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04 July 2018
The Sixth Circuit recently resurrected the relator's case in United States ex rel Prather v Brookdale Senior Living Communities, Inc.(1) In a two-to-one decision, the majority held that the relator's materiality and scienter allegations sufficed under Universal Health Services, Inc v United States ex rel Escobar.(2) The majority issued the decision over a vigorous dissent by Judge McKeague. The gulf between the majority and the dissent reflects persistent questions about how Escobar applies at the pleading stage.
Brookdale Senior Living involves alleged false claims for home health services. According to the relator, regulations require physicians to certify the necessity of home health care plans "at the time" when the plans are established or "as soon thereafter as possible".(3) The relator alleged that the defendant had violated this timing requirement by obtaining physicians' certifications months after patients' care plans had been established.
The district court dismissed the complaint for failure to allege materiality under Escobar. In Escobar the Supreme Court explained that a regulatory violation is actionable under the False Claims Act only if it is material to the government's payment decision. The materiality analysis is based on an analysis of various factors, including whether:
Applying these standards, the district court held that the relator had failed to allege materiality. It agreed with the relator that compliance with the timing requirement was an express condition of payment, but found that other Escobar factors weighed against the relator.
First, the complaint did not allege a single instance of a claim that the government had denied because of a belated certification, even though the timing requirement has been on the books for more than 50 years. This suggested that compliance with the timing requirement was immaterial to the government's actual payment practices.
Second, guidance documents cited by the relator focused more on medical necessity than timing. This suggested that the timing requirement was not the essence of the government's bargain with the defendant. For these reasons, the district court concluded that the relator had failed to allege materiality under Escobar.
The Sixth Circuit reversed. The majority held that the district court had erred in drawing a negative inference from the relator's silence about government payment practices. On a motion to dismiss, all inferences must be drawn in the relator's favour; therefore, the negative inference was improper. Further, the guidance documents cited by the relator provided "some support" for her allegation that the timing requirement was an important mechanism for preventing fraud and therefore essential to the government's bargain with the defendant. Weighing that allegation along with allegations that compliance with the timing requirement was an express condition for payment, the majority concluded that the complaint had alleged materiality under Escobar.
McKeague issued a resounding dissent. In his view, the Sixth Circuit should have joined those courts that require materiality to be alleged with particularity under Rule 9(b). Although Escobar did not address Rule 9(b), it characterised the materiality standard as "demanding". The dissent argued that this standard was more akin to particularity under Rule 9(b) than notice pleading under Rule 8. In any event, the relator had not alleged that the government routinely refused to pay claims based on the alleged violations, or that it would have refused to pay particular claims in the circumstances. According to the dissent, the government's payment habits were the best evidence of materiality. Although the relator's silence on that point did not hurt her case, it meant that she needed other allegations to show materiality. In the dissent's view, the guidance documents the relator cited only further undercut her case because none indicated the importance of the timing requirement that the relator suggested. According to McKeague, the district court was correct and the relator had failed to carry her burden of affirmatively alleging materiality under Escobar.
Unlike the district court, the majority and the dissent also addressed scienter. The majority held that the relator had plausibly alleged that the defendant had acted with reckless disregard for the timing requirement by instructing its staff to conduct only a cursory review of claims, disregarding the staff's concerns and acknowledging in an email that physicians might be uncomfortable signing untimely certifications. The dissent rejected these arguments, suggesting that the defendant could not have known that belated certifications violated the False Claims Act before the Sixth Circuit had issued its decision in Prather. Further, the relator's allegations suggested that the defendants had worked to ensure that the certifications were signed by physicians, as the regulations required. The dissent argued that the complaint was therefore neutral on scienter and insufficient under Rule 8.
Although the majority and the dissent diverged on most aspects of the analysis, the fundamental difference of opinion was about the pleading standard for materiality after Escobar. This disagreement reflects broader uncertainty about how courts should apply Escobar's instruction that the materiality standard is "demanding" and operates on a motion to dismiss. It also reflects uncertainty about how courts should analyse past government payment practices at the pleading stage.
The Department of Justice filed an amicus brief urging the court to adopt its view that past government inaction does not weigh against materiality unless it is clear that the government had actual knowledge of the violations at issue. In the government's view, the holistic approach required by Escobar means that materiality will usually be a jury question. Government inaction will be relevant at the pleading stage only if the complaint leaves no question about what the government knew and when, and there is no suggestion that the agency chose to forgive what in fact constituted fraud. From the government's perspective, the district court had erred by considering past payment practices relevant absent actual government knowledge of the alleged fraud.
The majority's opinion largely aligns with the government's view. It holds that the government's response to non-compliant claims cannot bear on materiality unless the government actually knew about the alleged violations. It also holds that no negative inference can be drawn from the relator's silence on past government practice. Provided that the relator has some other basis for alleging materiality, that will be enough for the relator to carry her burden in the Sixth Circuit.
Although the two-to-one vote resolves the debate about the pleading standard for materiality in the Sixth Circuit, it points to a broader debate that only the Supreme Court can resolve. Certiorari petitions have already been filed raising questions about the standard for pleading materiality in the face of government inaction. As the dissent points out, many courts apply a more stringent pleading standard than the one articulated by the Sixth Circuit in Prather. Until the Supreme Court weighs in, the fundamental debate in Prather is likely to continue in cases percolating up through the lower courts.
For further information on this topic, please contact Scott D Stein at Sidley Austin LLP's Chicago office by telephone (+1 312 853 7000) or email (firstname.lastname@example.org). Alternatively, contact Naomi A Igra at Sidley Austin LLP's San Francisco office by telephone (+1 415 772 1200) or email (email@example.com). The Sidley Austin website can be accessed at www.sidley.com.
(1) The Sixth Circuit's decision is available here.
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