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Supreme Court Rejects Two More False Claims ‘Materiality’ Cases

April 1, 2019, 3:08 PM

The U.S. Supreme Court continues to be reluctant to step into the issue of how to define materiality under the False Claims Act, rejecting two petitions on the subject April 1.

Materiality concerns whether the government would have withheld payment to a contractor had it known about alleged noncompliance. Both petitions concerned the effect of continued payments to contractors on the issue of materiality.

“It appears to be part of the Supreme Court’s trend not to further define the materiality standard under Universal Health Servs., Inc. v. United States ex rel. Escobar and to continue to allow the lower courts to render their own interpretations of that standard, notwithstanding the lack of consistency with which they are doing so,” said Gail D. Zirkelbach of Crowell & Moring LLP, Los Angeles.

One of the denied cases accused Honeywell International of defrauding the U.S. Army under a $162 million electricity supply project.

Honeywell convinced the U.S. Court of Appeals for the Ninth Circuit that because the Army continued to pay Honeywell even after learning of the contractor’s alleged noncompliance, the failure was not material.

The whistleblowers argued in their petition that contractors must not be allowed to wave a “magic wand” and defeat false claims cases because of a government agency’s continued payments in the face of alleged fraud.

An agency may continue to pay a fraudulent contractor for several reasons, including the need to maintain critical services. Such payments don’t demonstrate that fraud is unimportant to the agency, the petition said.

The other case involved claims that a San Francisco art school defrauded the Department of Education by violating an incentive compensation ban for admissions officers.

The Ninth Circuit said the whistleblowers could proceed with their case against the school because there is evidence that the department cared about ban violations and didn’t allow schools to continue such violations while receiving federal funds.

Academy of Art University said in its petition that the Ninth Circuit should have ended the case because the department knew of the alleged violations but didn’t disqualify the school from receiving federal funds.

Two More

The Supreme Court rejected two petitions in January raising similar materiality concerns.

Whistleblower Joshua Harman had sought review of a Fifth Circuit decision that vacated a $663 million jury verdict. The verdict was improper because the Federal Highway Administration paid for and approved of allegedly inferior highway guardrails, the Fifth Circuit said.

And Gilead Sciences Inc. had sought review of a Ninth Circuit ruling that a case alleging misrepresentations about its HIV drugs could proceed despite the Food and Drug Administration’s continued payments.

The Justice Department recently moved to dismiss this case for being too burdensome on government resources.

The cases are United States ex rel. Berg v. Honeywell Int’l, U.S., No. 18-1030, petition denied 4/1/19, Stephens Inst. v. U.S. ex rel. Rose, U.S., No. 18-1124, petition denied 4/1/19.

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