United States Ex Rel. Spay v. CVS Caremark Corp. ( 2017 )


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  •                                      PRECEDENTIAL
    UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    _____________
    No. 15-3548
    _____________
    UNITED STATES OF AMERICA, EX REL ANTHONY R.
    SPAY
    v.
    CVS CAREMARK CORPORATION; CAREMARK RX,
    LLC, f/k/a Caremark RX, Inc.;
    CAREMARK, LLC, f/k/a Caremark, Inc.; SILVERSCRIPT,
    LLC, f/k/a Silverscript Inc.
    Anthony R. Spay,
    Appellant
    _____________
    Appeal from the United States District Court
    for the Eastern District of Pennsylvania
    (No. 2-09-cv-04672)
    District Judge: Honorable Ronald L. Buckwalter
    _____________
    Argued
    November 10, 2016
    ____________
    Before: SMITH, Chief Judge, McKEE, and RESTREPO,
    Circuit Judges.
    (Opinion Filed: November 16, 2017)
    ______________
    Ian P. Samson, Esq.
    Paul A. Traina, Esq.
    Jared W. Beilke, Esq.
    Engstrom Lipscomb & Lack
    100100 Santa Monica Boulevard
    12th Floor
    Los Angeles, CA 90067
    Marc S. Raspanti, Esq. [ARGUED]
    Michael A. Morse, Esq.
    Pamela C. Brecht, Esq.
    Pietragallow Gordon Alfano Bosick & Raspanti
    1818 Market Street
    Suite 3402
    Philadelphia, PA 19103
    Attorneys for Appellant
    .
    Enu Mainigi, Esq. [ARGUED]
    Craig D. Singer, Esq.
    Grant A. Geyerman, Esq.
    Williams & Connolly LLP
    725 Twelfth Street, N.W.
    Washington, D.C. 20005
    Attorneys for Appellees
    Joy P. Clairmont, Esq.
    Berger & Montague, P.C.
    1622 Locust Street
    Philadelphia, PA 19103
    Jeffrey F. Keller, Esq.
    Kathleen R. Scanlan, Esq.
    Keller Grover LLP
    1965 Marker Street
    San Francisco, CA 94103
    Gordon Schnell, Esq.
    Constantine Cannon LLP
    335 Madison Avenue
    2
    9th Floor
    New York, NY 10017
    Claire M. Sylvia, Esq.
    Phillips & Cohen LLP
    100 The Embarcadero
    Suite 300
    San Francisco, CA 94105
    Attorneys for Amicus Appellant
    ______________
    OPINION OF THE COURT
    ______________
    McKEE, Circuit Judge.
    We are asked to consider the viability of two potential
    defenses to an alleged False Claims Act violation that arise in
    the context of the Medicare Part D Program: the government
    knowledge inference, which can defeat a finding of scienter in
    certain circumstances, and the element of materiality. 1 The
    District Court relied upon the government knowledge
    inference doctrine in dismissing the claims. Although we
    disagree with the court’s reliance on that doctrine, we
    nevertheless affirm the court’s dismissal of this suit because
    the misrepresentations it is based upon were not material to the
    government’s decision to pay the underlying claims.
    I. FACTS AND PROCEDURAL HISTORY
    A. The Medicare Part D Program
    1
    The False Claims Act, and the qui tam actions they give rise
    to, are explained in more detail below.
    3
    Part D of the Medicare program is a voluntary
    prescription drug benefit program that subsidizes the cost of
    prescription drugs and prescription drug insurance premiums
    for Medicare enrollees. 2 The Part D program operates as a
    public-private partnership between the Centers for Medicare
    and Medicaid Services (“CMS”) and government contractors.
    CMS contracts with private insurance companies called
    “Sponsors” that administer prescription drug plans. The
    Sponsors, in turn, subcontract with “first-tier entities,” such as
    Pharmacy Benefit Managers (“PBM”s), that provide
    administrative and healthcare services, including claims
    processing. PBMs then contract with the pharmacies that
    actually dispense prescription medications to Medicare
    enrollees. Defendant Caremark Rx LLC 3 was one of the largest
    PBMs in the United States from 2006 to 2007.
    Unlike many other government healthcare programs,
    Medicare Part D is not a fee-for-service program, in which the
    healthcare provider is reimbursed for providing specific
    services. Instead, a Sponsor submits a bid in the year prior to
    the calendar year in which Part D benefits will actually be
    delivered, and CMS—after calculating average costs—
    prospectively compensates Sponsors for their anticipated costs
    through regular monthly payments. 4 At the end of the year,
    CMS undertakes a reconciliation process, wherein it compares
    actual costs to payments made to Sponsors during the past
    calendar year. 5 This suit stems from plaintiffs’ claim that
    Sponsors intentionally submitted false information about their
    costs during the reconciliation process. According to plaintiffs,
    this false information resulted in CMS paying Sponsors more
    than they were actually entitled to during the reconciliation.
    2
    The Medicare Part D program was enacted as part of the
    Medicare Modernization Act of 2003 and began on January 1,
    2006. 42 U.S.C. § 1395w-101(a)(2).
    3
    “On March 22, 2007, Caremark Rx LLC merged with CVS
    Corporation to form Defendant CVS Caremark Corporation.
    The Defendants are various subsidiaries of Defendant CVS
    Caremark Corporation.” U.S. ex rel. Spay v. CVS Caremark
    Corp., No. 09-4672, 
    2015 WL 5582553
    , at *3 (E.D. Pa. Sept.
    22, 2015).
    4
    
    42 C.F.R. §§ 423.265
    , 315.
    5
    
    42 C.F.R. § 423.343
    .
    4
    1. Part D Claims Processing
    Processing payments and claims under Medicare Part D
    involves (1) the pharmacy claim, which the pharmacy submits
    to its PBM, and (2) the Prescription Drug Event (“PDE”)
    record, which the Sponsor submits to CMS.
    Before a pharmacy dispenses drugs to a Medicare
    recipient, it first submits an electronic pharmacy claim to the
    recipient’s Part D Sponsor (or the Sponsor’s agent). The
    pharmacy claim contains information about the patient and the
    patient’s prescription. If the pharmacy claim is accepted, the
    PBM transmits its approval to the pharmacy, and the drug is
    dispensed to the Medicare recipient. If the pharmacy claim is
    rejected, the PBM sends the pharmacy a “Reject Code” that
    explains why it was rejected. Once the pharmacy claim is
    approved and the medication dispensed, the Sponsor
    reimburses the pharmacy for the cost of the prescription, minus
    the amount of any copay that the pharmacy may have received
    from the Medicare recipient. This process is called the claims
    “adjudication.” Although it sounds rather laborious and time-
    consuming, modern technology allows the adjudication to
    occur in real-time, and PBMs typically inform pharmacies
    whether a claim has been approved or rejected within
    seconds—while the Medicare recipient waits at the pharmacy
    counter.
    Additionally, throughout the year, Sponsors submit
    PDE records to CMS for all prescriptions dispensed to
    Medicare recipients under Part D. Sponsors often submit those
    records to CMS through PBMs that act as the Sponsor’s agent.
    These PDE records are created electronically. They consist of
    summary extracts that include at least 34 mandated data fields
    about each prescription that was filled and the drug that was
    dispensed. Sponsors are required to give CMS a PDE for all of
    the prescriptions dispensed to a Part D Medicare recipient. 6
    From 2006 to 2007, the PDEs were only used for the end-of-
    year reconciliation. This dispute focuses on two of the 34 data
    6
    Medicare Program; Medicare Prescription Drug Benefit, 
    70 Fed. Reg. 4194
    , 4307 (Jan. 28, 2005) (to be codified at 42
    C.F.R. pt. 423).
    5
    fields on the PDEs: the Prescriber ID and the Prescriber ID
    Qualifier.
    The Prescriber ID was a unique number issued to an
    individual with prescribing authority such as a physician,
    dentist, or nurse practitioner. The PDE’s layout allowed for
    entry of any of four compatible sources of a Prescriber ID: (1)
    a National Provider Identifier (“NPI”); 7 (2) a Universal
    Provider Identification Number (“UPIN”); (3) a state license
    number; or (4) a Drug Enforcement Agency number. The
    Prescriber ID Qualifier specified which of these four types of
    numbers was being submitted. The automated system that
    CMS used to process the PDEs would reject any PDE with a
    blank Prescriber ID or blank Prescriber ID Qualifier field. As
    a result, the dispensing pharmacy would not be paid for the
    corresponding prescription.
    2. Dummy Prescriber IDs
    In March 2006, Caremark employees identified
    approximately 4,500 PDEs that had been authorized for
    payment by Caremark, but not yet submitted to CMS, that had
    “errored out” due to the lack of a compatible Prescriber 
    ID.
     8 In
    an attempt to resolve the problem, Caremark used a dummy
    Prescriber ID (AA0000000) for all of the corresponding data
    fields on each of those 4,500 PDEs. Caremark then
    programmed that dummy Prescriber ID into its computer
    system. Thereafter, when any claim with a missing or
    incorrectly formatted Prescriber ID was processed, the system
    would default to the dummy Prescriber ID, which the computer
    would enter into the appropriate data field. This allowed
    Caremark to submit for payment PDEs that would have
    otherwise had missing or incorrectly formatted Prescriber IDs,
    without trigging CMS error codes that would have resulted
    from an incorrect, or nonconforming, value in the Prescriber
    ID data field. Caremark later began to use additional dummy
    Prescriber IDs, all of which served the same purpose. In 2006–
    7
    “In 2006–2007, few prescribers used the NPI since there
    was no universal form of Prescriber ID issued to all
    prescribers in the United States.” Spay, 
    2015 WL 5582553
    , at
    *8.
    8
    Spay, 
    2015 WL 5582553
    , at *15.
    6
    2007, Caremark generated PDE records containing 56 different
    dummy Prescriber IDs, none of which identified the actual
    prescriber, or corresponded to anyone with actual prescribing
    authority.
    B. Procedural History
    Appellant Relator Spay is a former pharmacist and co-
    founder of a company that audits pharmacies. In 2007, during
    an audit of one of Caremark’s 9 insurance company clients,
    Spay identified six categories of alleged discrepancies in
    Caremark’s pharmacy claims processing. One of these
    categories was the use of “dummy” Prescriber IDs. After
    discussion with Caremark, its client dropped all six issues
    identified in the audit, collected no recovery from Caremark,
    and did not pay Spay for the audit.
    In 2009, Spay filed this qui tam 10 lawsuit based on those
    same six audit issues. Spay’s claims included an allegation that
    Caremark populated the Prescriber ID field on a large number
    of its PDE records with a dummy identifier and then falsely
    certified the accuracy of the PDEs. Spay alleged this
    constituted a violation of the False Claims Act (“FCA”),
    because those inaccurate PDEs were used to support requests
    for reimbursement for prescriptions that had been filled for
    9
    In 2006-2007, Caremark served as a PBM for 39 different
    Part B Sponsors.
    10
    “Qui tam is short for the Latin phrase qui tam pro domino
    rege quam pro se ipso in hac parte sequitur, which means
    ‘who pursues this action on our Lord the King's behalf as well
    as his own.’” Vt. Agency of Nat. Res. v. U.S. ex rel. Stevens,
    
    529 U.S. 765
    , 768 n.1 (2000) (citation omitted). A qui tam
    lawsuit is a private enforcement action under the False Claims
    Act where the private party bringing the suit referred to as the
    “relator.” U.S. ex rel. Eisenstein v. City of N.Y., 
    556 U.S. 928
    ,
    932 (2009) (citation omitted).
    7
    Medicare recipients at various pharmacies. 11 The government
    declined to intervene in the suit. 12
    The District Court denied Caremark’s subsequent
    motion to dismiss, and granted Caremark’s motion for
    summary judgment in its entirety. 13 In reviewing the dummy
    Prescriber ID claim, the court concluded that Caremark had
    established sufficient government knowledge to preclude
    finding the required element of scienter. 14 In arriving at this
    conclusion, the District Court first reviewed the law governing
    the “government knowledge inference” doctrine. 15 The District
    Court noted that “at least six” circuit courts have adopted this
    doctrine. 16 The court explained that doctrine as follows: “when
    the government knows and approves of the facts underlying an
    allegedly false claim prior to presentment, an inference arises
    that the claim was not knowingly submitted, regardless of
    whether the claim itself is actually false.” 17 The District Court
    11
    Specifically, Spay alleged that Caremark failed to comply
    with 
    42 C.F.R. § 423.505
    (k), which requires, as a condition
    for payment, that Part D Sponsors certify the “accuracy,
    completeness, and truthfulness of all data related to
    payment.”
    12
    “When a relator initiates [a qui tam] action, the United
    States is given 60 days to review the claim and decide
    whether it will ‘elect to intervene and proceed with the
    action.’” Eisenstein, 
    556 U.S. at 932
     (quoting 
    31 U.S.C. §§ 3730
    (b)(2), (b)(4)).
    13
    Spay also moved for partial summary judgment, which was
    denied in its entirety.
    14
    The District Court did not address Caremark’s additional
    arguments for why Spay’s dummy Prescriber ID claim failed:
    (1) the dummy Prescriber IDs were not deceptive and,
    therefore, not “false;” (2) Spay could not prove the
    “knowledge” element; and (3) Caremark did not make a false
    certification. Spay, 
    2015 WL 5582553
    , at *23.
    15
    
    Id.
     at *23–*25.
    16
    Id. at *24.
    17
    Id. (citing U.S. ex rel. Burlbaw v. Orenduff, 
    548 F.3d 931
    ,
    951 (10th Cir. 2008); United States v. Southland Mgmt.
    Corp., 
    326 F.3d 669
    , 683-84 (5th Cir. 2003) (en banc) (Jones,
    J., concurring); U.S. ex rel. Becker v. Westinghouse Savannah
    8
    then pointed out that, although this Court has not yet addressed
    the government knowledge inference doctrine, several district
    courts both within the Third Circuit 18 and outside the Third
    Circuit 19 had dismissed FCA claims on the basis of the
    government knowledge inference. Based on “the consistency
    in the federal case law, and the absence of any jurisprudence
    suggesting that the government knowledge inference should
    not be used,” the District Court relied on that doctrine to
    dismiss the complaint. 20
    The District Court concluded that (1) CMS knew about
    the use of dummy Prescriber IDs; (2) it paid all of the claims
    submitted on PDEs containing dummy Prescriber IDs anyway;
    and (3) it has never sought repayment from Caremark for any
    of those claims. 21 Accordingly, the District Court reasoned that
    “no jury could reasonably find that the Defendants acted with
    the requisite scienter of falsely submitting a claim,” and
    granted summary judgment. 22 This appeal followed.
    River Co., 
    305 F.3d 284
    , 289 (4th Cir. 2002); U.S. ex rel.
    Durcholz v. FKW Inc., 
    189 F.3d 542
    , 544-45 (7th Cir. 1999);
    U.S. ex rel. Kreindler & Kreindler v. United Techs. Corp.,
    
    985 F.2d 1148
    , 1157 (2d Cir. 1993); U.S. ex rel. Hagood v.
    Sonoma Cty. Water Agency, 
    929 F.2d 1416
    , 1421 (9th Cir.
    1991)).
    18
    
    Id.
     (citing United States v. Educ. Mgmt. LLC, No. 2:07-cv-
    00461, 
    2013 WL 3854458
    , at *11 (W.D. Pa. May 14, 2013);
    U.S. Dep’t of Transp. ex rel. Arnold v. CMC Eng’g Inc., 
    947 F. Supp. 2d 537
    , 545 (W.D. Pa. 2013), aff’d, 567 F. App’x
    166 (3d Cir. 2014); U.S. ex rel. Watson v. Conn. Gen. Life.
    Ins. Co., No. Civ.A.98-6698, 
    2003 WL 303142
    , at *8 (E.D.
    Pa. Feb. 11, 2003)).
    19
    
    Id.
     (citing S.F. Bay Area Rapid Transit Dist. v. Spencer,
    No. C 04-4632, 
    2007 WL 1450350
    , at *8 (N.D. Cal. May 14,
    2007); Boisjoly v. Morton Thiokol, Inc., 
    706 F. Supp. 795
    ,
    809 (D. Utah 1998); U.S. ex rel. Lamers v. City of Green Bay,
    
    998 F. Supp. 971
    , 988 (E.D. Wisc. 1998)).
    20
    Id. at *25.
    21
    Id. at *44.
    22
    Id.
    9
    Taxpayers Against Fraud Education Fund (“TAFEF”),
    a nonprofit organization “dedicated to combating fraud against
    the government and protecting public resources through
    public-private partnerships” and “committed to preserving
    effective anti-fraud legislation at the federal and state levels;” 23
    and Senator Charles E. Grassley, “the leading sponsor of the
    1986 and 2009 amendments” to the FCA, filed amicus briefs
    in support of Spay’s claims and arguing against the continued
    viability of the government knowledge inference. 24
    II. JURISDICTION AND STANDARD OF REVIEW
    The District Court had jurisdiction over Spay’s FCA
    claims under 
    31 U.S.C. § 3732
    (a) and 
    28 U.S.C. § 1331
    . We
    have jurisdiction pursuant to 
    28 U.S.C. § 1291
    . “We review an
    order granting summary judgment de novo, applying the same
    test the district court employed.” 25 Summary judgment is
    appropriate “if the movant shows that there is no genuine
    dispute as to any material fact and the movant is entitled to
    judgment as a matter of law.” 26 “We must view the record and
    draw inferences in a light most favorable to the non-moving
    party.” 27 We can affirm the District Court’s grant of summary
    judgment on any basis supported by the record. 28
    III. DISCUSSION
    “The False Claims Act was adopted in 1863 and signed
    into law by President Abraham Lincoln in order to combat
    23
    TAFEF Br. 1. Caremark notes that Spay’s counsel is a
    major donor to TAFEF and sits on its Advisory Board.
    Appellees’ Br. 43.
    24
    Grassley Br. 2.
    25
    In re Ikon Office Solutions, Inc., 
    277 F.3d 658
    , 665 (3d Cir.
    2002).
    26
    Fed. R. Civ. P. 56(a).
    27
    Knopick v. Connelly, 
    639 F.3d 600
    , 606 (3d Cir. 2011)
    (internal quotation marks omitted).
    28
    Fairview Twp. v. U.S. Envtl. Prot. Agency, 
    773 F.3d 517
    ,
    525 n.15 (3d Cir. 1985).
    10
    rampant fraud in Civil War defense contracts.” 29 The frauds
    included the government paying for artillery shells filled with
    sawdust instead of explosives, 30 uniforms made of “shredded,
    often decaying rags, pressed . . . into a semblance of cloth” that
    “would fall apart in the first rain,” 31 and the same horses being
    sold “two and three times to the Union cavalry.” 32 Congress
    hoped that enacting the FCA would combat these dishonest
    government contractors, who had become “bands of
    conspirators . . . knotted together . . . for the purpose of
    defrauding and plundering the Government.” 33
    The FCA’s qui tam provision allows individuals to
    bring claims on behalf of the government, and rewards
    successful plaintiffs with potentially very substantial
    recoveries. Though the precise awards to qui tam plaintiffs
    have changed since the statute’s inception, the current iteration
    of the False Claims Act imposes civil penalties and treble
    damages on defendants who submit false or fraudulent claims
    to the government. Individual relators can receive between
    15% and 30% of those swollen recoveries. 34 Because the
    29
    Kellogg Brown & Root Sers., Inc. v. U.S., ex rel. Carter,
    
    135 S. Ct. 1970
    , 1973 (2015) (quoting S. Rep. No. 99-345, at
    8 (1986), 1986 U.S.C.C.A.N. 5266, 5273). See also Act of
    Mar. 2, 1863, ch. 67, 
    12 Stat. 696
     (1863).
    30
    Cong. Globe, 37th Cong., 3d Sess. 955 (1863) (statement of
    Sen. Howard).
    31
    Ron Soodalter, The Union’s ‘Shoddy’ Aristocracy, N.Y.
    Times Opinionator (May 9, 2011, 9:30 PM),
    http://opinionator.blogs.nytimes.com/2011/05/09/the-unions-
    shoddy-aristocracy. See also James B. Helmer, Jr., False
    Claims Act: Incentivizing Integrity for 150 Years for Rogues,
    Privateers, Parasites and Patriots, 
    81 U. Cin. L. Rev. 1261
    ,
    1264–65 (2013) (listing reports of misappropriated war funds
    and collecting sources).
    32
    132 Cong. Rec. H6482 (daily ed. Sept. 9, 1986) (statement
    of Rep. Berman).
    33
    Cong. Globe, 37th Cong, 3d Sess. 955 (1863) (statement of
    Sen. Howard).
    34
    
    31 U.S.C. §§ 3730
    (d)(1)–(2) (outlining the award to a qui
    tam plaintiff to be “at least 15 percent but not more than 25
    percent of the proceeds of the action or settlement of the
    11
    statutory scheme of the FCA offers the potential for very
    lucrative damages, individuals have long attempted to take
    advantage of the potential for substantial awards, 35 and
    Congress has repeatedly amended the statute in response to
    past abuses. 36
    For example, because the original FCA did not prohibit
    relators from bringing qui tam actions even when the
    government prosecuted the identical fraud, Congress enacted a
    government knowledge bar in 1943. 37 This bar prohibited “qui
    claim” when the Government intervenes and “not less than 25
    percent and not more than 30 percent” when the Government
    does not intervene); 3729(a)(1) (providing for treble damages
    and civil monetary penalties for FCA claims). Under the
    original FCA, individuals bringing qui tam suits were entitled
    to half of the government’s recovery. Act of Mar. 2, 1863, ch.
    67, 
    12 Stat. 696
    , § 6 (1863).
    35
    See U.S. ex rel. Jamison v. McKesson Corp., 
    649 F.3d 322
    ,
    332 (5th Cir. 2011) (explaining that court’s holding would
    prevent qui tam relators from “arbitrarily select[ing] a large
    group of defendants in any industry in which public
    disclosures have revealed significant fraud, in hopes that
    [their] allegations will prove true for at least a few
    defendants”); James F. Barger, Jr., Pamela H. Bucy, Melinda
    M. Eubanks, Marc S. Raspanti, States, Statutes, and Fraud:
    An Empirical Study of Emerging State False Claims Acts, 42
    False Cl. Act and Qui Tam Q. Rev. 15 (2006) (“Because the
    FCA’s damages and penalty provisions tend to generate
    exceptionally large judgments, relators’ taxable recoveries
    involve substantial sums.”).
    36
    See Graham Cty. Soil and Water Conservation Dist. v. U.S.
    ex rel. Wilson, 
    559 U.S. 280
    , 310 (2010) (Sotomayor, J.,
    dissenting) (citing S. Rep. No. 99–345, at 10–11) (“To be
    sure, Congress was also concerned in 1986, as in 1943, with
    guarding against purely opportunistic, ‘parasitic’ qui tam
    relators.”).
    37
    145 Cong. Rec. E1546-01 (daily ed. July 14, 1999)
    (statement of Rep. Berman). The government knowledge bar
    was a response to the Supreme Court’s decision in U.S. ex rel.
    Marcus v. Hess, 
    317 U.S. 537
     (1943), where the Court
    “upheld the relator’s recovery even though he had discovered
    12
    tam suits based on information already in the Government’s
    possession” in an attempt to deter “parasitic suits” that allowed
    relators to recover even if they “contributed nothing to the
    discovery of this crime.” 38 As we explained in United States ex
    rel. Cantekin v. University of Pittsburgh:
    The implicit logic of the [government knowledge
    bar] was that if the government had the relevant
    information before the plaintiff initiated suit,
    then the government must be aware of the false
    claims and didn’t need the assistance of private
    parties to ferret them out. And if the government
    knew about the information yet did nothing, then
    the government probably thought the suit
    meritless, and any private action was apt to be
    spurious, driven only by the lure of the Act’s
    sizable damages. 39
    Although the government knowledge bar merely
    attempted to curb bogus FCA suits, the limitation it created
    undermined the Act’s usefulness. 40 It so “significantly limited
    the number of FCA cases that were filed” that “[b]y the 1980s,
    the FCA was no longer a viable tool for combating fraud
    against the Government.” 41 In response, in 1986, Congress
    amended the FCA yet again, “specifically overturned the
    Government knowledge bar . . . and replaced it with a new
    the fraud by reading a federal criminal indictment—a
    quintessential ‘parasitic’ suit.” Graham Cty., 
    559 U.S. at 294
    .
    38
    
    Id.
     (quoting Marcus v. Hess, 
    317 U.S. at 545
    ). The pre-
    1986 version of the FCA barred jurisdiction over any claim
    “whenever it shall be made to appear that such suit was based
    upon evidence or information in the possession of the United
    States, or any agency, officer, or employee thereof, at the
    time such suit was brought.” 
    31 U.S.C. § 232
    (C) (1943).
    39
    
    192 F.3d 402
    , 408 (3d Cir. 1999), superseded by statute,
    FERA, Pub. L. No. 111-21, as recognized in U.S. ex rel. Hill
    v. Univ. of Med. & Dentistry of N.J., 448 F. App’x 314, 317
    n.4 (3d Cir. 2011).
    40
    See 
    id.
    41
    S. Rep. No. 110-507, at 3 (2008).
    13
    mechanism referred to as a ‘public disclosure bar.’” 42 The
    public disclosure bar was enacted “in an effort to strike a
    balance between encouraging private persons to root out fraud
    and stifling parasitic lawsuits.” 43 Under this new standard, a
    qui tam suit would only be barred if it was based on
    information that was “publicly disclosed at various hearings,
    in certain types of reports, or by the media.” 44 “Once public
    disclosure became the linchpin of the jurisdictional scheme, the
    effect of government knowledge on the viability of an FCA
    claim was thrown to the courts to decide.” 45
    Meanwhile, courts were inquiring into whether the FCA
    included a materiality element requiring any alleged
    falsehoods to be material to the government’s decision to pay,
    and what the proper standard for measuring materiality might
    be. 46 Though “nearly every court to have considered the issue
    [of materiality] had imposed such a requirement,” courts “did
    not agree on what the standard for materiality was.” 47 In 2009,
    Congress passed the Fraud Enforcement and Recovery Act,
    which again amended the FCA and provided a uniform
    definition of materiality. 48 As explained in the corresponding
    Senate Report, these amendments “corrected and clarified”
    certain FCA provisions, the effectiveness of which had
    42
    Id. at 5.
    43
    Graham Cty., 
    559 U.S. at 295
    .
    44
    Cantekin, 
    192 F.3d at 408
     (internal quotation marks
    omitted) (citing 
    31 U.S.C. § 3730
    (e)(4)(A) (1994)). The
    public disclosure must have occurred “in a criminal, civil, or
    administrative hearing, in a congressional, administrative, or
    Government Accounting Office report, hearing, audit, or
    investigation, or from the news media . . .” 
    31 U.S.C. § 3730
    (e)(4)(A) (1994).
    45
    Lamers, 
    998 F. Supp. at
    988 (citing U.S. ex rel. Butler v.
    Hughes Helicopters, Inc., 
    71 F.3d 321
    , 326 (9th Cir. 1995)).
    46
    See James B. Helmer, False Claims Act: Whistleblower
    Litigation 247–48 n.873 (6th ed.) (2012) (cataloguing pre-
    2008 circuit cases imposing materiality requirement).
    47
    See id. at 248 (discussing circuit split on materiality
    standard).
    48
    Fraud Enforcement and Recovery Act of 2009 (FERA),
    Pub. L. No. 111-21 (2009).
    14
    “recently been undermined by court decisions which limit the
    scope of the law and, in some cases, allow subcontractors paid
    with Government money to escape responsibility for proven
    frauds.” 49
    With this background in mind, we will first address
    Spay’s argument that the District Court’s decision here created
    “an unprecedented ‘industry practice’ government knowledge
    inference that undermines the purpose of the FCA.” 50 We will
    then more generally address the issue of materiality under the
    FCA.
    A. Government Knowledge Inference.
    Though we have never recognized a “government
    knowledge inference” defense that would defeat the scienter
    requirement under the FCA, the District Court quite correctly
    noted that six of our sister circuit courts of appeals have. 51 Just
    as the Court of Appeals for the Fourth Circuit did before us,
    “[t]oday, we join with our sister circuits and hold that the
    government’s knowledge of the facts underlying an allegedly
    false record or statement can negate the scienter required for
    an FCA violation.” 52
    While the government knowledge bar that Congress
    overturned in 1986 (in favor of the public disclosure bar)
    “focused on the government’s knowledge of the fraud to
    preclude the relator from bringing suit,” the current
    government knowledge inference “focuses on the effect the
    government’s knowledge has on the defendant’s mental state
    49
    S. Rep. No. 111-10, at 4 (2009). The Report later clarifies
    that the amendments were meant to “clarify and correct
    erroneous interpretations of the law that were decided in
    Allison Engine Co. v. United States ex rel. Sanders, 
    128 S. Ct. 2123
     (2008) and United States ex rel. Totten v. Bombadier
    Corp., 
    380 F.3d 488
     (D.C. Cir. 2004).” Id. at *10.
    50
    Appellant’s Br. 15.
    51
    Arnold, 567 F. App’x at 170 n.9 (explaining that the Third
    Circuit had not yet adopted the government knowledge
    inference in 2014); Spay, 
    2015 WL 5582553
    , at *24
    (collecting circuit cases).
    52
    Becker, 
    305 F.3d at 289
    .
    15
    in order to determine if the defendant acted knowingly.” 53 “The
    ‘government knowledge inference’ helps distinguish, in FCA
    cases, between the submission of a false claim and the knowing
    submission of a false claim—that is, between the presence and
    absence of scienter.” 54 The government knowledge inference
    may arise “when the government knows and approves of the
    facts underlying an allegedly false claim prior to
    presentment” 55 and the defendant knows that the government
    is aware of the false information in a claim. In other words,
    there is a two-prong test that must be met before the
    government knowledge inference can preclude liability. The
    two-prong test requires that (1) the government agency knew
    about the alleged false statement(s), and (2) the defendant
    knew the government knew. 56
    A “classic example” of the government knowledge
    inference occurs “when the government, with knowledge of the
    facts underlying an allegedly false claim, authorizes a
    contractor to make that claim.” 57 For instance, in United States
    ex rel. Durcholz v. FKW, Inc., 58 officers at a naval facility
    directed the defendant general contractor to use incorrect line-
    items in order to expedite the bidding process. The officers did
    so because “[they] were more interested in speed than cost and
    made their decisions in accordance with these priorities.” 59 The
    53
    Michael J. Davidson, The Government Knowledge Defense
    to the Civil False Claims Act: A Misnomer by Any Other
    Name Does Not Sound as Sweet, 
    45 Idaho L. Rev. 41
    , 47
    (2008) (citations omitted).
    54
    Burlbaw, 
    548 F.3d at 951
    .
    55
    
    Id. at 952
    .
    56
    See Educ. Mgmt., 
    2013 WL 3854458
    , at *11; Southland
    Mgmt. Corp., 
    326 F.3d at 682
     (Jones, J., concurring) (“Most
    of our sister circuits have held that under some circumstances,
    the government’s knowledge of the falsity of a statement or
    claim can defeat FCA liability on the ground that the claimant
    did not act ‘knowingly’, because the claimant knew that the
    government knew of the falsity of the statement and was
    willing to pay anyway.”).
    57
    Burlbaw, 
    548 F.3d at
    952 (citing Wang, 975 F.2d at 1421).
    58
    
    189 F.3d 542
     (7th Cir. 1999).
    59
    
    Id. at 545
    .
    16
    Court of Appeals for the Seventh Circuit “decline[d] to hold
    [the defendant] liable for defrauding the government by
    following the government’s explicit directions.” 60 The court
    explained that “[t]he government knew what it wanted, and it
    got what it paid for.” 61 Though such direct and contract-
    specific authorization is not required to support the
    government knowledge inference, 62 generally, “[w]here the
    government and a contractor have been working together,
    albeit outside the written provisions of the contract, to reach a
    common solution to a problem, no claim arises.” 63 In other
    words, the easy case in which to apply the government
    knowledge inference is where the defendant and the
    government engage in open and ongoing discussions about the
    purportedly false claims. 64 This is the “easy case” because both
    prongs are easily met.
    60
    
    Id.
    61
    Id.; see also Becker, 
    305 F.3d at 289
     (applying government
    knowledge inference where the Department of Energy’s “full
    knowledge of the material facts underlying any
    representations implicit in [the defendant’s] conduct negates
    any knowledge that [the defendant] had regarding the truth or
    falsity of those representations”).
    62
    See Burlbaw, 
    548 F.3d at 953
     (applying the government
    knowledge inference where there was evidence of
    governmental knowledge and cooperation, the defendant was
    “completely forthcoming” with the government, and there
    was no evidence that the information the defendant provided
    was “materially inaccurate”).
    63
    Southland, 
    326 F.3d at 682
     (Jones, J., concurring).
    64
    See, e.g., Wang ex rel. United States v. FMC Corp., 
    975 F.2d 1412
    , 1421 (9th Cir. 1992) (“The government knew of
    all the deficiencies identified by [the relator], and discussed
    them with [the defendant]. The fact that the government knew
    of [the defendant’s] mistake and limitations, and that [the
    defendant] was open with the government about them,
    suggests that while [the defendant] may have been groping
    for solutions, it was not cheating the government in the effort.
    Without more, the common failings of engineers and other
    scientists are not culpable under the [FCA].”), overruled on
    other grounds by U.S. ex rel. Hartpence v. Kinetic Concepts,
    
    792 F.3d 1121
     (9th Cir. 2015); Butler, 
    71 F.3d at 327
     (finding
    17
    A two-prong test is necessary because knowledge by the
    government, without more, cannot negate the scienter
    requirement. This is so, as noted above, because the elements
    of the FCA claim focus on the defendant’s state of mind. An
    examination of the cases where government knowledge has not
    barred recovery drives home that merely showing some
    government knowledge of the alleged false nature of a claim is
    not enough.
    In Shaw v. AAA Engineering & Drafting, Inc., 65 the
    Court of Appeals for the Tenth Circuit distinguished the
    decisions of the Court of Appeals for the Ninth Circuit in
    United States ex rel. Butler v. Hughes Helicopters, Inc. 66 and
    Wang ex rel. United States v. FMC Corp. 67 The Tenth Circuit
    stressed that in Butler and Wang, the defendants and
    government had “completely cooperated and shared all
    information” 68 and “had an ongoing dialogue . . . about the
    problems.” 69 The Tenth Circuit reasoned that, although there
    was evidence of government knowledge in Shaw, the
    knowledge was not sufficient to “negate the intent requirement
    under the FCA as a matter of law.” 70 In Shaw, the evidence
    showed that (1) the plaintiff relator, and not the defendant
    government photography contractor, told the government
    about a failure to use the required film processing method; 71
    the government’s knowledge of allegedly false claims
    negated defendant’s intent where “the only reasonable
    conclusion a jury could draw from the evidence was that [the
    defendant] and the Army had so completely cooperated and
    shared all information . . . that [the defendant] did not
    ‘knowingly’ submit false claims”).
    65
    
    213 F.3d 519
     (10th Cir. 2000).
    66
    
    71 F.3d 321
    .
    67
    
    975 F.2d 1412
    .
    68
    Shaw, 
    213 F.3d at 534
     (emphasis omitted) (quoting Butler,
    
    71 F.3d at 327
    ).
    69
    
    Id.
    70
    
    Id.
    71
    In Shaw, the defendant government photography contractor
    was required to provide equipment necessary for silver
    recovery—a “process by which trace silver is removed from
    18
    (2) the defendant was “not forthcoming” about the alleged
    falsity and “repeatedly evaded government employees’
    questions on the subject;” (3) there was support for the
    inference that the defendants did include false information on
    some work orders; and (4) several government employees were
    not aware of that false information. 72 Other circuit courts of
    appeals have also repeatedly stressed “[t]hat the relevant
    government officials know of the falsity is not in itself a
    defense.” 73
    Thus, it appears the government knowledge inference
    might be more aptly named a “government acquiescence
    inference,” as knowledge alone on the part of the government
    is insufficient to establish an FCA defense. To reiterate, there
    are two prongs to this defense: (1) the government knew about
    the alleged false statement(s), and (2) the defendant knew that
    the government knew. This case presents an example where,
    though there is ample evidence of government knowledge of
    the industry practice at issue, the evidence to satisfy the second
    prong is lacking.
    film processing solution”—and to “dispose of the used
    [solution] and other chemicals in accordance with
    Environmental Protection Agency . . . guidelines and
    standards.” Id. at 527. The plaintiff relator alleged that the
    contractor failed to do so. Id. at 523.
    72
    Id. at 534–35.
    73
    Kreindler, 
    985 F.2d at 1156
     (quoting Hagood, 
    929 F.2d at 1421
    ); see also U.S. ex rel. A+ Homecare, Inc. v. Medshares
    Mgmt. Grp., Inc., 
    400 F.3d 428
    , 454 n.21 (6th Cir. 2005)
    (explaining that the government knowledge inference is
    typically applied where “the Government’s knowledge was
    used to demonstrate that what the defendant submitted was
    not actually false but rather conformed to a modified
    agreement with the Government,” and that, because the
    defendant had neither altered the Government’s
    understanding of reimbursement nor disclosed all pertinent
    information, that inference was not available in this case),
    superseded by statute, FERA, Pub. L. No. 111-21 (2009), as
    recognized in U.S. ex rel. Harper v. Muskingum Watershed
    Conservancy Dist., 
    842 F.3d 430
    , 436 (6th Cir. 2016).
    19
    B. The Government Knowledge Inference Does Not Apply
    Here.
    Spay alleges that Caremark’s false certifications
    violated three sections of the pre-2009 FCA. 74 Those sections
    prohibit (1) “knowingly present[ing] . . . a false or fraudulent
    claim for payment or approval” to the government; 75 (2)
    “knowingly mak[ing] . . . a false record or statement to get a
    false or fraudulent claim paid or approved by the
    Government;” 76 and (3) “knowingly mak[ing] . . . a false record
    or statement to conceal, avoid, or decrease an obligation to pay
    . . . the Government.” 77 The FCA defines “knowingly” to mean
    that a person “(1) has actual knowledge of the information; (2)
    acts in deliberate ignorance of the truth or falsity of the
    information; or (3) acts in reckless disregard of the truth or
    falsity of the information.” 78 However, “no proof of specific
    intent to defraud is required.” 79
    The District Court exhaustively reviewed the evidence
    in this case and concluded that it was clear that CMS knew of,
    and accepted, the industry-wide practice of using dummy
    Prescriber IDs on PDE records. The court explained:
    [T]he evidence is clear that (a) CMS officials
    knew, in 2006–2007, that Sponsors and PBMs
    were having trouble obtaining the unique
    physician identifier number necessary to
    populate the associated field on the PDE; (b)
    CMS prioritized the filling of valid pharmacy
    74
    As we explained at the outset, the False Claims Act was
    amended in 2009. Those amendments were deemed to “take
    effect on the date of enactment of this Act [May 20, 2009]
    and shall apply to conduct on or after the date of enactment.”
    Pub. L. 111-21 at § 4(f). Because the alleged conduct in this
    case occurred before 2009, we will use the pre-2009 version
    of the FCA to assess the claims here, just as the District Court
    did. 
    2015 WL 5582553
    , at *21 n.10.
    75
    
    31 U.S.C. § 3729
    (a)(1) (1994).
    76
    
    Id.
     at § 3729(a)(2).
    77
    Id. at § 3729(a)(7).
    78
    Id. at § 3729(b)(1)–(3).
    79
    Id. at § 3729(b).
    20
    claims over the administrative requirement of
    populating the physician identifier field and did
    not want valid claims rejected due to the absence
    of that number; (c) CMS knew that, in order to
    submit PDEs for valid pharmacy claims,
    Sponsors and PBMs were submitting PDEs
    containing dummy prescriber identifiers, yet
    never sanctioned any Sponsor, terminated any
    Sponsor, or required the submission of any PDE
    from 2006 or 2007 as a result of this practice; (d)
    although CMS preferred the use of a unique
    identifier, CMS affirmatively instructed
    Sponsors and PBMs to submit dummy prescriber
    IDs when a unique number was not available; (e)
    only after the 2006–2007 time frame did CMS
    issue affirmative instructions mandating the use
    of a unique identifier; (f) Defendants understood
    that CMS permitted the use of dummy prescriber
    IDs in 2006–2007; and (g) Defendants’
    certifications of the accuracy of the data were
    filed during the period when CMS clearly knew
    of dummy prescriber usage. 80
    The record clearly supports these conclusions. 81 It is
    therefore clear that CMS knew that many Sponsors and PBMs
    were using dummy Prescriber IDs on PDE records so that those
    records would not be rejected in the approval process.
    Accordingly, Caremark has adduced evidence to establish the
    first prong of the government knowledge inference.
    80
    Spay, 
    2015 WL 5582553
    , at *26.
    81
    Spay and Sen. Grassley argue that the District Court
    incorrectly applied agency principles when relying on the
    statements of CMS employees who testified individually, but
    not on behalf of the government, to infer government
    knowledge. Appellant’s Br. at 28–39 (citing 
    2015 WL 5582553
    , at *26 n.17); Grassley Br. at 21–24. As Caremark
    correctly points out, circuit courts routinely rely on
    government employee testimony as evidence of what relevant
    government officials knew about the alleged conduct in FCA
    cases, and do not require that the employee testify on behalf
    of the government. See, e.g., Huston v. Proctor & Gamble
    Paper Prods. Co., 
    568 F.3d 100
     (3d Cir. 2009).
    21
    The evidence of Caremark’s knowledge that CMS knew
    of the dummy Prescriber IDs practice, however, is lacking.
    Caremark understood that CMS seemed to allow the use of
    dummy Prescriber IDs on the PDEs. But Joe Mulenex,
    Caremark’s manager responsible for PDE submission, did not
    recall any conversation where he or anyone else from
    Caremark asked CMS about inputting default Prescriber IDs.
    He was not aware of any written guidance from CMS regarding
    how to proceed in the absence of an actual Prescriber IDs.
    Our review of the record shows there is no evidence of
    the kind of cooperation and collaborative problem-solving that
    exists in the easy case where the government knowledge
    inference is invoked. While it is true that both the government
    and contractors throughout the industry knew what was
    happening, there is no evidence of any explicit approval from
    the government to Caremark of this temporary work-around.
    More importantly, this evidence of what was occurring in the
    industry does not establish that Caremark knew that CMS was
    aware of the practice of using dummy Prescriber IDs. Indeed
    the record shows that Caremark was simply hopeful that its use
    of the dummy IDs would be acceptable. Thus, the
    circumstances here are somewhat different than the usual case
    where the government knowledge inference has been applied.
    Drawing reasonable inferences in Spay’s favor, as we must, the
    evidence does not demonstrate Caremark’s knowledge for
    purposes of the second prong. We agree with Spay and the
    amici that the District Court erred in relying upon the
    government knowledge inference in dismissing these claims
    based on the dummy Prescriber IDs.
    There is one more point we must address. The District
    Court’s application of the government knowledge inference is
    premised, at least in part, on the incorrect assertion that “the
    crux of an FCA violation is intentionally deceiving the
    government. Where the government has not been deceived, no
    violation can exist.” 82 The FCA itself, however, states “no
    proof of specific intent to defraud is required.” 83 Though we
    82
    
    2015 WL 5582553
    , at *43.
    83
    
    31 U.S.C. § 3729
    (b)(1)(B).
    22
    agree that there was no evidence of an intent to deceive the
    government here, Spay was not required to prove there was.
    In sum, the government knowledge inference is not
    applicable here because Caremark failed to establish the
    second prong of the two-prong test. 84
    C. Materiality in the FCA Before 2009
    While this case was on appeal, the Supreme Court
    decided Universal Health Services, Inc. v. Escobar, 85 which
    confirmed that materiality is an essential element of a False
    Claims Act violation that “descends from common law
    antecedents.” 86 Spay correctly points out that the Universal
    Health decision dealt with the post-2009 version of the FCA,
    and the Court explicitly stated that it had not considered
    “whether pre-2009 conduct should be treated differently.” 87
    The disputed conduct here all occurred before the 2009
    amendments were enacted. Accordingly, we must decide
    whether materiality was a requirement under the FCA prior to
    the 2009 FERA amendments. 88
    84
    The evidence in this case demonstrates that Caremark was
    stuck between a rock and a hard place at the inception of the
    Part D Program. Caremark hoped its approach of using
    dummy Prescriber IDs when they did not have the
    Prescriber’s actual ID—an approach which fit into the
    Prescriber ID validation algorithm—was a valid, non-
    fraudulent PDE submission given the circumstances at that
    time that allowed it to be paid for prescriptions needed by
    Medicare clients. Thus, Caremark did not act with the scienter
    necessary for liability to attach under the FCA.
    85
    
    136 S. Ct. 1989
     (2016).
    86
    Id. at 2002 (citations omitted).
    87
    Id. at 1998 n.1.
    88
    The Court of Appeals for the D.C. Circuit, when similarly
    evaluating pre-2009 conduct, “assume[d]—as the parties have
    done—that Universal Health’s materiality standard applies to
    the instant dispute.” U.S. ex re. McBride v. Halliburton Co.,
    
    848 F.3d 1027
    , 1031 n.5 (D.C. Cir. 2017). Here, Spay
    contends that Universal Health’s materiality standard does
    not apply to pre-2009 conduct, and we therefore address this
    question directly.
    23
    The impact of the 2009 amendments and the decision in
    Universal Health on the materiality element can best be
    understood by focusing on the three sections of the FCA at
    issue here: Sections 3729(a)(1), (a)(2), and (a)(7). As we noted
    above in summarizing Spay’s arguments, those three sections
    create liability for any person who:
    (a)(1) knowingly presents, or causes to be
    presented, to an officer or employee of the
    United States Government . . . a false or
    fraudulent claim for payment or approval;
    (a)(2) knowingly makes, uses, or causes to be
    made or used, a false record or statement to get a
    false or fraudulent claim paid or approved by the
    Government; . . . . or
    (a)(7) knowingly makes, uses, or causes to be
    made or used, a false record or statement to
    conceal, avoid, or decrease an obligation to pay
    or transmit money or property to the
    Government[.] 89
    When Congress amended the FCA in 2009, it included
    a materiality requirement in two of the seven predicates for
    FCA liability, both of which are at issue here: Sections
    3729(a)(2) and (a)(7). Specifically, the amended Section
    3729(a)(2) now imposes liability on one who “knowingly
    makes, uses, or causes to be made or used, a false record or
    statement material to a false or fraudulent claim.” 90 Similarly,
    Section 3729(a)(7) now imposes liability on a person who
    “knowingly makes, uses, or causes to be made or used, a false
    record or statement material to an obligation to pay or transmit
    89
    
    31 U.S.C. §§ 3729
    (a)(1), (2), (7) (1994). In 2009, Congress
    renumbered these sections, so that Section 3729(a)(1) became
    Section 3729(a)(1)(A), Section 3729(a)(2) became Section
    3729(a)(1)(B), and Section 3729(a)(7) became Section
    3729(a)(1)(G). Pub. L. No. 111-21, § 4. For clarity, we refer
    to these Sections in the text by their pre-2009 labels.
    90
    
    31 U.S.C. § 3729
    (a)(1)(B) (emphasis added).
    24
    money or property to the Government . . . .” 91 The 2009 FERA
    amendments did not, however, add an explicit materiality
    requirement to Section 3729(a)(1). 92 As we discuss below,
    Universal Health dealt with an alleged violation of that
    section. 93 The 2009 FERA amendments also added a provision
    defining “material” as “having a natural tendency to influence,
    or be capable of influencing, the payment or receipt of money
    or property.” 94 As the history of the materiality requirement
    demonstrates, these changes did not inject a new materiality
    standard into the FCA. Rather, the changes merely made
    explicit and consistent that which had previously been a
    judicially-imposed, and oftentimes conflicting, standard.
    By 2009, several circuit courts had already
    acknowledged the implicit materiality requirement in the
    FCA. 95 Importantly, none of those cases limited the materiality
    91
    
    31 U.S.C. §3729
    (a)(1)(G) (emphasis added).
    92
    Compare 
    31 U.S.C. § 3729
    (a)(1) (1994) (“knowingly
    presents, or causes to be presented, to [the Government] a
    false or fraudulent claim for payment or approval”), with 
    31 U.S.C. § 3729
    (a)(1)(A) (2009) (“knowingly presents, or
    causes to be presented, a false or fraudulent claim for
    payment or approval”).
    93
    136 S. Ct. at 2001, 2002, 2004 (discussing 
    31 U.S.C. § 3729
    (a)(1)(A) as relevant provision).
    94
    
    31 U.S.C. § 3729
    (b)(4).
    95
    U.S. ex rel. Loughren v. Unum Grp., 
    613 F.3d 300
    , 307 (1st
    Cir. 2010) (“We have long held that the FCA is subject to a
    judicially-imposed requirement that the allegedly false claim
    or statement be material.”); U.S. ex rel. Berge v. Bd. of
    Trustees of the Univ. of Al., 
    104 F.3d 1453
    , 1459 (4th Cir.
    1997) (“[W]e now make explicit that the current civil False
    Claims Act imposes a materiality requirement.”); U.S. ex rel.
    Longhi v. U.S., 
    575 F.3d 458
    , 468–70 (5th Cir. 2009)
    (discussing “proper standard for assessing the materiality of a
    false statement under the FCA’s civil-liability” provisions);
    United States v. Bourseau, 
    531 F.3d 1159
    , 1170–71 (9th Cir.
    2008) (holding “that the FCA includes a materiality
    requirement”); A+ Homecare, Inc., 
    400 F.3d at 442
    (concluding “that false statements or conduct must be
    material to the false or fraudulent claim to hold a person
    25
    requirement to the two sections amended in 2009. Indeed, the
    Court of Appeals for the First Circuit noted that the 2009
    FERA amendments had not changed the FCA’s general
    requirement that a relator “prove falsity, materiality, and
    scienter.” 96
    Although prior to Universal Health, we had never
    decided whether the FCA contained a materiality requirement,
    the Supreme Court’s analysis in Universal Health resolves any
    hesitation we may have otherwise had. 97 In United States ex
    rel. Cantekin v. University of Pittsburgh, we declined to decide
    whether materiality was an element of the pre-2009 FCA. 98 We
    there expressed doubt that the FCA included a materiality
    requirement based on a footnote in Neder v. United States, a
    Supreme Court case holding that there is a materiality
    requirement in the federal mail, wire, and bank fraud statutes. 99
    We explained that the Neder Court noted that “the term ‘false
    statement,’ unlike ‘fraudulent statement,’ does not imply a
    materiality requirement.” 100 Although we expressly refrained
    from deciding the issue, we did observe that “[g]iven that the
    False Claims Act prohibits merely making a knowingly false
    civilly liable under the FCA”); U.S. ex rel. Costner v. U.S.,
    
    317 F.3d 883
    , 887 (8th Cir. 2003) (acknowledging that a
    materiality requirement exists but refraining from deciding
    “the precise contours of the materiality requirement”);
    Lamers, 168 F.3d at 1019; U.S. v. TDC Mgmt. Corp., Inc., 
    24 F.3d 292
    , 298 (D.C. Cir. 1994) (“To prevail under the False
    Claims Act, the government must prove either that [the
    defendant] actually knew it had omitted material information
    from its monthly progress reports or that it recklessly
    disregarded or deliberately ignored that possibility.”).
    96
    Loughren, 
    613 F.3d at
    306–07 n.7–8 (“We need not decide
    whether the FERA applies retroactively here because under
    either the former or amended version of Section 3729(a)(2),
    our analysis of Relator’s claims . . . will be the same.”).
    97
    But see U.S. ex rel. Petratos v. Genentech Inc., 
    855 F.3d 481
    , 492 (3d Cir. 2017) (joining “the many other federal
    courts that have recognized the heightened materiality
    standard after Universal Health Services.”).
    98
    Cantekin, 
    192 F.3d at 415
    .
    99
    
    527 U.S. 1
    , 25 (1999).
    100
    Cantekin, 
    192 F.3d at 415
    .
    26
    claim and does not require a specific intent to defraud, perhaps
    Neder argues against a materiality requirement.” 101 But the
    subsequent Supreme Court decision in Universal Health, and
    its reliance on Neder’s definition of materiality in interpreting
    how the FCA’s materiality requirement should be enforced,
    resolves the doubts that we previously entertained in
    Cantekin. 102 Thus, contrary to the concerns expressed there,
    Universal Health clarified that Neder’s footnote did not
    suggest the absence of a materiality requirement in the FCA.
    Moreover, the real issue that divided the circuit courts
    before 2009 was not whether materiality was an element of a
    cause of action under the FCA. Rather, it was the proper
    standard for determining whether the falsity underlying such a
    claim was material. 103 Thus, including a formal definition of
    “material” in the statutory text in 2009 was merely an attempt
    to resolve those disagreements, and nothing more should be
    read into it. 104 It was not intended to add a new element to FCA
    claims. 105
    101
    
    Id.
    102
    See Universal Health, 136 S. Ct. at 2002 (explaining that
    the FCA’s post-2009 statutory definition of materiality uses
    “language that we have employed to define materiality in
    other federal fraud statutes,” like the language in Neder).
    103
    See Longhi, 
    575 F.3d at 470
     (noting the circuit split
    between the Fourth, Fifth, Sixth, and Ninth Circuits, which
    used the “natural tendency test” for materiality, and the
    Eighth Circuit, which used the “more restrictive ‘outcome
    materiality test’”).
    104
    See 
    id.
     (explaining that, with the 2009 FERA amendments,
    “Congress embraced the [materiality] test as stated by the
    Supreme Court and several courts of appeals”).
    105
    The legislative history of the 2009 FERA also indicates
    that the original FCA included a materiality requirement, and
    that Congress enacted the amendments contained in the
    FERA to restore that original requirement. Indeed, the title of
    the FCA section of the FERA was “Clarifications to the False
    Claims Act to Reflect the Original Intent of the Law.” FERA,
    Pub. L. No. 111-21, § 4. The Senate Report on the FERA
    explains that the 2009 amendments were enacted in response
    to certain Supreme Court decisions that “r[an] contrary to the
    27
    Finally, although the Supreme Court’s decision in
    Universal Health addressed only post-2009 conduct, it
    nevertheless informs our analysis of conduct that occurred
    before 2009. First, Universal Health interprets a section of the
    FCA—Section 3279(a)(1)—that did not have an explicit
    materiality requirement before 2009, and, unlike other sections
    of the FCA, still does not have an explicit requirement. 106
    Despite the lack of a materiality requirement, the Supreme
    Court had no trouble finding that the FCA’s materiality
    requirement also applied to this section. 107 Second, although
    clear language and congressional intent of the FCA.” S. Rep.
    No. 111-10, at 10. Accordingly, the revised text contained in
    Sections 3729(a)(1)(A) and (a)(1)(G) scaled back the more
    strenuous intent requirement created by the Supreme Court in
    Allison Engine, 
    553 U.S. 662
     (2008). See S. Rep. No. 111-10,
    at 12 (“To correct the Allison Engine decision, [the FERA]
    contains three specific changes to existing section 3729(a)(2)
    and (a)(3). In section 3729(a)(2) the words ‘to get’ were
    removed striking the language the Supreme Court found
    created an intent requirement for false claims liability under
    that section. In place of this language, the Committee inserted
    the words ‘material to’ a false or fraudulent claim.”). The
    Senate Report further explained that the newly-added
    definition of “material” was “consistent with the Supreme
    Court definition, as well as other courts interpreting the term
    as applied to the FCA.” 
    Id.
     (emphasis added). In other words,
    the legislative history explains that courts had previously
    been applying a materiality requirement to FCA claims, and
    these amendments simply (1) made the formerly implicit
    materiality requirement explicit, and (2) provided a standard
    definition of “material.”
    106
    Compare 
    31 U.S.C. § 3729
    (a)(1) (1994) (creating liability
    for anyone who “knowingly presents, or causes to be
    presented, to an officer or employee of the United States
    Government or a member of the Armed Forces of the United
    States a false or fraudulent claim for payment or approval”),
    with 
    31 U.S.C. § 3729
    (a)(1)(A) (2009) (creating liability for
    anyone who “knowingly presents, or causes to be presented, a
    false or fraudulent claim for payment or approval”).
    107
    Universal Health, 136 S. Ct. at 2002 (discussing Ҥ
    3729(a)(1)(A)’s materiality requirement”).
    28
    the 2009 amendments did include a definition of “material,”
    Universal Health held that it “need not decide whether §
    3729(a)(1)(A)’s materiality requirement is governed by §
    3729(b)(4) or derived directly from the common law” because
    both employ the same standard. 108 The unavoidable conclusion
    based on the Court’s analysis is that: (1) Section (a)(1) has a
    materiality requirement, even though that requirement has
    never been expressed in the statute, and (2) the standard used
    to measure materiality did not change in 2009 when Congress
    amended the FCA to include a definition of “material.”
    Accordingly, we conclude that the FCA has always included a
    materiality element (and that the 2009 provisions merely made
    this element explicit). We also conclude that the definition of
    “material,” which is derived from the common law and was
    enshrined in the statute itself in 2009, has not changed. 109
    D. The False Claims Alleged in This Case Were Not
    Material
    The Supreme Court has explained that “if the
    Government regularly pays a particular type of claim in full
    despite actual knowledge that certain requirements were
    violated, and has signaled no change in position, that is strong
    evidence that the requirements are not material.” 110 That is
    precisely the situation here. As the District Court succinctly
    concluded:
    The crucial facts underlying the false claims here
    are that (1) CMS was well aware of the difficulty
    many pharmacies and PBMs were having
    108
    Id.
    109
    Furthermore, in support of its statement that “[m]ateriality
    . . . cannot be found where noncompliance is minor or
    insubstantial,” the Supreme Court cites to two cases: a
    Supreme Court case from 1943 and a New York Court of
    Appeals case from 1931. 136 S. Ct. at 2003 (citing Marcus v.
    Hess, 
    317 U.S. at 543
    ; Junius Const. Corp. v. Cohen, 
    257 N.Y. 393
    , 400 (N.Y. 1931)). The 1943 Supreme Court case,
    Marcus v. Hess, dealt specifically with the FCA. 
    317 U.S. at 539
    . This further supports the existence of a materiality
    element in the FCA long before 2009.
    110
    Universal Health, 136 S. Ct. at 2003-04.
    29
    obtaining a proper physician identifier; (2) CMS
    was concerned with filling valid prescriptions
    and did not want claims rejected at the point of
    service for absence of a valid identifier; (3) PDE
    records could not be submitted without some
    type of number that satisfied the requisite
    algorithm in the physician identifier field; (4)
    CMS knew that many PBMs were submitting
    PDEs with dummy numbers in the physician
    identifier field in the 2006 and 2007 time period;
    (5) CMS could easily recognize dummy
    prescriber identifier numbers; and (6) CMS took
    no action to deny payment on such claims during
    the 2006–2007 time period. 111
    Nevertheless, Spay claims that, because the government
    explicitly advised the parties that the individual CMS
    employees did not speak for CMS and that CMS did not
    endorse their testimony, the testimony of those CMS
    employees cannot be used at summary judgment to establish
    that CMS as an agency knew of and affirmatively authorized a
    general industry use of false prescriber identifiers on PDE
    claims. Although that argument may well preclude reliance on
    the government inference doctrine, it does not undermine our
    belief that the misstatements here were simply not material to
    the government’s decision to pay the claims substantiated by
    the challenged PDEs. The government did not pay for services
    that were not provided, and the Sponsors did not receive any
    compensation for prescriptions that were never given to
    Medicare recipients.
    CMS knew that dummy Prescriber IDs were being used
    by PBMs, that it routinely paid PBMs despite the use of these
    dummy Prescriber IDs, and that CMS only “signaled [a]
    change in position” well after 2007. 112 Spay does not contest
    111
    Spay, 
    2015 WL 5582553
    , at *34.
    112
    See Spay, 
    2015 WL 5582553
    , at *37–*39 (discussing
    CMS’s post-2007 efforts to prohibit use of dummy identifiers
    and concluding that “[c]onsidered collectively, this evidence
    creates the sole reasonable inference that CMS did not
    previously have a clear prohibition on the use of dummy
    30
    that CMS employees knew that dummy identifiers were being
    used on PDEs or the reason for using them. Nevertheless, CMS
    paid for those prescriptions. Moreover, CMS can hardly be
    faulted for paying even though it knew the information
    identifying the prescribers was not accurate. CMS was
    concerned with making sure that the medications were
    dispensed to Medicare recipients and that pharmacies were
    paid for those prescriptions. Had the payments stopped, the
    prescriptions would not have been dispensed, and the
    pharmaceutical needs of Medicare recipients would not have
    been addressed. The misstatements that gave rise to this qui
    tam action allowed patients to get their medication, and they
    are precisely the type of “minor or insubstantial”
    misstatements where “[m]ateriality . . . cannot be found.” 113
    The Supreme Court has instructed that “[t]he False
    Claims Act is not ‘an all-purpose antifraud statute,’ or a vehicle
    for punishing garden-variety breaches of contract or regulatory
    violations.” 114 It is difficult for us to disagree with the District
    Court’s conclusion that, “[a]t base, this case appears to be
    nothing more than an effort to convert an unprofitable private
    audit—performed at a time when Part D regulations were new
    and not as explicit in their instructions—into a successful
    recovery of funds under the guise of a qui tam action.” 115 The
    dummy Prescriber IDs were intended as one thing, and one
    thing only: they were intended as a technical, formulaic way of
    preventing a computer program from denying legitimate
    claims for reimbursement and payment for prescriptions that
    were actually disbursed to Medicare recipients. Those
    recipients needed the prescriptions the claims were based on,
    and nothing here suggests that the prescriptions or the
    workaround that prevented legitimate claims for payment from
    being improperly rejected by a computer code served anything
    other than the practical purpose of facilitating that payment and
    disbursement of those prescriptions. The workaround could
    arguably be described as “creative,” or a “common sense
    identifiers. By first ‘clarifying’ its policies [in 2010], then
    ‘revising’ its prior policy and regulation text [in 2011 and
    2012], CMS effectively indicated that, prior to these efforts,
    dummy identifiers were permissible”).
    113
    Universal Health, 136 S. Ct. at 2003.
    114
    Id. (quoting Allison Engine, 
    553 U.S. at 672
    ).
    115
    Spay, 
    2015 WL 5582553
    , at *65.
    31
    solution” to a very real and perplexing problem. But we see
    nothing that would justify calling it “fraud.” The claims
    themselves were neither false nor fraudulent. Nothing in the
    text or history of the FCA leads us to conclude that Congress
    intended conduct such as this to morph into an actionable fraud
    against the government.
    V. CONCLUSION
    For the foregoing reasons, we will affirm the District
    Court’s order granting summary judgment in favor of
    Defendants.
    32
    

Document Info

Docket Number: 15-3548

Judges: Smith, McKee, Restrepo

Filed Date: 11/16/2017

Precedential Status: Precedential

Modified Date: 3/2/2024

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