A Decade Later, Escobar Is Still Shaping FCA Cases

A decade ago, the U.S. Supreme Court decided Universal Health Services Inc. v. U.S. ex rel. Escobar. It was the most consequential False Claims Act decision in years and changed the way lower courts evaluated FCA claims.

A decade later, what is the lasting effect of Escobar?

Leading Up to Escobar

The FCA is an old statute, first enacted in 1863. Over time, FCA jurisprudence developed two theories of liability: factual falsity and legal falsity.

Factual falsity was straightforward: The government paid for goods or services that were incorrectly described, faulty or not provided at all.

Legal falsity was less intuitive. Under that theory, the proper good or service may have been provided, but the claim is rendered false because of a false representation of compliance with a statute, regulation or contractual term that was a condition of payment.

Legal falsity was further subdivided into two types: (1) explicit false certification, in which the claimant explicitly certifies compliance with the conditions of payment; and (2) implied false certification, in which the claimant, by submitting the claim and making representations about the goods or services, implicitly certifies compliance with the conditions of payment.

Escobar involved the implied false certification theory. Before Escobar, the circuits split over whether that theory was a valid basis for FCA liability and, if so, the circumstances in which it applied.

The U.S. Court of Appeals for the Seventh Circuit rejected the implied false certification theory altogether. Other circuits upheld the theory, but only where the underlying requirement was expressly labeled a condition of payment. Still other circuits held that conditions of payment did not need to be expressly designated for the theory to apply.

The Escobar Case and Holding

Escobar originated in Massachusetts, where a teenage beneficiary of Massachusetts' Medicaid program received mental health services through a facility owned by Universal Health Services.

While under the care of that facility's personnel, the teen had an adverse reaction to a medication and died. Her parents later discovered that the treating personnel were not properly licensed under Massachusetts state Medicaid laws, and staff members misrepresented their qualifications and licensing status to the federal government.

In 2011, the parents brought a qui tam suit against Universal based on an implied false certification theory. They alleged that, when Universal submitted reimbursement claims that made representations about the specific services provided, it failed to disclose regulatory violations about staff qualifications and licensing.

According to the complaint, because Massachusetts' Medicaid program would not have paid those claims had it known of the deficiencies, Universal defrauded the program. The district court granted Universal's motion to dismiss, finding that the regulations in question were not conditions of payment.

In 2016, the U.S. Court of Appeals for the First Circuit reversed. It found the regulations at issue were "clearly" conditions of payment and were material to the payment decision. The Supreme Court granted certiorari.

On June 16, 2016, the Supreme Court issued a unanimous decision authored by Justice Clarence Thomas. In short, the court recognized for the first time that an implied false certification theory can serve as the basis for FCA liability.

It further held that such liability could exist "at least where" two conditions are met: (1) A defendant submits a claim to the government while making specific representations about the goods and services provided; and (2) the defendant's failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those representations misleading half-truths.

The court emphasized that such liability does not turn on whether the conditions are expressly designated conditions of payment, but on whether a defendant knows that the requirements are material to the government's decision to pay a claim.

In evaluating the materiality standard, the court rejected the government's and the First Circuit's expansive view. The court instead emphasized that the "materiality standard is demanding," and it cannot be met based on minor noncompliance or just because the government would have the option of declining to pay.

While the court did not state a definitive affirmative test for materiality, it highlighted that the government's decision to pay despite knowledge of the noncompliance was strong evidence that the requirements were not material.

Escobar's Wake

In the years that followed Escobar, lower courts wrestled with how to interpret and apply the opinion. A decade later, some of those issues appear largely settled, while others persist. Four issues in particular stand out.

Issue 1: Whether Falsity Conditions Are Illustrative or Mandatory

In the immediate years after Escobar, courts took different approaches regarding the decision's two-part test, including disagreeing on the very necessity of that test. The dispute over whether the test is required arose from the court's ambiguous phrasing that the theory applies "at least where" the two conditions are met.

Most courts, including the Ninth, Third, Seventh and Fifth Circuits, held or suggested that the test is mandatory - i.e., that it is the only path toward a viable implied false certification theory.

But several district courts initially held the test was just illustrative. The U.S. Department of Justice has argued this position as well.

In 2026, this issue appears settled. There may be an academic argument whether the implied false certification theory could apply without satisfying the two-part test. For example, the DOJ and early court decisions seized upon the Escobar decision's statement that it "need not resolve whether all claims for payment implicitly represent that the billing party is legally entitled to payment" to suggest the issue remained open.

But for all practical purposes, nearly every litigant and every circuit court now treat the test as mandatory. That seems unlikely to change, because savvy relators - or the government - are not going to bring cases in which they do not have a colorable argument under the two-part test.

Issue 2: Defining "Specific"

Courts have also diverged on what constitutes a "specific representation" for purposes of satisfying the Escobar falsity test. For example, the U.S. Court of Appeals for the Ninth Circuit has taken a restrictive view that a request for payment alone, without any accompanying representations, is insufficient.

By contrast, the U.S. Court of Appeals for the Fourth Circuit has taken a broader view, suggesting that a request for payment can be enough to satisfy the specificity needed depending on the circumstances. Other courts have taken differing views, and applied different rubrics to address the issue.

Again, practicality renders this issue mostly settled. The overwhelming majority of FCA cases involved healthcare billing, which almost always is going to be sufficiently specific - via current procedural terminology codes and other billing structures - to pass muster.

Moreover, questions about specificity are likely better raised in the context of materiality, which remains more hotly litigated.

Issue 3: Materiality and Continued Government Payment

Since Escobar, much of the battle over whether there is a viable FCA claim relates to the issue of materiality. In Escobar, the Supreme Court provided a nonexhaustive list of facts that can serve as proof of materiality.

The list includes evidence that the defendant knows that the government consistently refuses to pay claims in the mine run of cases, or if the government pays a claim despite actual knowledge of such noncompliance.

While Escobar noted that no one factor is dispositive in assessing materiality, some courts treat such evidence almost as a presumption against materiality that a relator must overcome.

For example, in 2017, the U.S. Court of Appeals for the Fifth Circuit acknowledged in U.S. ex rel. Harman v. Trinity Industries Inc. that continued payment by the government with knowledge of alleged fraud "substantially increases the burden on the relator in establishing materiality."

The U.S. Court of Appeals for the Tenth Circuit placed a similar emphasis on government knowledge in 2020, in U.S. ex rel. Janssen v. Lawrence Memorial Hospital.

Other circuits have arguably placed less reliance exclusively on government knowledge, or the absence of allegations about how the government has acted with such knowledge in the past. Taking a more contextual approach, the Ninth Circuit in U.S. ex rel. Campie v. Gilead Sciences Inc. opined in 2017 that there are many reasons why the government may continue to approve claims, not all of which support immateriality.

In 2018, in U.S. ex rel. Prather v. Brookdale Senior Living Communities Inc., the U.S. Court of Appeals for the Sixth Circuit assessed government knowledge as one factor of many, finding it neutral on materiality. In addition, the Sixth Circuit refused to infer, as the district court had, that the absence of allegations about past government action weighed against materiality.

By contrast, in 2017, the U.S. Court of Appeals for the Third Circuit found in U.S. ex rel. Petratos v. Genentech Inc. that the lack of such allegations by the relator would be "very strong evidence" that the requirement is not material.

Materiality generally, and the effect of government knowledge specifically, remain the most lasting issues from Escobar. The fact-specific nature of the inquiries resists the issues being fully resolved.

Issue 4: Scienter, From Escobar to SuperValu

Escobar focused primarily on falsity and materiality. But scienter was mentioned in dicta, where the Supreme Court noted that, like materiality, the FCA's scienter requirement was "rigorous."

Further, the court held that implied false certification cases turned on whether "the defendant knowingly violated a requirement that the defendant knows is material to the Government's payment decision." Nonetheless, scienter issues arising out of Escobar have been relatively few.

Instead, post-Escobar, much of the scienter debate turned on an issue not addressed in the Escobar opinion: whether an objectively reasonable interpretation of an ambiguous statute defeats scienter despite the defendant's subjective beliefs.

In 2023, the Supreme Court addressed that issue in U.S. ex rel. Schutte v. SuperValu Inc. In short, the court held that "the FCA's scienter element refers to [defendants'] knowledge and subjective belief - not to what an objectively reasonable person may have known or believed."

SuperValu resolved the objective reasonableness question over scienter. But Escobar's more subtle scienter issue - whether a defendant must not just know the claim is false but also know that the noncompliance is material to the government's payment decision - remains arguably open.

The language in Escobar seems clear that knowledge of materiality, not just falsity, is necessary to establish scienter. Pre-Escobar, this was the rule in the U.S. Court of Appeals for the District of Columbia Circuit.

But others had tacitly or explicitly held that only knowledge of falsity was needed to satisfy the FCA's scienter requirement. Post-Escobar, courts appear to have cited the Escobar court's scienter standard, but it is less clear that the actual analysis distinguishes between knowledge of falsity and knowledge of materiality.

While Escobar-related arguments over scienter persist, they have taken a back seat to materiality analysis. The knowledge-of-materiality issue embedded in Escobar's scienter test is an interesting, if less commonly probed, issue.

But it also appears unlikely to have independent resonance outside of courts' and litigants' analysis of materiality. Put another way, it is unlikely that a court could find that a defendant knowingly violated a requirement, and that the requirement was in fact material, but that the defendant did not know it was material.

The Relevance of Escobar 10 Years Later

In short, Escobar still matters. It remains a critical FCA decision that tangibly changed the way parties and courts treat FCA cases. The most obvious effect remains on implied false certification cases, which are now fully enshrined in FCA litigation.

But the broader effect may be in renewed focus on the rigorous materiality standard. It is unlikely that there has been a motion to dismiss in an FCA case filed after Escobar that hasn't raised materiality, especially in the context of arguments around Rule 9(b) of the Federal Rules of Civil Procedure arguments over particularized allegations or lack thereof.

While those arguments are commonplace now, they have had renewed relevance with other FCA policy developments.

For example, materiality factored into the DOJ's 2018 Granston memo, which outlined the factors the government would consider in moving to dismiss FCA actions under Title 31 of the U.S. Code, Section 3730(c)(2)(A).

More recently, the DOJ's policy on data miner relators - the Fraud Oversight through Careful Use of Statistics initiative - cited "clear and material" violations of claim requirements as a key for successful relators.

And last month, the DOJ announced a new fast-track initiative for benefits fraud FCA cases. While that policy did not mention materiality by name, its focus on increasing the speed of certain FCA investigations and cases, and especially relying on relators to litigate them, will almost surely increase materiality arguments in those cases.

While many of the initial issues raised by the Escobar opinion have been mostly settled, the case remains vital in nearly every FCA case filed. Until the Supreme Court elects to take a case to decide the constitutionality of the FCA's qui tam provision, Escobar will remain the most significant FCA decision in recent memory.

Republished with permission. This article was published in Law360. (login required)