The continual push and pull between the courts and Congress over the contours of the False Claims Act (“FCA”) has once again spawned proposed legislation unfavorable to FCA defendants, this time poised to curtail defense arguments that continued government payment of claims in the face of alleged noncompliance with contractual or other legal requirements demonstrates a lack of materiality.
On July 25, 2023, a bipartisan group of senators proposed legislation entitled the “False Claims Act Amendments of 2023.” Spearheaded by Senator Chuck Grassley (R-IA), the principal author of the 1986 FCA amendments, the bill purportedly attempts to close certain FCA defense “loopholes” left open by the U.S. Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016) (“Escobar”). Senator Grassley has been an outspoken critic of more recent FCA judicial developments, which he deems a gradual curbing of the power of the “single greatest tool in the fight against fraud.” These newest proposed amendments are another example of Grassley’s advocacy for stronger and more rigid fraud enforcement than courts have been willing to impose based on the text of the FCA.
Specifically, the latest proposed amendments attempt to limit arguments that a key element of FCA liability—materiality—is lacking based on factors that the Supreme Court enumerated in Escobar. While materiality is a “holistic” analysis under Escobar, one significant factor weighing against a finding of materiality is where the Government, despite knowing of alleged failure to comply with a legal requirement, continues to or regularly pays affected claims. The proposed amendments would significantly curb if not eliminate this factor, stating: “In determining materiality, the decision of the Government to forego a refund or to pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such refund or payment.’’
This is not the first time Senator Grassley has introduced amendments to the False Claims Act in recent years to address Escobar. Two years ago, on July 26, 2021, Senator Grassley introduced the Proposed False Claims Act Amendments of 2021 that similarly addressed numerous concerns that Grassley had with what he viewed as judicial “weakening” of the FCA. Those July 2021 proposed amendments were much more extensive than the July 2023 version, with more strident and ultimately controversial language. They quickly fizzled, only to be replaced by a new proposal in October 2021. The October 2021 version passed the Senate Judiciary Committee, but did not progress further. Like the newest July 2023 version, the October 2021 proposed amendments included the exceedingly vague “if other reasons exist” language to narrow the impact of continued payments on FCA materiality. As we previously discussed, if passed, this language raises significant concerns as to what manner of factual allegations put forth by a relator would sufficiently demonstrate such “other reasons.” For instance, if the Government pays a claim for services rendered, even while knowing that the defendant is breaching a term of the contract, the mere fact that the services were provided might be alleged as the “other reason” for the payment, undercutting a defense that the alleged violation was not material to the Government’s payment decision. Such an interpretation would significantly weaken the materiality element.
The latest proposed amendments also, in similarly vague terms, seek to clarify that the FCA’s anti-retaliation provision applies post-employment, and require the GAO to conduct a study on the benefits and challenges of enforcement efforts and amounts recovered under the FCA.
If the proposed amendments pass, they will undoubtedly lead to more questions and protracted litigation about the meaning of “if other reasons exist” in addressing materiality and how those “other reasons” can be adequately alleged by the Government and relators alike. The proposal could undercut what the Supreme Court has called the “rigorous” materiality standard, which stands as a bulwark against punishing ordinary breaches of contract and the like as FCA violations, and will cause more difficulties for defendants attempting to prove a lack of materiality. We continue to monitor these proposed amendments and will provide updates as they progress through the congressional process.