Jun 23, 2016

Supreme Court upholds implied false certification liability under the False Claims Act

In April of this year, we reported on the results of the oral argument before the U.S. Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar. On June 16, 2016, the Supreme Court issued its decision, upholding (as we predicted) the theory of implied false certification liability under the False Claims Act (FCA). In a unanimous opinion, authored by Justice Thomas, the Court rejected both the Petitioner’s plea for an outright repudiation of the implied false certification theory or, alternatively, an application limited to violations of express conditions of payment. Instead, the Court announced a standard that turns on evidence of the defendant’s knowledge that its noncompliance with a federal requirement is material to the government’s payment determination. Notwithstanding its claimed effort to “clarify” FCA liability limits under this theory, the Supreme Court has left lower courts with a fact-dependent standard that will likely mean fewer early stage dismissals of weak or non-meritorious claims. The Court’s opinion will no doubt be welcomed by the government and qui tam plaintiffs. Significant features of the Court’s holding and rationale are discussed infra.

The Court’s analysis starts with the language of the False Claims Act, which, the Court noted, lacks a definition of “false or fraudulent,” leading the Court to look to the common law which has long defined fraud in terms of both acts of omission and commission.[1] Focusing on non-disclosure of regulatory violations, the infraction which made the Petitioner’s payment requests impliedly false, the Court held that implied certification liability may arise where two conditions exist: (1) the claim makes specific representations (more than a mere request for payment) about the goods or services provided, and (2) the failure to disclose noncompliance with federal requirements makes those representations “misleading half-truths.” In the Escobar case, the representations cited by the Court were the Petitioner’s submission of claims for Medicaid reimbursement using payment codes corresponding to specific counseling services (e.g. family therapy) and National Provider Identification numbers corresponding to particular job titles for the employees who performed the counseling services. These “representations” in the Court’s view conveyed information about the services provided that was “misleading in context” insofar as they suggested (wrongly) compliance with regulations pertaining to employee qualifications and licensing.

These two elements are necessary, but not sufficient for implied false certification liability. The federal requirements (statutory, regulatory or contractual) must also be material and the defendant must act with the requisite scienter (actual knowledge, reckless disregard or deliberate ignorance). Scienter applies to the element of falsity as well as the element of materiality. That is, a defendant must know (or act with reckless disregard or deliberate ignorance) that the claim is false in some respect, and that the implicated federal requirement is material to the government’s decision to pay. Materiality can be satisfied by either objective or subjective evidence. Where a reasonable person would know that a particular requirement is important, the violation of which is likely to induce government action, materiality will be found (e.g., one who sells the Army guns that don’t shoot should know that a functioning firearm is a material requirement). Likewise, if the defendant has reason to know of special significance attached to an otherwise unremarkable requirement, the element of materiality is established. Identifying a requirement as an express condition of payment is relevant to, although not dispositive of, the element of materiality. A history of the government’s refusal of payment in the face of noncompliance is relevant to the materiality determination. Similarly, the government’s payment of claims knowing they were false in some respect would be strong evidence that the pertinent requirements were not material.

Emphasizing that the FCA is “not an ‘all-purpose antifraud statute’ . . . or a vehicle for punishing garden-variety breaches of contract or regulatory violations,” the Court described the materiality standard as both “demanding” and “rigorous.” In the same vein, the Court rejected the Petitioner’s argument that the current materiality standard was too fact intensive to permit disposition of non-meritorious cases at the pleading or summary judgment stages. In a footnote, the Court noted that plaintiffs must still plead their claims in compliance with FRCP 8 and 9(b). The Court also rejected the government’s position that any claim is actionably false if it is made with knowledge that the government may be entitled to refuse payment. This represented, in the Court’s judgment, an “extraordinarily expansive view of liability.”

Although the Escobar decision repudiates the government’s position that any violation of a requirement justifying nonpayment is actionable, and reaffirms the requirement to plead facts establishing all FCA elements, it falls well short of imposing clear, easily applied limits on implied certification liability. Instead, the Court’s holding relies upon materiality and scienter—elements which Congress has diluted in recent years—as checks on expansive implied certification FCA liability. The precise fallout is hard to predict, except to say that the Court’s decision will almost surely not lessen the workload on the lower courts and the parties to FCA cases. One possible outcome, given that express conditions of payment are relevant to (if not dispositive of) materiality, is that the government may incorporate more express “condition of payment” language in future regulations and contracts. Lower courts may reject this as evidence of materiality if undertaken in blanket, boilerplate fashion, however. And in many cases, evidence of the government’s history of payment of similar claims may not be available to counter a claim that an express condition of payment is material. In the absence of evidence of the government’s payment history, parties may need to resort to experts or current or former government employees to prove that a particular claim was not capable of influencing government action. What seems reasonably certain in the wake of this opinion is that claims relying on implied certification will only increase in the future.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client Alert authored by: Stephen A. Wood, Principal

[1] By way of brief background, this case arose from the First Circuit’s decision in United States ex rel. Escobar v Universal Health Services, Inc., 780 F.3d 504 (1st Cir. 2015). Relators brought suit under the FCA and its state counterpart after the seizure-related death of their teenage daughter who had been treated at defendant’s mental health clinic by personnel who were neither licensed nor properly supervised, in violation of several state health regulations. Relators alleged that defendant’s invoices for Medicaid reimbursement of the mental health services provided to Relators’ daughter and others were fraudulent in that defendant misrepresented its compliance with these regulations. Notably, the invoices contained no express certification of regulatory compliance; rather, Relators claimed that (false) certification was implied.