What is Materiality Under the False Claims Act?

The False Claims Act (FCA) stands as one of the federal government’s most formidable tools for combating fraud in programs like Medicare, defense contracts, and infrastructure projects. Enacted in 1863 to address profiteers exploiting the Union Army, the law has since adapted to modern contexts, targeting those who knowingly submit false claims for payment or induce others to do so. Violations can lead to severe consequences: triple damages, hefty fines per claim, and litigation often sparked by whistleblowers through qui tam suits. Yet not every misrepresentation triggers liability. A pivotal element—materiality—determines whether a falsehood rises to the level of an FCA violation.

So, what does materiality mean in this context? At its core, it asks whether a misrepresentation influenced—or had the potential to influence—the government’s decision to pay. This concept isn’t mere legal minutiae; it’s the threshold that separates minor errors from actionable fraud. For businesses, healthcare providers, or contractors navigating federal agreements, understanding materiality is essential.

The False Claims Act: A Brief Overview

To grasp materiality, it helps to understand the FCA itself. Codified in 31 U.S.C. §§ 3729-3733, the statute imposes liability on those who knowingly present false or fraudulent claims to the government, from inflated invoices to fabricated compliance certifications. Penalties are steep, and whistleblowers, termed “relators,” can file suits on the government’s behalf, sharing in any recovery. However, liability hinges on more than just a false statement. The FCA requires that the falsehood be material to the payment decision—a standard that has evolved through judicial interpretation.

Defining Materiality: The Legal Standard

The FCA provides a broad definition of “materiality,” and the courts have since refined its application. A turning point came in 2016 with the Supreme Court’s decision in Universal Health Services v. United States ex rel. Escobar. The case involved a mental health facility billing Medicaid for services by unqualified staff, including a counselor whose lack of credentials contributed to a patient’s death. The Court ruled that materiality depends on whether the misrepresentation “has a natural tendency to influence, or is capable of influencing,” the government’s payment decision.

The Escobar decision established a flexible, fact-based test:

1. Impact on Payment: Would the government have declined payment if aware of the truth?
2. Government Response: Does it consistently pay despite knowing of similar violations?
3. Significance of the Violation: Was the misrepresented requirement central to the payment obligation?

This “holistic” approach rejects rigid formulas, focusing instead on practical effect. It moved away from earlier views tying materiality solely to explicit payment conditions, broadening the inquiry to reflect real-world dynamics.

Why Materiality Matters

Materiality serves as a gatekeeper, distinguishing inconsequential errors from significant misrepresentations. Consider a healthcare provider submitting a claim with a minor coding mistake—unlikely to alter Medicare’s payment decision. Contrast that with a provider billing for services never rendered. The latter has a direct bearing on payment, crossing the materiality threshold. This distinction ensures the FCA targets deliberate or impactful fraud, not every administrative misstep.

The principle also protects defendants from overreach. Without materiality, any technical violation could trigger liability, flooding courts with trivial disputes. Instead, it demands evidence that the falsehood carried weight in the government’s financial choices.

The Escobar Framework in Action

The Escobar ruling reshaped FCA litigation by emphasizing context over checklists. In the case itself, the clinic’s billing for unqualified staff violated Medicaid regulations. The whistleblowers argued this undermined payment eligibility; the defendant claimed it was peripheral. The Supreme Court remanded the case, instructing lower courts to assess whether the credentialing lapse truly influenced payment—a question of fact, not assumption.

Subsequent cases illustrate this nuance. In United States ex rel. Campie v. Gilead Sciences (2018), a pharmaceutical company, sold hepatitis C drugs produced with unapproved methods. The government continued purchasing after learning of the issue, suggesting the violation lacked materiality; the case was dismissed. Conversely, in United States v. Brookdale Senior Living (2021), a nursing home chain billed Medicare for unperformed care. Since payment depended on actual services, the misrepresentation held material weight, sustaining the claim.

The Role of Government Knowledge

A key factor in materiality is the government’s reaction to a falsehood. If it knows of a violation yet continues payment, this can undermine a claim’s strength. In United States ex rel. Harman v. Trinity Industries (2017), a guardrail manufacturer misrepresented crash-test results for highway projects. Federal agencies kept funding the contracts post-disclosure, signaling the flaw didn’t sway their decision—materiality didn’t hold. However, if the government halts payment or seeks recovery upon discovery, it bolsters the case for materiality.

This “knowledge test” isn’t absolute. Payment might persist due to oversight or bureaucratic lag, not indifference. Courts often look beyond surface actions, asking whether the requirement was a formality or a foundational obligation.

Practical Examples Across Industries

Materiality’s reach varies by sector. In healthcare, misrepresenting patient care, such as falsifying diagnoses to justify procedures, typically meets the threshold, unlike clerical errors in documentation. For defense contractors, delivering substandard materials (e.g., weak steel for a bridge) may be material if it affects safety or performance, less so if it’s a minor deviation. Small businesses aren’t exempt: a vendor overbilling a federal agency for undelivered goods faces scrutiny if the excess materially alters the payout.

Consider a hypothetical: a construction firm contracts to build a VA clinic, certifying adherence to seismic codes. If it cuts corners but the building still stands, is the misrepresentation material? Courts would examine whether compliance was a payment condition and if the government would have withheld funds, knowing the truth.

Navigating Materiality: Insights for Compliance

For those engaging with federal programs, materiality informs both risk and defense:

• Maintain Records: Evidence of good-faith compliance can show errors were immaterial.
• Assess Requirements: Violations of core obligations (e.g., service delivery) carry greater risk than peripheral lapses.
• Monitor Government Action: Consistent payment despite known issues may weaken materiality claims.

Whistleblowers must prove the falsehood’s impact; defendants can counter by demonstrating its insignificance. Either way, materiality drives the analysis.

Broader Implications

Materiality’s evolution reflects a balance between enforcement and fairness. Pre-Escobar, some courts fixated on contractual fine print, sidelining the practical effect. Now, the focus is outcome-driven: did the lie matter? This shift benefits defendants by filtering out petty claims, but it also empowers the government and relators to pursue subtle, impactful frauds, like billing schemes masked as compliance.

The stakes are high. FCA cases can yield millions in penalties, disrupt operations, and tarnish reputations. Misjudging materiality risks exposure—or missed opportunities to challenge weak claims.

A Critical Lens for False Claims Act Litigation

Materiality under the False Claims Act is more than a legal term—it’s the lens through which courts assess fraud’s true weight. The Escobar standard demands a thorough look at influence, government behavior, and obligation, ensuring the FCA strikes at significant misconduct, not every slip. For anyone tied to federal funds, this principle is a cornerstone of compliance and defense.

Facing an FCA concern? Consulting an attorney experienced in this field can clarify whether materiality strengthens or weakens your position, because in these disputes, precision can make all the difference. At Powell & Majestro, we are known for taking on difficult cases in nuanced areas of the law – such as potential violations of the False Claims Act. If you or someone close to you has been impacted, contact us for a free consultation and case assessment.