In a thorough and thoughtful 23-page opinion, Judge Steven Merryday of the Middle District of Florida dismissed a $350 million judgment against the defendants, owners and operators of specialized nursing facilities. The court detailed the rigorous materiality and scienter requirements for liability under the False Claims Act that the U.S. Supreme Court “defined unambiguously and required emphatically” in Universal Health Services, Inc. v. Escobar, 136 S. Ct. 1989 (2016):
Escobar necessarily means that if a service is noncompliant with a statute, a rule, or a contract; if the non-compliance is disclosed to, or discovered by, the United States; and if the United States pays notwithstanding the disclosed or discovered non-compliance, the False Claims Act provides a relator no claim for “implied false certification” (although some other claim, maintainable by the United States in its own name, or some regulatory authority, exercisable by the United States, might attach under other law).
In other words, a False Claims Act claim cannot be based on a “minor or unsubstantial” or “garden-variety” regulatory violation; to do so would result in a system of “government traps, zaps, and zingers” that permits the government to retain the benefit of a “substantially conforming” good or service, and to recover under the False Claims Act damages (up to treble times) due to the immaterial regulatory non-compliance.
In United States ex rel. Ruckh v. Salus Rehabilitation, LLC et al., No. 8:11-cv-01303-SDM-TBM (M.D. Fla. Jan. 11, 2018) (Merryday, J.), the relator alleged the nursing facilities violated Medicaid regulations, which rendered fraudulent its claims to the Medicaid program. The alleged non-compliances involved a failure to maintain a comprehensive care plan and a failure to keep proper records of services. After trial, the judgments against defendants totaled $350 million.
In its opinion, the court found compelling the entire absence of evidence of how the government has behaved in comparable circumstances. Given the lack of evidence, the jurors returned “an unwarranted, unjustified, unconscionable, and probably unconstitutional forfeiture – times three – sufficient in proportion and irrationality to deter any prudent business from providing services and products to a government armed with the untethered and hair-trigger artillery of a False Claims Act invoked by a heavily invested relator.”
The court, like many now since Escobar, agreed that Escobar requires that the relator prove “both that the non-compliance was material to the government’s payment decision and that the defendant knew at the moment the defendant sought payment that the non-compliance was material to the government’s payment decision.” Absent this evidence, a False Claims Act cannot stand – whether at a motion to dismiss stage, summary judgment stage, or like in Ruckh, past jury trial and judgment.