Senator Grassley advocates for closing the False Claims Act's materiality loophole

by Kait Pararas, Program Manager

Published on March 26, 2021

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Grassley advocates for closing FCA materiality loophole

As Whistleblower Network News reported this week, Senator Chuck Grassley (R-IA) delivered remarks on the floor of the Senate on March 22nd highlighting how to close a major loophole in the False Claims Act that has allegedly allowed corporations to get away with contracting fraud.

The False Claims Act (FCA) is America’s most successful whistleblower law. Since it was amended in 1986, whistleblowers under the False Claims Act have helped the government recover $46.5 billion from wrongdoers and been awarded over $7.8 billion for their assistance. However, in recent years it has faced several key setbacks.

The focus of Senator Grassley’s remarks this week was the “materiality” standard, which has been plagued with issues since 2016 when the Supreme Court took up the issue in Universal Health Services, Inc. v. U.S. ex rel. Escobar.

This standard refers to the fact that not every act of negligence or failure to comply with a U.S. government contract will necessarily result in liability under the FCA; rather, any violation prosecuted under the FCA must be “material”. In other words, the violation must have “a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property” by the U.S.

However, in the Escobar case, the Supreme Court provided a list of factors that courts could use when determining whether fraud under the FCA was material. One of these factors was government knowledge of the fraud. Regarding this factor, the Supreme Court wrote: “[I]f the Government 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.”

Effectively, this allows government contractors to escape liability for fraud by claiming that the government had acquiesced to the fraud and it is therefore not material.

Even more concerning, NWC board chair Stephen Kohn states in a National Law Review article that lower federal courts have greatly expanded upon the government knowledge factor that the Supreme Court described in Escobar.

He writes, “Specifically, even though the Supreme Court only discussed “actual knowledge” of the fraud, many courts have used “government knowledge” of mere allegations of fraudulent conduct as grounds to dismiss FCA cases… Specifically, a recent Tenth Circuit FCA opinion relied on the fact that the government was aware only of “detailed allegations” of fraud while admitting the government “may not have obtained ‘actual knowledge’ of the alleged infractions,” as grounds to dismiss a FCA case.” (The Tenth Circuit case was recently overturned for other reasons.)

Given these concerns, it is clear that the FCA materiality standard must be clarified by Congress in order to prevent future lawsuits from being dismissed along these lines. It is extremely encouraging to see that progress may be made in the 117th Congress on this pressing issue, as Senator Grassley’s remarks were delivered in advance of the introduction of a bipartisan bill that he says is in “the final stages of negotiation.”

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