Effort To Revive Dismissed Implied Certification Claims Based On Escobar Fails On Materiality Grounds

Author:Mr William H. Voth and Jessica Caterina
Profession:Arnold & Porter Kaye Scholer LLP
 
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The Supreme Court's June 2016 decision in Universal Health Services v. U.S. ex rel. Escobar was widely read as providing new support for the theory of "implied certification" liability in cases brought by Government prosecutors and qui tam relators under the federal False Claims Act (FCA), as it held that a contractor that requests payment without disclosing "violations of statutory, regulatory, or contractual requirements" may be making a false claim against the Government.

A federal judge in the District of Columbia, however, recently reaffirmed the prior dismissal of "implied certification" FCA claims brought against a materials supplier over body armor durability issues that the company allegedly kept hidden, saying the Supreme Court's holding in Escobar was not a sufficient basis to amend the previous findings.1 The District Court stated that Escobar had not changed the "strict" requirement that any violations be "material to the Government's payment decision."2

The Government filed suit against Toyobo Co. Ltd. in 2007, accusing the company of violating the FCA by falsely representing information about its vests, which allegedly contained Zylon, a plastic fiber manufactured by Toyobo. The Government alleged that Toyobo knew of degradation issues with Zylon but concealed this information from vest manufacturers, who sold the vests to the Government while guaranteeing their durability. Toyobo argued that the Government contracting agency did not list "durability or degradation resistance" as a specific requirement in the published solicitation for the contract, and thus any alleged misstatements were immaterial to the purchase decisions.

The Government replied that various expectations were implied by the contracting process, pointing to various external documents and regulations. In its original dismissal, the District Court ruled that such statements did not create FCA liability unless they related to "material" terms of the contract, and that only one of these examples—a guarantee in a reseller catalog provided to the Government in 2002—created a genuine issue of fact for trial.3 The court thus dismissed all claims relating to sales prior to 2002, and limited the issues going forward to only the catalog guarantee.4

Following the Supreme Court's holding in Escobar, the Government sought to revive the dismissed implied certification claims, arguing that Escobar allows for the kind of "implied certification" of regulatory compliance claims that...

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