United States v. Walgreen Co.

USCA4 Appeal: 22-1491 Doc: 56 Filed: 08/15/2023 Pg: 1 of 19

PUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 22-1491

UNITED STATES OF AMERICA,

Plaintiff − Appellant,

and

COMMONWEALTH OF VIRGINIA,

Plaintiff,

v.

WALGREEN CO.,

Defendant – Appellee.

------------------------------

CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA; THE
AMERICAN MEDICAL ASSOCIATION; THE MEDICAL SOCIETY OF
VIRGINIA; NATIONAL ASSOCIATION OF CHAIN DRUG STORES,
INCORPORATED; NATIONAL HEALTH LAW PROGRAM,

Amici Supporting Appellee.

No. 22-4292

COMMONWEALTH OF VIRGINIA,

Plaintiff − Appellant,
USCA4 Appeal: 22-1491 Doc: 56 Filed: 08/15/2023 Pg: 2 of 19

and

UNITED STATES OF AMERICA,

Plaintiff,

v.

WALGREEN CO.,

Defendant – Appellee.

------------------------------

CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA; THE
AMERICAN MEDICAL ASSOCIATION; THE MEDICAL SOCIETY OF
VIRGINIA; NATIONAL ASSOCIATION OF CHAIN DRUG STORES,
INCORPORATED; NATIONAL HEALTH LAW PROGRAM,

Amici Supporting Appellee.

Appeal from the United States District Court for the Western District of Virginia, at
Abingdon. James P. Jones, Senior District Judge. (1:21−cv−00032−JPJ−PMS)

Argued: May 4, 2023 Decided: August 15, 2023

Before DIAZ, Chief Judge, and WYNN and QUATTLEBAUM, Circuit Judges.

Vacated and remanded by published opinion. Chief Judge Diaz wrote the opinion, in which
Judge Wynn and Judge Quattlebaum joined.

ARGUED: Martin V. Totaro, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C.; Martin Jordan Minot, OFFICE OF THE ATTORNEY GENERAL OF
VIRGINIA, Richmond, Virginia, for Appellants. Jonathan M. Phillips, GIBSON, DUNN
& CRUTCHER LLP, Washington, D.C., for Appellee. ON BRIEF: Brian M. Boynton,
Principal Deputy Assistant Attorney General, Michael S. Raab, Charles W. Scarborough,
Civil Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.;
Christopher R. Kavanaugh, United States Attorney, OFFICE OF THE UNITED STATES

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ATTORNEY, Roanoke, Virginia, for Appellant United States of America. Jason S.
Miyares, Attorney General, Charles H. Slemp III, Chief Deputy Attorney General, W. Clay
Garrett, Assistant Attorney General, Andrew N. Ferguson, Solicitor General, Erika L.
Maley, Principal Deputy Solicitor General, Lucas W.E. Croslow, Deputy Solicitor General,
Rohiniyurie Tashima, John Marshall Fellow, OFFICE OF THE ATTORNEY GENERAL
OF VIRGINIA, Richmond, Virginia, for Appellant Commonwealth of Virginia. Reed
Brodsky, New York, New York, Matt Gregory, Francesca Broggini, GIBSON, DUNN &
CRUTCHER LLP, Washington, D.C., for Appellee. Tara S. Morrissey, Andrew R. Vance,
UNITED STATES CHAMBER LITIGATION CENTER, Washington, D.C., for Amicus
Chamber of Commerce of the United States of America. Elisabeth S. Theodore, Kolya D.
Glick, ARNOLD PORTER KAYE SCHOLER LLP, Washington, D.C., for Amici
Chamber of Commerce of the United States of America, The American Medical
Association, and The Medical Society of Virginia. Scott McIntosh, Kirti V. Reddy,
QUARLES & BRADY LLP, Washington, D.C., for Amicus National Association of Chain
Drug Stores. Martha Jane Perkins, Arielle Linsey, Catherine McKee, NATIONAL
HEALTH LAW PROGRAM, Chapel Hill, North Carolina, for Amicus National Health
Law Program.

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DIAZ, Chief Judge:

The United States and the Commonwealth of Virginia (together, the “governments”)

appeal the district court’s dismissal of their complaint under the False Claims Act, 31

U.S.C. § 3729 et seq., and Virginia state law. The governments allege that Walgreen Co.

(“Walgreens”) misrepresented that certain patients met Virginia’s Medicaid-eligibility

requirements for expensive Hepatitis C drugs.

The district court dismissed the complaint, holding that Virginia’s eligibility

requirements violated the Medicaid Act, and therefore Walgreens’s misrepresentations

were immaterial as a matter of law. We hold that the governments plausibly allege facts

that establish materiality. So we vacate and remand.

I.

A.

The governments’ complaint alleges the following.

1.

Virginia participates in Medicaid and administers its state plan through its

Department of Medical Assistance Services. The Department, in turn, contracts with

Magellan Medicaid Administration and two managed-care organizations (Virginia Premier

and Aetna) to administer patients’ Medicaid claims and cover prescription drugs.

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The Department covers Sovaldi, Harvoni, and Daklinza, which are direct-acting

antiviral drugs that treat Hepatitis C. 1 These drugs are “extremely expensive.” J.A. 17

¶ 40. To control costs, the Department requires prior authorization before patients may

obtain the drugs. See 42 U.S.C. § 1396r-8(d)(1)(A) (“A State may subject to prior

authorization any covered outpatient drug.”).

During the relevant time, the Department had built into its prior-authorization

process two eligibility requirements that are at issue here. First, a patient’s Hepatitis C had

to be sufficiently severe; this generally required a fibrosis score of at least 0.59, a metavir

stage of at least F3, or documented cirrhosis of the liver. 2 Second, a patient must have

abstained from alcohol and illicit substances for six months, as shown by an acceptable

drug- and alcohol-screening test.

The Department tasked Magellan, Virginia Premier, and Aetna with ensuring that

Medicaid patients seeking coverage for direct-acting antiviral drugs met Virginia’s

eligibility requirements. If they determined that the patient satisfied the criteria (including

the disease-severity and substance-abstinence requirements), the patient would receive

Medicaid coverage for the requested drugs and pharmacies like Walgreens would be

reimbursed by Medicaid for dispensing them. Conversely, a patient deemed ineligible

would be denied coverage and told why.

1
Hepatitis C is an infection caused by the hepatitis C virus that primarily affects the
liver.

The fibrosis and metavir scoring systems are used to assess fibrosis, or scarring of
2

the liver, in patients with Hepatitis C.

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2.

Enter Amber Reilly, a clinical pharmacy manager for a Walgreens store in

Kingsport, Tennessee. Reilly told her store manager she had become “an expert in

customizing [Medicaid-coverage] appeal letters” to “receiv[e] approvals [for direct-acting

antiviral drugs], which in turn . . . increased profits and strengthened relationships with

providers.” J.A. 20 ¶ 56.

But rather than “customizing” Medicaid paperwork, Reilly was falsifying patient

records and other documents to satisfy Virginia’s eligibility requirements.

The governments’ complaint illustrates the fraudulent scheme with twelve Virginia

Medicaid patients, Patients 1 through 12. For instance, Virginia Premier at first denied

Patient 3’s prior-authorization request for direct-acting antiviral drugs because it wasn’t

backed up by “negative urine drug screens.” J.A. 29 ¶ 107. In response, Reilly’s

Walgreens store submitted reports that falsely showed Patient 3 passed the drug test. After

that, the Department approved the request, costing Virginia Medicaid over $64,000.

Similarly, Patient 8 was denied prior authorization for the drugs, and on appeal to

the Department, acknowledged falling short of Virginia’s metavir-score threshold. The

Department upheld the denial. Then Reilly’s Walgreens store got involved, submitting a

false lab report that changed Patient 8’s fibrosis score from 0.19 to 0.59 and metavir level

from F0 to F3, after which the Department approved coverage and paid Walgreens over

$96,000.

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This fraudulent scheme took place from at least January 2015 through June 2016.

During that time, Reilly’s Walgreens store’s revenue increased more than 320% over the

year before.

Walgreens learned about the fraudulent scheme at least as early as 2016, when

Tennessee and Walgreens both launched investigations. Reilly has since pleaded guilty to

engaging in the same scheme to defraud Tennessee’s Medicaid program. But Walgreens

still hasn’t paid back any of the money it received for Virginia Medicaid Patients 1 through

12.

B.

The governments sued Walgreens, alleging (1) violations of the federal False

Claims Act and Virginia’s state-law version; and (2) state-law claims of fraud, unjust

enrichment, and payment by mistake.

Walgreens moved to dismiss and asked the district court to take judicial notice of

various documents. One was the Centers for Medicare and Medicaid Services’ Release

No. 172 from November 2015, entitled Assuring Medicaid Beneficiaries Access to

Hepatitis C (HCV) Drugs.

In that Release, the Centers expressed “concern[] that some states are restricting

access to [direct-acting antiviral] drugs contrary to the [Medicaid Act] by imposing

conditions for coverage that may unreasonably restrict access to these drugs,” including by

requiring a “metavir fibrosis score F3” or higher, or by “requiring a period of abstinence

from drug and alcohol abuse as a condition for payment” for the medications. J.A. 97–98.

The Centers noted that any restrictions on coverage must satisfy the Medicaid Act and

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“should not result in the denial of access to effective, clinically appropriate, and medically

necessary treatments” using these medications. J.A. 98.

The district court held a hearing. Walgreens argued that Reilly’s store’s

misrepresentations couldn’t be material because they went to eligibility requirements that

violated the Medicaid Act, so the drugs should’ve been covered no matter if patients had a

sufficient fibrosis score, abstained from drugs, and so on.

The district court agreed with Walgreens’s materiality argument. The court held

that Virginia’s eligibility requirements violated the Medicaid Act because they restricted

coverage of medically necessary drugs beyond the permissible restrictions laid out in 42

U.S.C. § 1396r-8(d)(1)(B).

As for materiality, the district court reasoned:

On a superficial level, the fraudulent statements and records did influence
the decision of [the Department] and its contractors to approve
reimbursement for the relevant drugs. But the falsified records should not
have so influenced the decision-making because the drugs should have been
covered for Patients 1 through 12 regardless of the information contained on
the falsified records. The relevant drugs should have been covered because
they were properly prescribed medically necessary treatments for which
there was not an equally effective covered alternative. The plaintiffs have
not alleged that the drugs were not medically necessary for Patients 1 through
12 or that there were equally effective alternative medications that would
have been covered.

United States v. Walgreen Co., No. 1:21CV00032, 2021 WL 5760307, at *11 (W.D. Va.

Dec. 3, 2021). So while the district court found the fraud to be “regrettable, to say the

least,” it determined that “Walgreens was entitled to be reimbursed by Virginia Medicaid

under the federal statute governing Medicaid funds.” Id. at *12. This foreclosed the

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governments from pleading the necessary element of materiality under the False Claims

Act and doomed their state-law claims as well, the court held.

The governments appealed. 3

II.

We review de novo the district court’s dismissal under Federal Rule of Civil

Procedure 12(b)(6). United States ex rel. Taylor v. Boyko, 39 F.4th 177, 189 (4th Cir.

2022). We view factual allegations in the light most favorable to the governments, without

crediting “legal conclusions couched as facts or unwarranted inferences, unreasonable

conclusions, or arguments.” Id. (cleaned up). To avoid dismissal, the complaint must state

a claim to relief that is “plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

(cleaned up). 4

III.

To plausibly allege a claim under the False Claims Act, a plaintiff must generally

plead four elements: “(1) there was a false statement or fraudulent course of conduct; (2)

3
The governments also appealed the district court’s denial of their request for
reconsideration under Federal Rule of Civil Procedure 59. But we need not reach that issue
because we vacate the dismissal.
4
While not at issue, the governments’ fraud claims must also satisfy Rule 9(b)’s
heightened pleading standards. Taylor, 39 F.4th at 189. A defendant’s mindset can be
alleged generally, but plaintiffs must particularly allege the “who, what, when, where, and
how of the alleged fraud.” Id. (cleaned up).

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made or carried out with the requisite scienter; (3) that was material; and (4) that caused

the government to pay out money or to forfeit moneys due.” Taylor, 39 F.4th at 188

(cleaned up).

We hold that the governments’ complaint plausibly alleges facts that establish False

Claims Act materiality as explained in Universal Health Services, Inc. v. United States ex

rel. Escobar, 579 U.S. 176 (2016). So we vacate the dismissal and remand for further

proceedings.

The district court and the parties took on the daunting question whether Virginia’s

eligibility requirements violated the Medicaid Act. But we don’t think it necessary to

answer that question (at least at this point in the proceedings) because it doesn’t control

materiality as a matter of law.

The governments allege that the misrepresentations did, in fact, influence the

decisionmakers. As we explain below, that’s what matters under Escobar. And in any

event, we’re persuaded by the governments’ argument that Walgreens can’t collaterally

attack Virginia’s eligibility requirements as a defense to fraud.

A.

We begin by summarizing the authorities that bear on this case.

According to the False Claims Act’s text, “the term ‘material’ means having a

natural tendency to influence, or be capable of influencing, the payment or receipt of money

or property.” 31 U.S.C. § 3729(b)(4).

Escobar is the key case on materiality, which the Court called a “rigorous”

requirement. 579 U.S. at 181. Materiality “looks to the effect on the likely or actual

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behavior of the recipient of the alleged misrepresentation.” Id. at 193 (cleaned up). So

whether a requirement is an express condition of payment might be “relevant, but [it’s] not

automatically dispositive” of materiality. Id. at 194. The Court went on:

Likewise, proof of materiality can include, but is not necessarily limited to,
evidence that the defendant knows that the Government consistently refuses
to pay claims in the mine run of cases based on noncompliance with the
particular . . . requirement. Conversely, if 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.

Id. at 194–95.

Following Escobar’s lead, we’ve analyzed materiality at the pleading stage. In

Taylor, we upheld the dismissal of a False Claims Act claim when the relator failed to

allege how or whether a misrepresentation about corporate certificates of authorization

impacted government decision-making on claims for payment. 39 F.4th at 191, 202.

The relator alleged only that the government generally rejected claims by individual

healthcare providers who had lost their personal medical licenses. Id. at 191. But medical

licenses are distinct from corporate certificates of authorization, and the relator didn’t

plausibly allege how the government would treat a claim by a company that truthfully

represented it lacked such a certificate. Id. at 193–94. Even if a certificate were an express

condition of payment, that’s not enough under Escobar. Id. at 190. Rather, the relator had

to allege how the misrepresentations at issue would influence government decision-making

in practice. Id. at 194–95.

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B.

We hold that the governments’ complaint sufficiently alleges materiality under

Escobar and Taylor. As alleged, the Department and its proxy decisionmakers rejected (or

required more information about) claims when patients truthfully stated they didn’t satisfy

Virginia’s disease-severity or substance-abstinence requirements. The decisionmakers

changed course and approved these same patients’ claims only after Walgreens doctored

documents and lied to indicate compliance with those requirements.

Taking these allegations as true, they show that Walgreens’s misrepresentations had

“a natural tendency to influence, or [were] capable of influencing,” the government

decisionmakers. 31 U.S.C. § 3729(b)(4). In fact, they did influence the decisionmakers.

According to Escobar and Taylor, that’s what materiality under the False Claims Act is all

about.

The district court erred when it held that it wasn’t enough for the governments to

plead that “the fraudulent statements and records did influence the decision of [the

Department] and its contractors to approve reimbursement for the relevant drugs.”

Walgreen, 2021 WL 5760307, at *11. The court suggested that the governments also

needed to allege that the falsified representations “should . . . have so influenced the

decision-making.” Id. But that’s more than the statutory text, Escobar, and Taylor require.

The legality of Virginia’s eligibility requirements might be relevant to whether the

misrepresentations had a natural tendency to influence, or could influence, the

decisionmakers. But it isn’t dispositive, the same way that labeling something an express

condition of payment “is relevant to but not dispositive of” materiality. Escobar, 579 U.S.

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at 190. 5 And the complaint plausibly (in a non-conclusory way) alleges that the

misrepresentations did, in fact, influence the decisionmakers.

As Escobar explains, the Act’s “focus remains on those who present or directly

induce the submission of false or fraudulent claims” to the government. Id. at 182. There’s

no dispute that Reilly’s Walgreens store fraudulently submitted false claims. Allowing

Walgreens to avoid liability by challenging Virginia’s eligibility criteria only after getting

caught would hinder the Act’s purpose of holding fraudsters accountable.

Indeed, the very act of falsifying records to feign compliance with requirements

suggests that Walgreens itself thought that those requirements were material. See United

States ex rel. Badr v. Triple Canopy, Inc., 775 F.3d 628, 638 (4th Cir. 2015) (“Triple

Canopy’s actions in covering up the guards’ failure to satisfy the marksmanship

requirement suggests its materiality. 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.”).

5
The guidance from the Centers for Medicare and Medicaid Services that the district
court found to be a “compelling interpretation of the applicable statute,” Walgreen, 2021
WL 5760307, at *10, was published eleven months after the fraudulent scheme had begun.
So we question the district court’s conclusion that the decisionmakers should’ve paid out
the claims no matter if patients met Virginia’s eligibility requirements at a time when they
didn’t have the benefit of this guidance. The district court didn’t engage with this fact and
Walgreens hasn’t either. We leave open whether a misrepresentation can be material when
it goes to a requirement that’s so blatantly illegal that no reasonable decisionmaker could
be influenced by it. That’s not the case here, where the legality of Virginia’s requirements
was fairly debatable—both before and after Release 172.

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Triple Canopy was decided shortly before Escobar, which vacated our decision and

remanded for further consideration. 579 U.S. 924 (2016). But we’ve continued to cite the

vacated opinion’s persuasive reasoning.

For instance, in Taylor, we cited Triple Canopy for the proposition that the

government’s early intervention in the qui tam action was an indicator of materiality. 39

F.4th at 194. So too here: If the government’s early intervention signals materiality, then

the fact that the governments here were the original plaintiffs to bring this False Claims

Act suit should be an even stronger indicator of materiality.

C.

Vacating the dismissal is necessary for other reasons, too.

1.

The complaint alleges at least one misrepresentation unrelated to the eligibility

requirements Walgreens challenges. When Walgreens steered Patient 12’s request through

the prior-authorization process for the drugs at issue, Virginia asked whether Patient 12

might instead be able to use “the preferred alternative, Viekira Pak.” J.A. 49 ¶ 254. 6 In

response, the Walgreens store falsely represented that Patient 12 couldn’t use Viekira Pak

6
Amici supporting Walgreens explain that this is typical of the way prior
authorization is intended to operate. See, e.g., Brief of the National Association of Chain
Drug Stores as Amicus Curiae in Support of Defendant-Appellee at 8 (“To comply with
this [statutory] regime, a provider wishing to prescribe a medication requiring prior
authorization will typically call a government hotline, at which point the government and
a provider can discuss whether there is a cost-effective, therapeutically comparable drug to
the one the provider wishes to prescribe. The government may persuade the provider to
prescribe another drug, or it may not; coverage is assured so long as the provider takes the
administrative step of calling the state.” (cleaned up)).

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because of an adverse reaction to a related drug. After Walgreens made that representation,

Virginia approved Patient 12’s request for direct-acting antiviral drug coverage, for which

it paid over $98,500.

In other words, this alleged misrepresentation (that Patient 12 couldn’t use the

cheaper drug alternative) has nothing to do with the eligibility requirements Walgreens

now challenges. The district court didn’t explain how the supposed illegality of Virginia’s

eligibility requirements rendered this misrepresentation immaterial or how it otherwise

failed to state a claim.

2.

We’re also persuaded that Walgreens can’t avoid liability by collaterally

challenging the eligibility requirements’ legality, under a line of cases beginning with

United States v. Kapp, 302 U.S. 214, 217–18 (1937) (stating that a defendant can’t avoid

criminal liability by arguing that a fraudulent statement was about an illegal requirement).

a.

Walgreens says that the governments haven’t preserved this argument. But the

governments pressed at the motion hearing that Walgreens couldn’t “collaterally attack”

Virginia’s eligibility requirements to avoid liability for fraud. See J.A. 777 (district court

noting the governments’ argument “that this is an impermissible collateral attack on the

state regulations”). 7

See also J.A. 781 (similar); Walgreen, 2021 WL 5760307, at *10 (noting the
7

governments’ argument that Walgreens is “collaterally attacking” the requirements).

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While the governments may now be putting a finer point on their argument by

expressly invoking Kapp and similar cases, the district court and Walgreens were on notice

of the contention. See Wards Corner Beauty Acad. v. Nat’l Accrediting Comm’n of Career

Arts & Scis., 922 F.3d 568, 578 (4th Cir. 2019) (requiring that “the lower court be fairly

put on notice as to the substance of the issue” to preserve an issue for appeal (cleaned up));

see also In re Under Seal, 749 F.3d 276, 288 (4th Cir. 2014) (noting that issues are

preserved when they’re “plainly encompassed by the submissions in the underlying

litigation” (cleaned up)).

In any event, we have inherent discretion to consider issues that weren’t properly

preserved. Singleton v. Wulff, 428 U.S. 106, 121 (1976). And we choose to do so here,

since (1) we’re reviewing de novo whether the complaint states a claim, (2) the Kapp

question is purely legal, and (3) the parties have fully briefed it.

b.

A long line of Supreme Court cases beginning with Kapp establishes that criminal-

fraud defendants can’t escape liability by arguing that their fraudulent statements went to

illegal requirements. See, e.g., Kapp, 302 U.S. at 218 (“It is cheating the government at

which the [false claims] statute aims and Congress was entitled to protect the government

against those who would swindle it regardless of questions of constitutional authority as to

the operations that the government is conducting.”). 8

8
See also United States v. Knox, 396 U.S. 77, 79 (1969) (“[O]ne who furnishes false
information to the Government in feigned compliance with a statutory requirement cannot
defend against prosecution for his fraud by challenging the validity of the requirement
(Continued)
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Walgreens says that the Kapp precedents don’t apply because they’re criminal

cases. It emphasizes that Dennis, for instance, expressly notes the case was “a [criminal]

prosecution directed at petitioners’ fraud,” and “not an action to enforce the statute claimed

to be unconstitutional.” 384 U.S. at 867. But the governments aren’t seeking to enforce

Virginia’s eligibility requirements. Rather, they seek civil damages caused by Walgreens’s

factual misrepresentations. Nothing in Dennis and its related precedents foreclose their

applicability to civil fraud.

In fact, we’ve already applied Kapp’s principles in the civil context. In Acanfora v.

Board of Education, a teacher deliberately omitted from his job application that he had

associated with a gay-rights group. 491 F.2d 498, 501 (4th Cir. 1974). The school district

admitted it wouldn’t have hired him had the teacher disclosed that association. Id. After

the teacher publicly supported gay rights, the school district transferred him to a

nonteaching position, and the teacher sued, alleging discrimination and a violation of his

First Amendment rights. Id. at 500–01. The school district refused to reinstate his teaching

position, citing the misleading omission on his job application. Id. at 500.

The district court dismissed the teacher’s case; we affirmed. Id. at 499. We clarified

that “[t]he principles stated in Kapp, Kay, Dennis, and Bryson have not been confined to

itself.”); Bryson v. United States, 396 U.S. 64, 72 (1969) (rejecting the argument that “a
citizen has a privilege to answer fraudulently a question that the Government should not
have asked”); Dennis v. United States, 384 U.S. 855, 865 (1966) (“[P]etitioners are in no
position to attack the constitutionality [of a likely-illegal provision requiring them to certify
they’re not communists]” when their indictment “alleges an effort to circumvent the law
and not to challenge it.”); accord Kay v. United States, 303 U.S. 1, 6 (1938).

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criminal cases.” Id. at 502. Applying those principles, we held that the school district

could refuse to reinstate the teacher because he “purposely misled the school officials so

he could circumvent, not challenge, what he considers to be their unconstitutional

employment practices. He cannot now invoke the process of the court to obtain a ruling

on an issue that he practiced deception to avoid.” Id. at 504 (citing Kay, 303 U.S. at 6).

Walgreens criticizes Acanfora for condoning the school district’s “open

homophobia.” Appellee’s Br. at 40. But the shameful and discriminatory stigma that

formed the backdrop of that case is beside the point here. Acanfora teaches that Kapp’s

rule applies in the civil context. And if Kapp’s principles apply to a discrimination case, it

makes even more sense to apply them to claims under the False Claims Act, given that the

statute’s roots are in the common law of fraud and its civil penalties are meant to be

“essentially punitive in nature.” Escobar, 579 U.S. at 182 (cleaned up).

3.

Finally, Walgreens points to a separate line of cases under Kaiser Steel Corp. v.

Mullins, 455 U.S. 72 (1982), to support its illegality argument. Kaiser Steel held that courts

can’t enforce a promise that violates antitrust and labor laws. Id. at 77. Walgreens argues

that Kaiser Steel prevents the governments from attempting to enforce Virginia’s illegal

eligibility requirements. But seeking to recover False Claims Act damages for fraud isn’t

the same as enforcing an illegal requirement.

And Kaiser Steel and its ensuing precedents are largely collective-bargaining cases;

even at their broadest, they’re still limited to contract law. See id.; United Paperworkers

Int’l Union v. Misco, Inc., 484 U.S. 29, 42–45 (1987) (addressing the enforceability of an

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arbitration award under a collective-bargaining agreement); Bassidji v. Goe, 413 F.3d 928,

936–37 (9th Cir. 2005) (applying Kaiser Steel’s reasoning to a private contract that would

violate an executive order). Walgreens offers no good reason why a contract-law (and even

more specifically, a collective-bargaining-contract-law) rule should displace the liability

created by the False Claims Act, a federal statute.

At bottom, the governments have the better argument, and Walgreens can’t evade

liability by collaterally attacking Virginia’s eligibility requirements as illegal under the

Medicaid Act.

IV.

One final point. We read the district court’s order of dismissal of all the

governments’ claims—not just those related to the False Claims Act—to be based on

materiality. For that reason, our decision today addresses that single legal error at the heart

of the district court’s dismissal. Having corrected that error, we leave all other issues to

the district court.

VACATED AND REMANDED

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