04.21.2016

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Updates

The U.S. Supreme Court is poised to resolve a circuit split over the False Claims Act (FCA) that could have broad implications for those that do business with the federal government.  On April 19, 2016, the Supreme Court heard arguments in a case challenging the “implied certification” theory of FCA liability, under which a claim for payment may be considered false or fraudulent when the party submitting the claim has violated a regulation, statute, or contract term, even if the claim is not accompanied by a representation of compliance.  See Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7.  Circuits have split over the viability and scope of the implied certification theory, with some circuits accepting a broad version of the theory, others accepting a narrower version, and some questioning the theory entirely.  Because the implied certification theory is the basis for many claims under the FCA, the Supreme Court’s decision could have a significant impact.  A decision is expected in June 2016.

False Claims Act

The False Claims Act, 31 U.S.C. §§ 3729-3733, imposes treble damages and civil penalties on those who knowingly or recklessly present false or fraudulent claims for payment to the federal government.  The FCA may be enforced by the U.S. Department of Justice or by private parties, called relators, who may bring civil qui tam actions under the FCA “in the name of the Government.”  Relators who bring such cases are entitled to share in any recoveries.  Qui tam cases have proliferated as Congress has amended the FCA to encourage relators to file cases, massive recoveries have incentivized filings, and relators and DOJ have successfully applied the FCA to more types of conduct.

Circuit Split and Why It Matters

The FCA imposes liability for presentation of a “false or fraudulent” claim for payment, but it does not define what that means.  The courts agree that a claim is false or fraudulent where the contractor did not provide the goods or services as claimed or where the contractor expressly certifies that it has complied with an associated statute, regulation, or contractual requirement, but in fact has not done so.  But not every case presents such a clear fact pattern.  What about instances in which the invoice says nothing about whether the contractor has complied with the relevant regulations or contract terms?  Has a contractor that is out of compliance in that case presented a false or fraudulent claim?  Does mere submission of an invoice implicitly certify compliance with statutes, regulations or contractual requirements?  If so, which ones?  For example, does a healthcare provider really certify compliance with the thousands of pages of potentially applicable Medicare and Medicaid statutes, regulations, and subregulatory guidance each time she submits a claim for federal reimbursement? 

The U.S. Courts of Appeals have split on the answer.  Some have accepted a broad version of the implied certification theory that requires only that the statute, regulation, or contractual requirement be material to the government’s decision to pay—a limitation that may offer little protection as materiality will be determined in hindsight.  Others have adopted a narrower version that limits the implied certification to statutory, regulatory, or contractual requirements that are an express condition to payment.  And other circuits have not adopted any version of the implied certification theory, either because they have not addressed the issue or because they have questioned the theory’s viability. 

These differences matter because many FCA cases rely on the implied certification theory of falsity.  If the implied certification theory is not viable, or if its scope is limited, many such cases will not survive a motion to dismiss, if they are filed at all.  Moreover, an FCA lawsuit can be filed in any federal judicial district where a contractor is located or does business.  When the defendant is a large corporation, or the plaintiff alleges a nationwide scheme, the plaintiff’s choice of forum is nearly limitless.  Given the split among the circuits, the outcome of a case may depend on where DOJ or the relator decides to file.          

Issues Facing the Supreme Court    

In Escobar, the U.S. Court of Appeals for the First Circuit came down squarely in the “broad view” camp, holding that a claim is false or fraudulent whenever a defendant fails to comply with a material—rather than express—regulatory precondition of payment.  See United States ex rel. Escobar v. Universal Health Services, Inc.,780 F.3d 504, 512-13 (1st Cir. 2015).

Calling the implied certification theory a “Frankenstein’s monster,” the defendant appealed to the Supreme Court, challenging the First Circuit’s decision on two grounds.  First, the defendant asked the Supreme Court to reject the implied certification theory in its entirety on the ground that the FCA—a punitive statute that imposes treble damages and civil penalties on violators—should not be used to police compliance with every regulatory, statutory, or contractual requirement related to a claim for payment.  Second, the defendant argued that should the Supreme Court decline to reject the theory in its entirety, it should limit it to violations of requirements that are express preconditions to payment. The relator, backed by the Solicitor General, opposed both arguments, contending that the FCA broadly punishes contractors who seek payment knowing that they have not complied with a material requirement. 

The oral argument on April 19, 2016, suggests that the justices are struggling with two conflicting concerns.  On one hand, some justices appeared reluctant to restrict the FCA too narrowly, noting that many of the types of fraud that the FCA was intended to reach might not involve an express certification or an express precondition to payment.  For example, Justice Sotomayor suggested that providing guns that don’t shoot, or boots that fall apart in a matter of hours, might not violate an express condition to payment but are exactly the types of misconduct that led Congress to enact the FCA.  On the other hand, some justices expressed concern that the implied certification theory could impose treble damages and civil penalties for every statutory, regulatory, or contractual violation, no matter how insignificant—an especially troubling prospect for programs that are subject to thousands of pages of regulatory requirements. 

How the Supreme Court rules will likely depend on the balance it strikes between those two concerns.  Whatever the outcome, the decision is likely to have a significant impact on contractors and others that conduct business with the U.S. government.  

© 2016 Perkins Coie LLP