Fifth Circuit Applies the Escobar Materiality Standard for the First Time in U.S. ex rel. Abbott v. BP Exploration and Production, Inc., 851 F. 3d 384 (5th Cir. 2017)
On March 14, the Fifth Circuit applied the Supreme Court’s landmark 2016 False Claims Act holding in Universal Health Services, Inc. v. U.S. ex rel. Escobar for the first time. The Fifth Circuit’s decision in U.S. ex rel. Abbott v. BP Exploration and Production, Inc. provides insight into how federal circuits will interpret and apply the “rigorous” and “demanding” materiality standard recently established in Escobar.
The False Claims Act (FCA) imposes liability on any person who knowingly presents, or causes presentment, of a “false or fraudulent” claim for payment to the government. It is an increasingly popular and effective tool for both private plaintiffs alleging federal program fraud as well as for the government in its routine fraud enforcement activity. In Escobar, the Supreme Court affirmed the availability of the “implied certification theory” as a basis of liability under the FCA and outlined what it means for a claim to be “material” to the government’s payment decision. Regarding materiality, Escobar specifically held that if the government pays claims despite its actual knowledge that certain regulatory, statutory, or contractual requirements were violated, “that is very strong evidence that those requirements are not material” to the government’s payment decision and thus do not violate the FCA.
In Abbott, an FCA qui tam complaint was filed against BP alleging that it falsely certified compliance with regulatory engineering requirements applicable to the construction and maintenance of its Atlantis platform, a semi-submersible oil production facility in the Gulf of Mexico. An investigation of the allegations by the Department of the Interior (DOI)—initiated by Congressional request— followed and concluded that the allegations were meritless, that no false submissions had been made, and that there were no grounds for suspending the facility’s operations. Despite the DOI findings, the FCA relators persisted with their lawsuit until the district court ultimately granted summary judgment in favor of BP.
On appeal, the Fifth Circuit affirmed the district court’s decision focusing on the materiality standard articulated in Escobar. It noted that under Escobar, not every violation of a regulatory, statutory, or contractual requirement will be material. A violation is not considered material if the government pays the claim despite knowledge of the alleged violation. The Fifth Circuit reasoned that when the DOI allowed the Atlantis to continue drilling after a substantial investigation of the alleged regulatory violations, its actions represented “strong evidence” that the alleged violations were immaterial and that these “strong facts” had not been rebutted.
Escobar and its progeny will continue to provide meaningful FCA defenses for all entities doing business with the federal government. All companies which provide goods or services of any sort to the government should remain keenly aware of the Fifth Circuit’s application of Escobar, include it in their enterprise risk management analyses and assumptions, and allow it to guide and inform both business decision-making and operational compliance activities when navigating the potentially perilous waters of government contracting.