On May 16, 2017, the Fourth Circuit issued a decision in United States ex rel. Omar Badr v. Triple Canopy, holding that the Government had properly alleged an implied certification claim under the standard articulated by the Supreme Court in Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).  In the eleven months following the Supreme Court’s landmark ruling on the implied certification theory of liability, Escobar has been cited in nearly 100 court opinions. (Our recent Feature Comment in the Government Contractor highlights some of the key cases and developing trends).

In Badr, the relator alleges that a security contractor responsible for ensuring the safety of an air base in a combat zone employed Ugandan guards who were unable to meet the required marksmanship scores on a U.S. Army qualification course. According to the relator, Triple Canopy knowingly falsified marksmanship scorecards and presented claims to the government for payment for those guards.

Procedural Posture

At the district court level, Triple Canopy prevailed on a motion to dismiss after demonstrating that the government failed to plead that it ever reviewed — and therefore ever relied on — the allegedly false scorecards. United States ex rel. Badr v. Triple Canopy, Inc., 950 F. Supp. 2d 888 (E.D. Va. 2013). But the Fourth Circuit reversed, explaining: “[c]ommon sense strongly suggests that 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 … If Triple Canopy believed that the marksmanship requirement was immaterial to the Government’s decision to pay, it was unlikely to orchestrate a scheme to falsify records on multiple occasions.” 775 F.3d 628, 637–38 (4th Cir. 2015). After the Fourth Circuit issued that decision, Triple Canopy petitioned for a writ of certiorari.

In the meantime, the Supreme Court granted certiorari in Escobar to resolve the circuit split on whether and to what extent the implied certification theory was valid under the FCA. On June 16, 2016, the Court issued its decision which recognized the viability of the implied certification theory but narrowed its application to truly “material” misrepresentations, stating that the FCA’s materiality requirement is both “rigorous” and “demanding” because the FCA is not ‘‘a vehicle for punishing garden-variety breaches of contract or regulatory violations.’’ 136 S. Ct. at 2003. The Supreme Court then vacated four cases (including Badr) and remanded the cases for further consideration in light of Escobar’s holding.

Fourth Circuit Reaffirms Earlier Decision

Applying Escobar on remand, the Fourth Circuit panel concluded that the Supreme Court’s ruling did not alter the panel’s earlier decision. Reaffirming its earlier conclusion that Triple Canopy’s falsity was material, the panel wrote: “we found Triple Canopy’s omissions material for two reasons: common sense and Triple Canopy’s own actions in covering up the noncompliance.” Moreover, the panel found persuasive a hypothetical offered by the Court in Escobar—i.e., if the government enters into a contract for the purchase of firearms, the ability of the guns to shoot is a material condition regardless of whether it is spelled out in the contract. 136 S. Ct. at 2001-02. Citing this hypothetical, the Fourth Circuit concluded that “[g]uns that do not shoot are as material to the Government’s decision to pay as guards that cannot shoot straight.”

Relevance of DOJ’s Intervention Decision

In discussing the evidence the Government could introduce to show materiality, the panel briefly observed that the “Government did not renew its contract for base security with Triple Canopy and immediately intervened in the litigation.” The relevance of the government’s decision whether to intervene in a qui tam case has long been the subject of much debate. On the one hand, intervention sends a strong signal to a defendant as to the government’s view of the strength of the case on the merits, and it can hardly be said that a jury does not take notice at trial when the government is (or is not) present. On the other hand, the government when it declines to intervene avoids as a matter of course any statement as to whether that decision is based on its view of the merits of the action; and courts typically preclude defendants from arguing non-intervention to the jury as bearing on the merits of the case. But now, under Escobar, it appears that there may be room for a government’s intervention decision to be considered a factor in determining materiality. Relatedly, in United States ex rel. Petratos et al. v. Genentech Inc., 2017 WL 1541919 at *5 (3d Cir. May 1, 2017), the Third Circuit suggested that DOJ’s decision not to intervene was a factor that weighed against a finding of materiality. (“[T]he Department of Justice has taken no action against Genentech and declined to intervene in this suit.”). Defendants can only hope that such analysis of intervention decisions will continue to cut both ways.

Conclusion

One clear take-away from the Fourth Circuit’s ruling is that a contractor’s efforts to disguise non-compliance can impact the materiality analysis. In reaffirming its earlier decision, the Fourth Circuit observed that: “Triple Canopy’s own elaborate cover-up suggested that the contractor realized the materiality of the marksmanship requirement.” It’s important to remember that this decision is not on the merits but rather only on the pleadings, and thus it remains to be seen whether sufficiently pleading allegations to infer materiality will play out after discovery. Nevertheless, in sending the Badr case goes back to the trial court for further proceedings, the Fourth Circuit might well have paraphrased Richard Nixon’s statement from the Watergate tapes, “It’s not the contractual noncompliance that gets you…it’s the cover up.”