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Oles Morrison

Escobar: Two-Stepping Away from False Claims Act Liability?

By on October 2, 2017 | Posted in False Claims Act

Escobar was initially feared as authorizing another avenue for plaintiffs bringing False Claims Act (FCA) claims. Some federal district courts, however, have used the two-step test of Escobar as a stringent requirement for an implied certification theory for proceeding against a contractor. Other courts, however, have charted a different pathfinding that the two-test step is not a requirement, but rather one means of establishing an implied certification theory based claim.  This is an important development for companies to understand in the face of FCA litigation.

The U.S. Supreme Court held in Escobar that a claim under the implied certification theory, which we wrote about previously, required that: (1) the claim make specific representations about the goods or services and (2) the failure to disclose those representations make the claim misleading. The issue arising in recent cases is whether Escobar created an exclusive two-step test that applies to any false certification theory.

Some recent cases illustrate diverging views on the application of the two-part test:

The United States brought a presentment claim against DynCorp alleging that Federal Acquisition Regulations required DynCorp’s reimbursable charges for accommodations and labor to be reasonable. The complaint alleges DynCorp made claims for payment of unreasonable charges while withholding information about their unreasonableness. Dyncorp brought a motion to dismiss, in part, based on the failure to allege facts in satisfaction of the two-part Escobar test.

The District of Columbia Court interpreted Escobar as holding that the implied certification theory was not exclusively satisfied under the two-part test and that the broader implied certification theory of the D.C. Circuit remained good law after Escobar. In applying this standard, the Court held that the falsity element of a False Claims Act claim under an implied certification theory can be established where (1) a contractor withheld information about its noncompliance with contractual or regulatory requirements; and (2) those contractual or regulatory requirements were material. Applying this standard, the Court denied defendant contractor’s motion to dismiss as to the presentment claim.

The Northern District of Illinois Court granted the company’s (defendant’s) motion for summary judgment applying the two condition Escobar test to the plaintiffs’ implied certification theory. The Court held plaintiffs failed to present sufficient evidence reimbursement claims on prescription dosage and type were misleading because they omitted information about an alleged switching scheme intended to profit defendant by selling higher reimbursable value prescriptions. The switching scheme theory of plaintiffs did not meet the two-part tart test of Escobar and therefore could not be the basis for an implied certification theory claim.

The Ninth Circuit Court of Appeals held Escobar’s two-step test applicable for implied certification theory claims but solely used the test in evaluating whether the element of falsity was pleaded. The Ninth Circuit found that the relators had adequately plead their implied certification theory claim where the plaintiff plead facts showing that defendants made false statements about the regulatory process by omitting information about drugs and committing FDA violations through alterations and mislabeling of drugs.

The Takeaway

These cases illustrate the diverging views on Escobar where an exclusive two-step test does not apply to any false certification theory. Some Courts are committed to the stringent application of the two-part Escobar test, while others simply view the test as one means to establish a False Claims Act claim under the implied certification theory.  Companies must be aware that courts are two stepping back from the two-part test, leading to more uncertainty in FCA litigation.

Image courtesy of Flickr (Licensed) by MitchellShapiroPhotography