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Fifth Circuit Applies “Demanding” Materiality Standard To Dismiss An Implied Certification Case

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  • Posted on: Apr 21 2017

Last month, the Fifth Circuit issued U.S. ex rel Abbott v. BP Exploration and Production, Inc., — F.3d —, 2017 WL 992506 (5th Cir. Mar. 14, 2017), a decision in which it applied the materiality standard set forth by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016) (discussed here), to dismiss a qui tam action using the implied certification theory as the basis for liability. In doing so, the Fifth Circuit joined the FirstSeventhEighth, and Ninth Circuits in issuing post-Escobar rulings.

Background

Kenneth Abbott (“Abbott”), a former BP administrative employee, claimed that BP falsely certified compliance with various safety regulations applicable to the construction and maintenance of its Atlantis Platform (“Atlantis”), a semi-submersible oil production facility in the Gulf of Mexico. Abbott alleged that without the false certifications, the Atlantis would not have been approved. Abbott filed a complaint under the False Claims Act (“FCA”) and sought over $200 billion in damages. The government declined to intervene.

As a result of his lawsuit, the Department of the Interior (“DOI”) began reviewing BP’s compliance with the regulatory requirements identified by Abbott. In a detailed report, the DOI found Abbott’s claims to be both “unfounded” and “without merit.” Consequently, the DOI concluded that there “no grounds for suspending the operations of the Atlantis . . . or revoking BP’s designation as an operator . . ..”

Despite the DOI’s findings, Abbott continued with his qui tam action. Following discovery, the district court granted summary judgment in BP’s favor on all claims, describing BP’s alleged misconduct as “paperwork wrinkles,” which could not have affected the government’s decision to pay. U.S. ex rel. Abbott v. BP Exploration and Production, Inc., Case No. 4:09-CV-01193 (S.D. Tx. Aug. 21, 2014) (ECF No. 431). Abbott appealed.

The Fifth Circuit’s Ruling

In affirming the district court’s ruling, the Fifth Circuit found that the regulatory violations cited by Abbott were immaterial to the government’s decision to pay the claims. In doing so, the Court explained that the FCA’s materiality standard is “demanding” and noted that the Supreme Court “debunked the notion that a Governmental designation of compliance as a condition of payment by itself is sufficient to prove materiality.” Consequently, it was necessary to consider whether the government’s payment was dependent upon regulatory compliance – that is, for example, whether the government paid the claim with knowledge of the regulatory violation.

Applying the foregoing analysis, the Court found that although the government did not know of BP’s alleged regulatory violations when it paid the claims, compliance with the regulations was not material to the government’s decision to pay:

[W]hen the DOI decided to allow the Atlantis to continue drilling after a substantial investigation into Plaintiffs’ allegations, that decision represents “strong evidence” that the requirements in those regulations are not material. These “strong facts” have not been rebutted by Plaintiffs’ evidence such that Plaintiffs have failed to create a genuine dispute of material fact as to materiality. The district court therefore correctly granted summary judgment on the FCA claims in favor of BP.

Takeaway

At the time of its issuance, Escobar was largely considered to be a victory for the United States and whistleblowers using the implied certification theory of liability to fight fraud under the FCA. Though the Supreme Court recognized the viability of the theory, it nevertheless limited the reach of the theory by instructing the lower courts to strictly enforce “the [FCA]’s materiality and scienter requirements.”

Although the Supreme Court did not provide a test for materiality under the FCA, it reminded the lower courts that the standard was “familiar and rigorous,” “demanding” and not “too fact intensive”. In the short time since the Supreme Court decided Escobar, many circuit courts have applied Escobar to limit the reach of implied certification cases by rejecting claims asserted by relators who cannot establish materiality or satisfy the scienter requirement. Abbott falls within this trend.

Apart from falling in line with other circuit courts, Abbott is important for its use of post-payment evidence to show that that alleged noncompliance was not material to the government’s decision to pay claims. As such, FCA Defendants should find Abbott to be a powerful resource to secure dismissal of implied certification cases brought against them.

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