United States Ex Rel. Spay v. CVS Caremark Corp. , 875 F.3d 746 ( 2017 )

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.
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