They say bad facts makes for bad law. And in the world of the False Claims Act (“FCA”) 31 U.S.C. § 3729, et seq., where much law is made at the dismissal stage, bad allegations can be just as dangerous. When the Triple Canopy case (U.S. ex rel. Badr v. Triple Canopy, Inc.) was on appeal before the Fourth Circuit for the first time in 2015, it seemed like it was the epitome of such a case. In 2015, courts were still wrestling with the viability of the implied certification theory under the FCA. So a case involving Ugandan mercenaries with falsified marksmanship scorecards hired to protect U.S. and Iraqi facilities in Iraq was exactly the type of case that seemed likely to cement the Fourth Circuit as a favorable jurisdiction for FCA cases brought under the implied certification theory. Recently, the Fourth Circuit ruled (again) on the case—this time taking into consideration the Supreme Court’s decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016). Although the FCA defense bar hoped this might result in a different decision, the Fourth Circuit appears to be standing by its 2015 decision in which it held that the government had adequately stated a claim for relief under the FCA’s implied certification theory.

So how did we get here? To recap, in 2009, Triple Canopy was hired by the Government to provide security services for an airbase in Iraq. The contract required Triple Canopy’s guards to qualify under specified firearm standards for marksmanship. When the hired guards could not demonstrate such firearm proficiency, a Triple Canopy supervisor allegedly directed the creation of false qualifying marksmanship scorecards for these guards, as well as additional guards hired, that were signed, sometimes allegedly post-dated, and placed in the guards’ personnel files.

A Triple Canopy medic who had been ordered to prepare some of the false scorecards, Omar Badr, filed a qui tam action under the FCA and the Government intervened in the case. The Government and Badr alleged violations of the FCA under the implied certification theory. Under this theory, the Government and Badr argued that Triple Canopy violated the FCA by merely submitting a request for payment. It was irrelevant, in the Government’s and Badr’s views, that Triple Canopy never explicitly certified compliance with the contract’s marksmanship requirement on its invoices, nor did Triple Canopy ever make any certification of any kind on the Government’s Material Inspection and Receiving Report (form DD-250).

In January 2015, the Fourth Circuit, relying on the troubling allegations in this case, unsurprisingly reversed the district court’s dismissal of the Government’s claim, finding a false claim is adequately pleaded if the party knowingly makes a claim for Government payment and withholds information about its noncompliance with material contractual requirements. The court reasoned, “If Triple Canopy believed that the marksmanship requirement was immaterial to the Government’s decision to pay, it was unlikely to orchestrate a scheme to falsify records on multiple occasions.” The Fourth Circuit also rejected the argument that, because the Government never reviewed the records, it could not have relied on the scorecards, finding that a false record could influence the Government’s payment decision “even if the Government ultimately does not review the record.”

About one year after the Fourth Circuit’s decision, and while a petition for certiorari in the Triple Canopy case was pending at the Supreme Court, the Supreme Court issued its landmark decision in Escobar. Escobar confirmed that the implied certification theory is a viable theory of liability under the FCA. Escobar went on to describe the FCA’s “rigorous” materiality standard and the types of facts that would be relevant to a district court’s determination of whether a particular certification was material to a Government payment decision. The specific and oft-cited rule from Escobar is that, to establish liability under the implied certification theory, a relator or the Government must show that a defendant’s claim for Government payment makes specific representations about the goods and services provided, and the defendant’s failure to disclose noncompliance with material contractual or other legal requirements makes those representations misleading. The Supreme Court stressed that the materiality requirement is “demanding,” and that noncompliance with contractual or other legal terms must have materially affected the Government’s payment decision. The Court noted that materiality is not necessarily satisfied even where a party violates an express condition of payment or the Government could have declined to pay the claim had it known of a party’s violation of a legal requirement. The Court also identified some facts that would be relevant to materiality, e.g., whether the Government “regularly pays a particular type of claim in full despite actual knowledge” of violations, indicating that the materiality standard is a fact-specific one. With the Escobar decision on the books, the Supreme Court sent the Triple Canopy case back to the Fourth Circuit for further consideration in light of its decision in Escobar. Triple Canopy, Inc. v. U.S. ex rel. Badr, 136 S. Ct. 2504 (granting petition for certiorari, vacating judgment, and remanding to the Court of Appeals for further consideration in light of Escobar).

In its recent decision, the Fourth Circuit found that Triple Canopy’s requests for payment constituted the types of “half-truths” identified in the Escobar decision. “[A]lthough Triple Canopy knew its ‘guards’ had failed to meet a responsibility in the contract, it nonetheless requested payment each month from the Government for those ‘guards.’” Slip Op. at 8. Just as the Supreme Court reasoned in Escobar, the Fourth Circuit found that “anyone reviewing Triple Canopy’s invoices ‘would probably—but wrongly—conclude that [Triple Canopy] had complied with core [contract] requirements.” Id. 

And in regard to materiality, the Fourth Circuit noted that “nothing in [Escobar] undermines our earlier conclusion that Triple Canopy’s falsity was material. In fact, far from undermining our conclusion, [Escobar] compels it.” Slip Op. at 9. The court cited to a hypothetical provided in the Escobar decision, which states as follows:

If the Government failed to specify that guns it orders must actually shoot, but the defendant knows that the Government routinely rescinds contracts if the guns do not shoot, the defendant has “actual knowledge.” Likewise, because a reasonable person would realize the imperative of a functioning firearm, a defendant’s failure to appreciate the materiality of that condition would amount to “deliberate ignorance” or “reckless disregard” of the “truth or falsity of the information” even if the Government did not spell this out.

Slip Op. at 9-10 (citing Escobar, 136 S. Ct. at 2001-02). “Guns that do not shoot,” the Fourth Circuit explained, “are as material to the Government’s decision to pay as guards that cannot shoot straight.” Slip Op. at 10.

The Fourth Circuit also noted that the Government’s decision to not renew its contract with Triple Canopy and its decision to “immediately intervene[]” in Badr’s qui tam suit constituted “evidence that Triple Canopy’s falsehood affected the Government’s decision to pay.” Slip Op. at 10.

The Fourth Circuit’s decision is not surprising, but it is important. First, to the extent it characterizes its 2015 decision as taking “a narrower view of materiality than the Court” did in Escobar, it suggests that Triple Canopy is not going to be a limiting principle case—i.e., this case does not tell us the outer bounds of the implied certification theory. This should be troubling for anyone who does business with the Government because it suggests that novel theories of liability—to quote Lloyd Christmas—have a chance.

Second, Triple Canopy can be placed in the category of cases in which a contractual violation goes to the “essence of the bargain.” A run of the mill breach of contract is not the type of breach that goes to the “essence of the bargain” and therefore does not give rise to FCA liability. Accordingly, Triple Canopy might be distinguishable from future cases because of its bad factual allegations. As we wrote when we first covered this case, perhaps future courts “that face this same question will take a close look at the facts of the alleged conduct of Triple Canopy and properly limit the application of this decision to similar factual circumstances.”