The Ruckh decision is significant because it: (1) confirms once again that the Supreme Court’s 2016 ruling in Universal Health Services, Inc. v. Escobar, 136 S.Ct. 1989 (2016), requires strict enforcement of the FCA’s materiality element; (2) similarly reinforces the obligation to prove defendants’ “knowledge” that the government perceives and has treated the alleged regulatory non-compliance and corresponding false claims as material to the government’s payment decisions; and (3) requires proof and evidence to establish a causal connection between general “corporate pressure” to submit false claims and the falsity of claims that were actually submitted to the government.

This third point is particularly noteworthy as it becomes increasingly more common for the government and relators to pursue causation theories under the FCA alleging that “corporate pressure” and schemes to maximize corporate profits caused numerous affiliated entities to submit false claims. As FCA plaintiffs continue to rely on evidentiary shortcuts such as statistical sampling/extrapolation in attempts to satisfy elements of proof and to inflate damages calculations, the standard applied in Ruckh reinforces the requirement for such plaintiffs to present evidence linking the submission of actual, identifiable false claims to the purported corporate pressure or scheme.

Background

In Ruckh, a qui tam relator (“Ruckh” or “relator”) brought suit alleging that owners and operators of skilled nursing facilities violated the federal FCA and its Florida state analog by submitting claims for Medicare and Medicaid reimbursement. The relator alleged that the defendants improperly sought reimbursement for unnecessary services, for services that were never provided, and for failure to comply with certain documentation requirements, such as maintaining a comprehensive plan of care and relying unsigned and undated documents. The U.S. Department of Justice and the State of Florida both declined to intervene in the suit.

After discovery, the case proceeded to trial by jury, which lasted more than four weeks. The jury found the defendants liable and, after trebling damages and assessment of civil penalties required under the FCA, the court entered judgment against defendants in the amount of $347,864,285. Defendants filed a renewed motion for judgment as a matter of law and filed a motion for a new trial.

The Decision

Materiality

The Ruckh decision underscores the Supreme Court’s instruction in Escobar that the FCA’s materiality analysis is “rigorous” and “demanding.” See Ruckh, 2018 WL 375720, at *3 (quoting Escobar, 136 S.Ct. at 2002). In doing so, the court noted that “Escobar rejects a system of government traps, zaps, and zingers that permits the government to retain the benefit of a substantially conforming good or service but to recover the price entirely — multiplied by three — because of some immaterial contractual or regulatory non-compliance.” Ruckh, 2018 WL 375720, at *3.

Applying this standard, the court found that the relator “offered no meaningful and competent proof” of materiality. Id. at *1; see also id. at *12 (“The record suffers an entire absence of evidence of the kind a disinterested observer, fully informed and fairly guided by Escobar, would confidently expect on the question of materiality”). To the contrary, the evidence available reflected that the state and federal governments were aware of defendants’ alleged conduct and practices and nonetheless continued paying the requested reimbursement without ever questioning or threatening to terminate those reimbursement payments. Id. In the absence of any evidence concerning how the government has treated similar documentation deficiencies in claims for payment in the “mine run” of cases, and where the governments “permitted a practice to remain in place for years without complaint or inquiry,” id. at *4–6 & 8, relator’s proof fell woefully short of satisfying the “rigorous and demanding” materiality analysis.

Knowledge / Scienter

Second, the Ruckh decision focused on the FCA’s knowledge/scienter requirement, as it relates to the materiality standard. Specifically, again citing Escobar, the court held that “the False Claims Act requires the relator to prove … that the defendant knew at the moment the defendant sought payment that the non-compliance was material to the government’s payment decision.” Ruckh, 2018 WL 375720, at *2. In other words, the relator was required to show not only that defendants knew their claims for payment were false, but also knew that “the governments regarded the disputed practices as material” and nonetheless elected to seek payment despite that “guilty knowledge.” Id.

This standard provided another basis for the court to overturn the jury’s verdict. Indeed, because the relator failed to offer proof of materiality, it logically followed that she could not prove the defendants knew their false claims were material to government payment decisions. Id. (“Of course, with no evidence that the governments regarded the disputed practices as material, establishing the defendants’ knowledge of materiality seems at least impractical, if not impossible”).

Causation

In perhaps one of the most overlooked portions of the Ruckh decision, the court held that a causation theory of FCA liability requires the relator to prove a causal connection between the purported corporate pressure and specific false claims that were influenced by such pressure. Ruckh, 2018 WL 375720, at *8–9. Specifically, several defendant entities managed the skilled nursing facilities that ultimately submitted claims for government reimbursement; the management entities did not themselves submit claims for government reimbursement. Thus, the relator pursued a causation theory under the FCA, alleging that the management entities imposed a “corporate scheme” to illicitly maximize corporate profits and that this scheme “caused” the 53 nursing facilities to submit false claims to the government. Id.

As to this theory, the court first held that the relator failed to present evidence of a corporate scheme because the theory was detached from any evidence identifying individuals “who could and did hatch, direct, and implement the scheme.” Id. at *8. Instead of providing evidence of a “massive, authorized, cohesive, concerted, enduring, top-down, corporate scheme to defraud the government,” the relator relied on limited and isolated evidence that was insufficient to support the existence of a corporate scheme. Id. Moreover, the relator could not show that the purported corporate pressure to engage in fraud actually resulted in the submission of any false or fraudulent claim; there simply was no factual linkage between the supposed corporate pressure and the submission of claims that were allegedly false. Id. at *9.

Notably, the relator relied on statistical sampling evidence to extrapolate the results of medical record reviews, and to support the FCA element of falsity. In its opinion, the court agreed with defendants that the relator’s statistical extrapolation evidence and corporate pressure evidence were irrelevant to establish the requisite causal link. Id.

The court’s ruling thus requires factual evidence linking the alleged corporate pressure to specific, discrete claims that defendants actually submitted to the government. This holding makes clear that corporate profit motives and vague contentions that “pressure” influenced the content of some unidentified claims for payment are insufficient. Instead, the government and relators must present factual evidence to show that such corporate schemes did, in fact, systematically influence the content of claims for payment and did, in fact, “cause” the submission of actual false claims.

Conclusion

The Ruckh opinion is the latest in a growing line of decisions that have resulted in dismissal of FCA claims or defense judgments based on failures to allege or prove the requisite materiality and knowledge elements emphasized in Escobar. Chief Judge Merryday’s additional holding on the causation claims, underscoring the need for FCA plaintiffs to identify and prove actual false claims resulting from corporate pressure, may be helpful to future FCA defendants facing vague and abstract corporate pressure allegations.

Client Alert 2018-023