Substantially Increased Burdens: Harman-izing the Texas Healthcare Fraud Prevention Act with the Supreme Court’s Implied Materiality Standard

In June, the Texas Supreme Court determined that the state’s counterpart to the False Claims Act implies a materiality standard in provisions that do not expressly identify materiality as an element of a violation and, when that issue arises on summary judgment, the government’s knowledge and continued payment weigh against a finding of materiality.

The Underlying Suit

Laboratory Corporation of America Holdings v. State concerned whether LabCorp’s alleged failure to extend discounts or pricing that it offered to other payers to the government violated the Texas Healthcare Fraud Prevention Act (“THFPA”). Tex. Hum. Res. Code §§ 36.002–.132. LabCorp’s key defenses were that the discounts were never publicly offered and therefore did not have to be extended and, more importantly, that the state was plainly aware of LabCorp’s billing practices through a series of communications, slide decks, and other materials provided to decision makers at the Texas Health and Human Services Commission, yet continued to pay claims for seven years without objection.

The district court in Houston granted summary judgment in LabCorp’s favor on materiality grounds. The First District Court of Appeals reversed, reasoning that the omissions provision does not include a materiality requirement. The Supreme Court of Texas granted review on two issues: (1) whether the THFPA requires materiality to impose liability; and (2) whether the government’s knowledge of the underlying conduct and continued payment weigh against a finding of materiality.

The Omissions Provision

The THFPA identifies numerous theories under which a payment recipient may have defrauded a healthcare program, including through false statements, misrepresentations, and omissions that enable an unauthorized benefit or payment.

The Omissions provision, Section 36.002(2), makes it unlawful for a person to “knowingly conceal or fail to disclose information that permits a person to receive a benefit or payment under a healthcare program that is not authorized.” As the state noted in its briefing, the statute itself contains a material omission: the omissions provision does not mention the word “material.”

The THFPA Has a Materiality Requirement

A 7–2 majority of the state supreme court applied familiar canons of statutory interpretation recognizing that legislatures do not enact statutes in a vacuum. When statutes draw on a background of common-law principles, the legislature is presumed to have adopted those principles.

The court acknowledged that fraud is “one of the oldest wrongs known to our law” and noted that when a common-law term is transplanted into a statute, it “brings the soil with it.” Tracing that soil from English common law through recent U.S. Supreme Court precedent, the Texas Supreme Court reasoned that fraud itself requires materiality. Thus, when the Legislature draws on a common-law tradition in a statute, it incorporates that tradition unless it clearly indicates otherwise.

Applying these principles to the THFPA, the majority rejected both of the State’s textual arguments against a materiality requirement for omissions under Section 36.002(2). First, the Court explained that the provision’s silence on materiality was insufficient: “Silence is not repudiation.” The Legislature’s use of the verb “permits”—a concealment is unlawful only if it “permits” an unauthorized payment—itself imports a materiality-like concept because an immaterial omission could not “permit” anything. Second, the Court declined to draw a negative inference from neighboring subsections of Section 36.002 that expressly reference “material” facts. Because subsection (2)’s abstract phrasing is not a close syntactic match to the subsections that use “material,” and because the whole-text and harmonious-reading canons counsel against construing the statute to punish immaterial omissions more harshly than immaterial misrepresentations, the Court found no “clear repudiation” of the common-law materiality requirement.

Importing Escobar and Harman

The significance of the Texas Supreme Court’s opinion lies not merely in its adoption of a materiality element, but also in how the court defined that element.

In its analysis, the Texas Supreme Court cited for the first time and relied heavily on the U.S. Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016).

The state Supreme Court also drew on the Fifth Circuit’s analysis in United States ex rel. Harman v. Trinity Industries, Inc., 872 F.3d 645 (5th Cir. 2017). Favorably discussing and borrowing extensively from the opinion by Fifth Circuit Judge—former Texas Supreme Court Justice—Don Willett, the Texas Supreme Court adopted the principle that “continued payment by the federal government after it learns of the alleged fraud substantially increases the burden on the relator in establishing materiality.” This proposition has emerged across federal appellate circuits as courts continue to foreclose remedies where either the government or a relator seek to pursue penalties for conduct the government's knowledge of and reaction to that conduct evidences either a lack of concern or a lack of diligence.

Beyond confirming that materiality applies, the state Supreme Court adopted a detailed evidentiary framework for resolving materiality at the summary-judgment stage, borrowing heavily from Escobar and Harman. From Escobar, the state Supreme Court drew the central proposition that a government’s continued, informed payment of claims is “very strong evidence” that the requirement allegedly violated is not material. A government’s consistent practice of paying similar claims from other providers despite known noncompliance points in the same direction. The state supreme court likewise adopted Escobar’s rejection of the government’s proposed “extraordinarily expansive view of liability,” under which any violation of a payment condition would automatically be material. Instead, courts must consider whether the violated requirement was an express condition of payment or a general regulatory obligation and whether the alleged noncompliance was substantial or merely minor. This lays fertile ground for Defendants where state suits, whether brought by relators or the government, rest on minor regulatory requirements.

From Harman, the state supreme court borrowed the insight that the identity and authority of the government officials who learned of the alleged violation matter in analyzing materiality. Disclosure to, and inaction by, senior decision makers—as occurred when LabCorp’s disclosures reached the Deputy Chief of the Attorney General’s Civil Medicaid Fraud Division—strengthens the inference of immateriality. In Harman, the Fifth Circuit reversed a jury verdict and rendered judgment for the defendant because the government’s unrebutted, years-long continued payment after learning of the alleged fraud “substantially increase[d] the burden on the relator in establishing materiality.” The Texas Supreme Court found that same logic controlling on the record before it.

Winning Summary Judgment on Materiality

The Texas Supreme Court reviewed the First Court of Appeals’ reversal of the district court’s grant of summary judgment on materiality.

That procedural posture required the state supreme court to reconcile the FCA-style materiality standard with Texas’s traditional summary-judgment framework, under which a defendant moving for traditional summary judgment must “conclusively negate” at least one element of the plaintiff’s claim. The difficulty, as the state supreme court recognized, is that materiality is an inherently negative and circumstantial inquiry. Proving that conduct lacked a natural tendency to influence a decision is the type of negative proposition that courts have long recognized as difficult, if not practically impossible, to establish with certainty.

The state supreme court resolved that tension by holding that a defendant may conclusively negate materiality by offering competent evidence of undisputed facts that, viewed as a whole, are “incompatible with a finding of materiality.” Once a defendant makes that showing, the burden shifts to the State or relator to raise a fact issue with evidence—not argument—that the alleged unlawful conduct had a natural tendency to influence the government’s payment decision.

In defining its approach to summary judgment on the issue of materiality, the Texas Supreme Court identified four categories of evidence that would demonstrate such incompatibility.

First, that the government knew of the allegedly violative conduct and "how it acted in light of that knowledge." This includes “proof that the defendant disclosed its practices to the government; that the government had access to the relevant data; and that the government continued paying claims, renewing contracts, and maintaining the defendant's enrollment in the program.” The longer the period of knowing payment and more complete the government's knowledge, the stronger the inference of immateriality.

Second, the authority of the state officials aware of the potential wrongdoing. The greater the authority of decision makers who take no action in response to the allegations, the stronger the inference that the conduct is immaterial.

Third, how the government treats similar violations by other providers.

Finally, whether the requirement was a formal condition of payment or merely a general regulatory obligation. Citing to Escobar, the Court noted that noncompliance that goes to the very essence of the bargain is more likely material than “minor or insubstantial” noncompliance. Furthermore, violations of statutes are more likely to be material that “noncompliance with one of thousands of ambiguous administrative pronouncements promulgated by regulatory agencies.”

LabCorp met that burden. It presented undisputed evidence that it had disclosed its two-tier pricing structure, its practice of billing Medicaid at the same Patient Fee Schedule rate charged to all third-party payors, and its refusal to treat privately negotiated payment reductions as “discounts.” Those disclosures occurred first through a 250,000-page document production, then through an in-person meeting and slide-deck presentation to senior officials in the Attorney General’s Civil Medicaid Fraud Division, and again through a detailed 2015 white paper. For the next seven years, the state paid every LabCorp claim without objection, denied no claims, and never disputed LabCorp’s interpretation of the ambiguous “discount” regulations.

The state’s attempts to raise a fact issue fared no better. The court rejected the argument that LabCorp’s disclosures were inadequate because LabCorp never expressly admitted a legal violation, explaining that “it is conduct that matters, not the legal conclusion a party attaches to it.” The court likewise rejected the state’s argument that regulatory compliance was material as a matter of law simply because it was a condition of payment—an argument the U.S. Supreme Court had already rejected in Escobar—and held that evidence of an alleged regulatory violation is not itself evidence of materiality. Because the state could not explain why it continued to pay LabCorp’s claims for seven years if the alleged violations mattered, and because unsupported arguments about the “muddy” nature of LabCorp’s disclosures were not evidence, the court held that the state failed to raise a genuine issue of material fact on materiality.

The court closed with several cautions limiting the decision’s reach. It explained that the decision does not foreclose the government’s right to “pay and chase” and disclaimed any suggestion that estoppel runs against the government. On the record before it, however, seven years of uninterrupted, informed payment rendered the state’s fraud theory legally unsustainable. The court therefore reversed the court of appeals and reinstated the trial court’s summary judgment for LabCorp.

Notably, the court reserved for another day whether materiality is an objective or subjective inquiry. The seven-justice majority nevertheless observed that, in its view, the definition of “material” uses language that “typically implicates an objective inquiry” because it focuses on the information’s “inherent capacity.”

Reed Smith will continue to follow developments related to False Claims litigation both at the state and federal level. If you have any questions about this decision or fraud litigation in general. Please do not hesitate to reach out to the health care lawyers at Reed Smith.