davis’s suggests DOJ may be receptive to arguments that purportedly false certifications were good-faith mistakes and may be willing to dismiss FCA cases in appropriate circumstances.

 

[15] U.S. v. Quicken Loans Inc., 239 F. Supp. 3d 1014, 1019, 1028-29 (E.D. Mich. 2017). 

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