Oh Say, Do You See Materiality?

Just before this summer's July 4 holiday, the Ninth Circuit affirmed summary judgment for technology and manufacturing company Honeywell in yet another False Claims Act (FCA) case that turned in large part on application of the "demanding" and "rigorous" materiality standard articulated by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar. United States ex rel. Berg v. Honeywell Int'l, Inc., No. 17-35083, 2018 WL 3237518 (9th Cir. July 3, 2018). With this decision, Honeywell finally declared independence from relators' misguided suit filed in 2007.

Honeywell had an 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. The US Army, however, 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.

Defendants are rightfully hesitant to set off the victory fireworks over the Ninth Circuit's willingness to give teeth to the materiality requirement just yet, however. This ruling contrasts with another Ninth Circuit ruling from last July that held virtually the opposite. In United States ex rel. Campie v. Gilead Sciences, Inc., the relators had alleged that the defendant made false claims for reimbursement from Medicare, Medicaid, and other federal health care programs by falsely billing for drugs as FDA-approved when they did not meet FDA standards. 862 F.3d 890 (9th Cir. 2017). The government there also had continued to pay after it knew of violations, and the FDA left in place its approval of the drug. Notwithstanding these facts, the Ninth Circuit held that "to read too much into FDA's continued approval – and its effect on the government's payment decision – would be a mistake." The court noted that there might be many reasons for the agency not to have withdrawn its approval of payments, unrelated to the concern over paying out billions of dollars for nonconforming and adulterated drugs. Also, the Gilead defendant ultimately stopped using the non-compliant drugs, so the agency's decision to keep paying did not have the same significance "as if the government continued to pay despite continued noncompliance."

It is possible the Honeywell case could signal a move within the circuit back toward a more "rigorous" and "demanding" application of the Escobar materiality standard. Notably, however, the Honeywell decision is unpublished, hinting that the Ninth Circuit may instead be making a one-time distinction and remains deferential to its decision in Gilead. It is also possible that the circuit is waiting to see whether the Supreme Court chooses to weigh in on the issue prior to generating heaps of precedential opinions only to see them reversed later. Gilead currently has a pending petition for certiorari to the Supreme Court, for which the Court called for the views of the Solicitor General in April 2018. If certiorari is ultimately granted, you can be sure that FCA practitioners from sea to shining sea will be waiting on pins and needles to see what resolution the Court brings to this very live issue.

© Arnold & Porter Kaye Scholer LLP 2018 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.