The U.S. Supreme Court handed down an important decision on June 16, 2016 that expands the scope of liability under the False Claims Act, 31 U.S.C. §§ 3729-3733, (the FCA).  In  Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. __ (2016), the Supreme Court resolved a circuit split and held that the implied certification theory of liability is viable, at least  in some circumstances.  The implied certification theory can provide a basis for liability under the FCA where the claim for payment “omits critical qualifying information” that renders statements made in the claim misleading—consistent with common law fraud rules. 

The Court further held that liability under this theory attaches whenever the misrepresentation is material to the government’s payment decision.  The Court rejected a requirement urged by the defendant that liability under the implied certification theory should attach only where the statute, regulation or contract provision at issue is an express condition of payment. 

The ruling should be of interest to all businesses and vendors that may face claims under the False Claims Act, including any that does business with the federal government or otherwise receives money from the public treasury.  This update supplements Perkins Coie’s prior update in the Escobar case entitled “Supreme Court Poised to Resolve Circuit Split on False Claims Act Liability Under Theory of Implied Certification.”  That update generally describes the FCA as well as the circuit split over the viability and scope of the implied certification theory of liability under the FCA.

The Escobar Case

The Escobar case was brought by parents whose daughter died while receiving medical treatment from the defendant, United Health Services (UHS).  The treatment was paid for under the joint state-federal Medicaid program.  The parents filed suit, alleging that UHS violated the FCA by seeking reimbursement from the federal government for services provided by staff members who were not qualified, licensed and supervised as required by Medicaid regulations.  The district court dismissed the case on the ground that an FCA claim based on the implied certification theory of liability required a violation of a condition of payment, not simply a condition of participation in the Medicaid program itself, and the relevant regulations were not conditions of payment.  The U.S. Court of Appeals for the First Circuit reversed, holding that a claim under the FCA may exist where a defendant knowingly misrepresents compliance with a material condition of payment and finding that the Medicaid regulations at issue were material conditions of payment.  Thus, UHS submitted “false or fraudulent” claims when it sought reimbursement for services that violated those regulations.

The Supreme Court’s Decision

The Supreme Court granted UHS’s petition for certiorari to address two questions: (1) whether the implied certification theory is viable and (2) if so, whether the implied certification theory is limited to violations of a statutory, regulatory or contractual requirement that the government has expressly designated an express condition to payment.  In a unanimous decision, the Supreme Court endorsed the implied certification theory in at least some circumstances and refused to limit it to violations of express conditions to payment.    

First, the Court held that the implied false certification theory can serve as a basis for liability where two conditions are satisfied: (1) the claim does not merely request payment but also makes specific representations about the goods or services provided; and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory or contractual requirements renders the representations “misleading half-truths.”  Because UHS submitted claims using payments codes that corresponded with specific services and job titles without disclosing the provider’s violation of basic staff and licensing requirements, the Court found its claims to be misleading so as to support liability under the implied false certification theory.

Second, the Court refused to limit liability to violations of statutory, regulatory or contractual requirements that are an express condition to payment.  Instead, the Court held that a misrepresentation about compliance with a statutory, regulatory or contractual requirement is actionable whenever the misrepresentation is material to the government’s payment decision—regardless of whether the requirement is an express condition to payment. 

Purporting to clarify how the materiality requirement should be enforced, the Court emphasized that the FCA is not an “all-purpose antifraud statute,” such that “strict enforcement” of the FCA’s “demanding” and “rigorous” materiality element is required.  One factor cited by the Court that may affect the materiality determination is whether the government consistently pays—or refuses to pay—claims where it knows that a particular statutory, regulatory or contractual requirement has been violated.  The government’s decision to expressly identify a provision as a condition of payment is also relevant, but not dispositive.  Finally, the Court rejected the government’s “extraordinarily expansive” view of materiality, namely, that any statutory, regulatory or contractual requirement is material so long as the defendant knows that the government would be entitled to refuse payment were it aware of the violation.  In sum, whether a misrepresentation is material will be a fact-dependent inquiry, although a “familiar and rigorous” one. 

What the Decision Means

Escobar raises nearly as many questions as it answers. 

Although the decision endorses the implied false certification theory of liability for misleading half-truths, it leaves unresolved the harder question of whether the FCA imposes liability where a claim is entirely silent about the goods or services provided.  Nor does the decision answer whether all claims for payment constitute an implicit representation that the claimant is legally entitled to payment.  The decision leaves it to the lower courts to determine the contours of “materiality” with only limited guidance from the Supreme Court and seems to invite discovery from the government on this issue. 

In Escobar, the Court passed up an opportunity to adopt bright-line rules for FCA claims based on alleged violations of statutory, regulatory or contractual requirements, although the Court seems to have little regard in the healthcare context for denying FCA liability because the non-compliance relates to so-called “conditions of participation.”  The more flexible, fact-based standards adopted by the Court are likely to encourage the filing of more cases, promote motion practice over the adequacy of pleadings and evidence, and result in greater uncertainty for defendants who do business with the federal government.  Expect further litigation over the contours and limits of the implied certification theory.

© 2016 Perkins Coie LLP