The DOJ Weighs in After Escobar: Misleading Half-truths Are Actionable Under the False Claims Act

• Posted on: Jul 8 2016

On June 22, 2016, the Department of Justice (“DOJ”) filed a Notice of Supplemental Authority in U.S. ex rel. Westrick v. Second Chance Body Armor, et al., No. 04-0280 (D.D.C.), a case brought under the False Claims Act (“FCA”) against contractors who manufactured and sold bullet proof vests.  The purpose of the filing was to notify the court of the U.S. Supreme Court’s unanimous decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. ___, slip op. No. 15-7 (June 16, 2016) (discussed here), and to explain its impact on the court’s dismissal of the government’s fraud-in-the-inducement claim.

In Westrick, the government alleged that the bullet proof vests that the defendants manufactured and sold to the government degraded without warning and did not maintain the same level of bullet-resisting efficacy during the five-year warranty period. See United States ex rel. Westrick v. Second Chance Body Armor, Inc., 685 F. Supp. 2d 129, 132 (D.D.C. 2010); United States v. Toyobo Co., Ltd., 811 F. Supp. 2d 37, 41-42 (D.D.C. 2011). The government claimed that the defendants, Second Chance Body Armor, Inc., Toyobo Co., Ltd. and Toyobo America, Inc., and certain individuals, knew that the vests were unable to maintain their bullet-resisting efficacy during the five-year warranty period, did not inform the government or other buyers about this degradation, and intentionally placed false information into the market suggesting that there was no degradation. See Second Chance, 685 F. Supp. 2d at 132; Toyobo, 811 F. Supp. 2d at 41-43.

On motions for summary judgment, the district court dismissed some of the government’s fraud-in-the-inducement claims on the ground that the government did not present evidence that the withholding of data caused the government to purchase the vests (i.e., the data was a condition of payment). U.S. ex rel. Westrick v. Second Chance Body Armor, Inc., 128 F. Supp. 3d 1, 19 (2015). Prior to Escobar (and its adoption of the implied certification theory of liability in which half-truths are actionable), courts “employed a fraud-in-the-inducement theory to establish liability under the [FCA] for each claim submitted to the Government under a contract which was procured by fraud, even in the absence of evidence that the claims were fraudulent in themselves.” Id. (citation omitted). To prevail under this theory, the government had to “show that the false statements upon which [it] relied … caused [the government] to award the contract at the rate that it did.”  E.g., United States ex rel. Thomas v. Siemens AG, 991 F. Supp. 2d 540, 569 (E.D. Pa. 2014) (citing United States ex rel. Marcus v. Hess, 317 U.S. 537, 543-44 (1943)).

The government moved for reconsideration of the dismissal, and filed the supplemental authority to underscore the point that after Escobar the defendants “had a legal duty to disclose” their knowledge that the degradation of the bullet-proof vests sold to the government “contradicted [their] misrepresentations about the superiority” of those vests, and that the condition of payment analysis the court employed was no longer valid.  In Escobar, the Supreme Court rejected arguments that the FCA only prohibits fraud that is “expressly designated” as a “condition of payment.”

The DOJ’s Notice of Supplemental Authority in Westrick is the first public statement by the DOJ concerning the application of Escobar to the facts in a pending case under the FCA.

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