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Editor: Mike Bothwell
Profession: Qui Tam Attorney

Category: Legal Analysis

In affirming a decision from the United States District Court for the Southern District of California, the Ninth Circuit recently lined up with the Sixth to find that, by the plain language of the statute, presentment is not a requirement under § 3729(a)(7) but that materiality (using the "natural tendency test") is a requirement of the FCA. The Court also rejected an excessive fines challenge.

The district court had found that Appellants' 1997, 1998 and 1999 cost reports constituted false claims under the FCA and were actionable as both affirmative false claims and reverse false claims. The district court found that by including false costs in cost reports, the amount owed to Medicare had been decreased by $5,219,195. The district court awarded the government $15,657,585 in treble damages and $31,000 in civil penalties.

The Ninth Circuit rejected again the notion that in an FCA case the government is required to prove that a claim is false under any reasonable interpretation of applicable law (see, e.g., United States v. Adler, 623 F.2d 1287, 1289 (8th Cir. 1980) finding instead (in line with its own decision in United States ex rel. Oliver v. Parsons Co., 195 F.3d 457, 463 (9th Cir. 1999)) that reasonableness of interpretation may be relevant to the knowledge requirement under the FCA but not the falsity requirement.

The Court also found that all Appellants had the requisite scienter under the FCA. As to one Appellant, Sabaratnam, the Court noted that as president and a general partner of one of the offending entities, he depended upon the cost reports for reimbursement just as much as anyone. Thus, while Sabaratnam may have lacked actual knowledge, his failure to undertake any inquiry (let alone the "reasonable and prudent" inquiry required) amounted to "deliberate ignorance." Quoting the Congressional record, the court found that this amounted to the "ostrich situation" in which individuals are prohibited from "burying their heads in the sand."

Next, the Ninth Circuit adopted the reasoning of Am. Textile Mfrs. Inst., Inc. v. The Ltd., Inc., 190 F.3d 729, 735 (6th Cir. 1999) and United States v. Q Int'l Courier, Inc., 131 F.3d 770, 773 (8th Cir. 1997) to find that Appellants had a legal obligation to pay the government money at the time they submitted the cost reports. In so doing, the Court rejected Appellants' argument that they had no definite and fixed duty to pay Medicare because the cost reports in question had never been audited.

The Ninth Circuit then continued to follow the Sixth Circuit to hold that the FCA includes a materiality requirement. This holding is consistent with decisions in the First, Fourth, Fifth, Sixth and Eighth Circuits. Medshares Mgmt. Group, 400 F.3d at 442; United States v. Southland Mgmt. Corp., 326 F.3d 669, 679 (5th Cir. 2003); U.S. ex rel. Costner v. United States, 317 F.3d 883, 886-87 (8th Cir. 2003); United States ex rel. Berge v. Bd. of Trs. of the Univ. of Ala., 104 F.3d 1453, 1459 (4th Cir. 1997); United States. v. Data Translation, Inc., 984 F.2d 1256, 1267 (1st Cir. 1992). But see U.S. ex rel. Cantekin v. Univ. of Pittsburgh, 192 F.3d 402, 415 (3d Cir. 1999) (casting doubt on whether materiality is an element under the FCA, but declining to resolve the issue).

The Ninth then adopted the Fourth and Sixth Circuits' formulation of the materiality test, the "natural tendency test," which focuses on the potential effect of the false statement when it is made rather than on the false statement's actual effect after it is discovered (which is the more stringent test used in the 8th Cir.).

Finally, the Court upheld treble damages and penalties assessed despite an Excessive Fines challenge, finding that that penalties imposed were not grossly disproportionate and that nothing in the statute suggests a court may not award both treble damages and penalties.