District Court Rejects “Holistic” Approach to Escobar’s FCA Materiality StandardSeptember 26, 2017 – Insight
The District Court for the Southern District of New York recently rejected the notion of a “holistic” approach to materiality, instead zeroing in on the government’s continued payment of claims despite knowledge of non-compliances as proof positive those non-compliances were not material. In United States ex rel. Kolchinsky v. Moody’s Corp., the relator alleged the defendant violated the False Claims Act (FCA) when it received payments for inaccurate credit ratings it issued to the government.1 The Kolchinsky court concluded these facts could not sustain a viable FCA claim under the Supreme Court’s Escobar decision.
The Kolchinsky court considered the relator’s motion for reconsideration of the court’s earlier dismissal of the relator’s case against Moody’s Corporation, a credit rating company. In its prior dismissal, the court held the relator failed to plead with particularity the accuracy of the defendant’s credit ratings was material. Public reports at the time indicated the defendant’s credit ratings were inaccurate. However, because the government continued to pay for the defendant’s credit ratings despite gleaning knowledge of the inaccuracies through public reports, the court concluded those inaccuracies could not be material.
Litigants and courts across the country are still debating and determining the contours of an implied certification claim in the post-Escobar world. Since Escobar, FCA plaintiffs and some courts have tried to temper the “demanding” materiality standard the Supreme Court articulated. For example, the First Circuit, on remand from Escobar, held Escobar’s materiality standard requires a “holistic” analysis of a variety of factors to decide whether the implied certification was “sufficiently important to influence the behavior of the recipient.”2 Under the holistic approach, courts look to the sum of the following factors: (1) whether regulatory compliance was a condition of payment, (2) whether the requirement is central to the program, and (3) whether the government paid claims despite actual knowledge of misrepresentations. The Kolchinsky court explicitly rejected the First Circuit’s position that materiality, under Escobar, must be analyzed holistically. Instead, it traced Escobar’s guidance and held the actual behavior of the government—the continued payments of the defendant’s claims—showed the accuracy of the defendant’s credit ratings had no impact on the government’s decision to pay. The court also properly treated the two-part test for establishing falsity in an implied certification claim under Escobar—that a defendant (1) make specific representations about goods or services such that (2) its failure to disclose a material non-compliance makes those specific representations misleading half-truths—a requirement to stake out an implied certification theory, as opposed to merely being one example of how falsity could be established.
1 See United States ex rel. Kolchinsky v. Moody’s Corp., No. 12cv1399, 2017 U.S. Dist. LEXIS 142106 (S.D.N.Y. Sep. 1, 2017).
2 United States ex rel. Escobar v. Universal Health Servs., 842 F.3d 103, 110 (1st Cir. 2016) (quoting United States ex rel. Winkelman et al. v. CVS Caremark Corp., 827 F.3d 201, 211 (1st Cir. 2016)).