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Defining The Contours Of Falsity After Escobar

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  • Posted on: May 26 2017

In Universal Health Services, Inc. v. United States ex rel. Escobar, the U.S. Supreme Court unanimously confirmed that the false certification theory “can be a basis for liability” under “some circumstances.” (See Blog post here.)  Those circumstances are: (1) the defendant does not merely request payment, but also makes specific representations about the goods or services provided; and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading.

Since the Supreme Court decided Escobar, courts have devoted much of their time on cases involving the second prong of the Escobar test – that is, whether the plaintiff satisfied the heightened pleading standard for materiality. Recently, the Fourth Circuit addressed the first prong of the test, falsity. See United States ex rel. Badr v. Triple Canopy, Inc., No. 13-2190 (4th Cir. May 16, 2017). In Triple Canopy, the Fourth Circuit broadly defined falsity such that it permitted the government to avoid identifying any specific misrepresentation.

United States ex rel. Badr v. Triple Canopy, Inc.

Background

In Triple Canopy, the government had awarded the company a one-year contract to provide security services at an airbase in Iraq. As part of that contract, Triple Canopy was required to meet certain “responsibilities,” including “ensur[ing] that all employees have . . . qualified on a U.S. Army qualification course.” According to the relator, Triple Canopy brought in guards from Uganda who were unable to meet this marksmanship requirement. Rather than inform the government of this deficiency, Triple Canopy falsified the scorecards of these contractors. Triple Canopy submitted monthly invoices for its guards without certifying compliance with the marksmanship requirement in the contract, though such certification was not required.

Triple Canopy moved to dismiss the complaint, which the district court granted. United States ex rel. Badr v. Triple Canopy, Inc., 950 F. Supp.2d 888 (E.D. Va. 2013).  In doing so, the court “decline[d] recognition of an implied certification theory of liability.” Id. at 899.

On appeal, the Fourth Circuit adopted the implied theory of liability and decided that the government adequately pled a false claim against Triple Canopy by alleging that the company hired guards that could not meet the government’s contractual requirements for marksmanship. United States v. Triple Canopy, Inc., 775 F.3d 628, 635-637 (4th Cir. 2015) (here). Thereafter, Triple Canopy filed a writ of certiorari with the Supreme Court. Following Escobar, the Supreme Court granted certiorari, vacated the Fourth Circuit’s opinion, and remanded the case for reconsideration in light of its Escobar ruling.  On remand, the Fourth Circuit affirmed its prior decision, finding that the government had adequately alleged both falsity and materiality.

The Fourth Circuit’s Decision

The Fourth Circuit first addressed the falsity question, concluding that claims for payment implicitly state a legal entitlement to payment. Accordingly, because Triple Canopy’s alleged noncompliance with the requirements of the contract would have rendered it legally ineligible for payment, its claims to the government were false.

We conclude that the Government has sufficiently alleged falsity. Simply, the Universal Health rule is not as crabbed as Triple Canopy posits. In announcing the rule, the Court made clear that it was targeting omissions that “fall squarely within the rule that half-truths—representations that state the truth only so far as it goes, while omitting critical qualifying information—can be actionable misrepresentations.” That “half-truth” is exactly what we have here: although Triple Canopy knew its “guards” had failed to meet a responsibility in the contract, it nonetheless requested payment each month from the Government for those “guards.” Just as in Universal Health, anyone reviewing Triple Canopy’s invoices “would probably—but wrongly—conclude that [Triple Canopy] had complied with core [contract] requirements.” [Citations and footnote omitted.]

Next, the Court addressed the materiality prong of the Escobar test, concluding that “common sense and Triple Canopy’s own actions in covering up the noncompliance” confirmed the materiality of the company’s violation the contract: “Guns that do not shoot are as material to the Government’s decision to pay as guards that cannot shoot straight.”

The Fourth Circuit also looked at the government’s conduct after becoming aware of the allegations in the action.  In that regard, the Court noted that the government did not renew its contract with Triple Canopy and “immediately intervened” in the qui tam action – actions that spoke volumes about the materiality of the false certification:

In addition, in discussing the types of evidence the Government could introduce to show materiality, the Court referenced whether the Government typically paid claims that violated the particular requirement. Here, the Government did not renew its contract for base security with Triple Canopy and immediately intervened in the litigation. Both of these actions are evidence that Triple Canopy’s falsehood affected the Government’s decision to pay. As we explained, the “Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight.” Triple Canopy, 775 F.3d at 638.

A copy of the panel’s decision can be found here.

Takeaway

It remains to be seen whether the panel’s decision will be relied upon by courts outside of the Circuit. The Court’s view of falsity post-Escobar is broad. Indeed, to the panel, the mere fact the word “guard” appeared on the invoice sufficed to constitute a representation that the guards met the requirements of the contract. Other courts may find this broad analysis to be a bridge too far, even if the representation is the type of “half-truth” that the Escobar Court found sufficient to satisfy the first prong of the analysis.

While the falsity portion of the decision is broad in scope, its materiality analysis is limited and could be confined to its facts. Indeed, as noted above, the panel was focused on the company’s alleged concealment of unqualified guards and the government’s “immediate[ ]” intervention into the litigation. No doubt the defense bar will find the decision more helpful than will the relators bar given the fact that the government declines to intervene in approximately 75% of the qui tam actions initiated by a relator. (See U.S. Chamber Inst. for Legal Reform, The New Lawsuit Ecosystem 63 (Oct. 2013).) Nevertheless, the relators bar may find, on a broad level, governmental action after becoming aware of the non-compliance to be helpful in showing materiality.

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