The Eleventh Circuit reviewed and overturned the U.S. District Court for the Northern District of Georgia’s decision in U.S. ex rel. Bibby v. Mortgage Investors Corporation. The decision clarified applying the materiality standard detailed by the U.S. Supreme Court in Universal Health Care Services, Inc. v. U.S. ex rel. Escobar as it applies to cases brought under the False Claims Act (FCA).
Former mortgage brokers specializing in handling VA mortgage loans filed a lawsuit under the FCA as whistleblowers against its former employer Mortgage Investors Corporation (MIC). They alleged MIC defrauded the U.S. Department of Veterans Affairs, claiming the company misled the VA into backing veterans’ home loans that included fraudulent fees. The whistleblowers warned the government agency of the fraud in 2006.
The VA conducted an audit and discovered evidence of noncompliance by MIC, supporting the whistleblowers’ claims. Still, the VA is legally to continue backing the home loans. To address the noncompliance, the agency sent warning letters to the defendant contractor, alerting it of the audit findings and instructing MIC to review the VA policies and adjust the VA home loan origination process accordingly. Even though the defendant continued charging the fraudulent fees, the VA continued paying the claims.
Under the FCA, fraud that is committed must be material to the government’s payment conditions. After learning of the fraud, the district court determined that the VA should have stopped payments and rescinded the loan guarantees. Without proof of these actions, the district court demonstrated that the illegal fees were not material based on Escobar. The lower court granted MIC’s request to toss the case, basing its opinion heavily on the requirement of materiality and the standard for determining materiality as detailed in Escobar.
In Escobar, the U.S. Supreme Court emphasized the materiality factor holding “if the [g]overnment pays a particular claim in full despite its actual knowledge that certain requirements were violated that is very strong evidence that those requirements are not material.”
However, the Eleventh Circuit determined that while the government continued paying the claims, this action did not automatically determine that the requirements on which payments were based were immaterial. The Eleventh Circuit opted to broaden its consideration by looking at the VA’s behavior holistically. It emphasized that the materiality standard is based on various factors and “no single element – including the government’s knowledge and its enforcement action – being dispositive.”
Notably, the Eleventh Circuit distinguished the facts before it from those of the Fifth Circuit in U.S. ex rel. Harman v. Trinity Industries, Inc., a case in which the Fifth Circuit reversed a $660 million jury verdict relating to highway guardrails that were falsely certified as compliant with Federal Highway Administration safety requirements. While the Fifth Circuit observed that continued payment by the federal government is “not dispositive” but “increases the burden on the relator in establishing materiality.” As such, the Fifth Circuit in Harman held that there was “very strong evidence” of immateriality because the Federal Highway Administration had knowledge of the relator’s allegations and that the guardrails were not compliant but nevertheless issued a memorandum stating that the guardrails were eligible for reimbursement. The Eleventh Circuit distinguished Harman by stating there was not strong evidence of immateriality in Bibby such that a factfinder would need to consider factors beyond the fact of continued payment.
Like the Fifth Circuit in Harman, the Tenth Circuit in U.S. ex rel. Janssen v. Lawrence Memorial Hospital held that a hospital’s falsification of data and false certifications to receive Medicare reimbursement were not material because the Centers for Medicare & Medicaid Services was aware of the conduct but continued to pay the hospital’s claim. However, the Eleventh Circuit made clear the “materiality test is holistic” such that continued payment is not dispositive.
The Eleventh Circuit’s opinion puts government contractors committing fraud on notice that the government’s continued payments made despite knowledge of the potential fraud alone are not enough to absolve the contractor of FCA liability. Instead of rewarding companies that defraud the government, the court’s application of a “holistic” approach to materiality gives deference to the government when it takes some enforcement action to hold wrongdoers accountable.