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Supreme Court Hears Arguments on FCA Implied Certification Theory

April 19, 2016

Authors: Robert T. Rhoad, David W. O'Brien, Brian Tully McLaughlin, Jason M. Crawford, and Sarah Hill.

The Supreme Court heard arguments today in Universal Health Services, Inc. v. United States ex rel. Escobar, a False Claims Act (FCA) case with potentially far-reaching consequences for whistleblowers, healthcare providers, government contractors, and all companies and institutions that receive federal dollars. There are two questions before the Court: (1) whether the “implied certification” theory of liability is ever viable, and (2) if it is, whether a government contractor’s reimbursement claim can be false if the provider failed to comply with a statute, regulation, or contractual provision that does not state that it is a condition of payment.

Based on the questions from the bench, it would appear that the implied certification theory of liability is here to stay as there was little discussion about the viability of the theory. Instead, most of the discussion centered on developing a standard that will help courts identify whether particular regulatory, statutory, or contractual requirements are “material” such that the failure to disclose their violation renders a claim for payment fraudulent. If the court defines materiality broadly, contractors face the risk that they will have to defend themselves in FCA actions based on their failure to comply with myriad contractual terms or regulations.

The Implied Certification Theory

Traditional FCA liability arises in cases involving claims that are factually false—e.g., a contractor mischarges the government for goods or services that were never delivered. In contrast, false certification li­ability involves a claim that is legally false—e.g., a contractor fails to satisfy a legal re­quirement underlying the claim for payment. The false certification theory has been used where the government would not have paid a claimant had it known that the claimant’s certification of compliance was false. The false certification can be express (where a contractor has certified compliance with a legal requirement on the face of the invoice) or implied (where the mere request for payment signifies its ongoing compliance).

At present, there is a split among the circuits regarding the scope of the implied certification theory. We discussed the implied certification theory and the current split in the circuit courts of appeal on the issue in a previous post and in an article available here. Several circuits have held that the implied certification theory is only appropriately applied where the statute or regulation that the defendant has failed to comply with expressly states that compliance with it is a condition of payment. Universal Health Services is on appeal from the First Circuit, which has rejected distinctions between “conditions of participation” and “conditions of payment” and adopted a broader implied certification standard—i.e., a contractor violates the FCA if the contractor submits a claim for payment while knowingly misrepresenting compliance with a material precondition of payment.

Background on Universal Health Services

In Universal Health Services, two whistleblowers (or relators, as they are known under the statute) filed an FCA action after their daughter died of a seizure following treatment from unlicensed and unsupervised counselors at a mental health clinic in Massachusetts owned and operated by United Health Services (UHS). Relators alleged that UHS violated the FCA when it presented reimbursement claims to Medicaid for services provided by these counselors who were not supervised as required by Massachusetts’ regulations. The clinic did not explicitly certify compliance with these regulations, and no explicit conditions of payment were violated.

Recognizing that “not every regulatory violation gives rise to a potential FCA action,” the District Court for Massachusetts dismissed the relators’ complaint and observed that “the FCA concerns itself exclusively with fraud and false statements to the government leaving general regulatory compliance and compliance with regulations that do not bear on the government’s obligation to pay reimbursement to other enforcement mechanisms.” Pet. App. 37. The district court found that the Massachusetts regulations at issue imposed only conditions of participation in the government program, not preconditions to payment as required for FCA liability. On appeal, the First Circuit reversed, finding that the regulations at issue were in fact conditions of payment, even if they did not expressly state they were.

Arguments Before the Court

During oral argument, and in its briefing, UHS argued that according to the plain language of the FCA, a claim cannot be false or fraudulent unless it contains an affirmative misstatement. UHS argued that even if the Court finds that making a claim for payment impliedly certifies compliance with certain legal requirements, FCA liability should only attach if those requirements expressly provide that compliance with them is a condition of payment. UHS emphasized that the treble damages and other penalties assessed under the FCA would dwarf the fines that the regulatory agencies deemed appropriate for the mental health clinic’s conduct. Furthermore, UHS challenged the assertion that the FCA’s knowledge element provides sufficient protection for contractors where the implied certification theory is being stretched to reach mere regulatory or contractual violations. As UHS noted, analysis of both the knowledge and materiality elements present fact-intensive questions difficult to resolve on a motion to dismiss. Thus, contractors faced with extraordinary discovery costs and potential treble damages often feel pressure to settle even meritless claims.

On the other side, Relators argued that a provider’s claim for payment presented to the government impliedly represents that the provider is entitled to payment. Whether or not the claim contains a statement that is untrue, a claim is nevertheless false if it is submitted by a provider not entitled to payment because the provider knowingly violated the government’s requirements. Relators argued that limiting FCA liability to violations of requirements expressly made conditions to payment would create a loophole through which providers could escape liability for knowing violations of material requirements.

The Justices asked very few questions regarding the viability of the implied certification theory. They appear likely to hold that an implied certification may give rise to FCA liability in some cases, but many of their questions focused on where the line should be drawn—i.e. when does a regulatory or statutory violations fall within the ambit of the FCA? Chief Justice Roberts expressed skepticism that every claim for payment is an implicit certification of compliance with thousands of pages of regulations. At one point, he responded with incredulity when the Deputy Solicitor General—arguing in support of implied certification—suggested that a company could face FCA liability for not fulfilling an obligation to buy U.S.-made staplers on a contract that was otherwise performed to specifications.

There was little discussion of the Petitioner’s argument that FCA liability should be limited to violations of those provisions expressly made conditions to payment, the test applied by the majority of the Circuits who have ruled on implied certification to date. Most questions from the bench were focused on how to determine when a violation is “material.” Justice Breyer asked whether the difference between a material violation and a non-material violation might be akin to the distinction in contracts law between violations that justify repudiation of a contract versus violations that justify a claim for damages only. Whether or not the Justices can reach a majority opinion may hinge on the Justices’ ability to agree on the definition of a material violation. If the Court is deadlocked 4-4, the First Circuit’s decision in the case will be upheld and the Supreme Court’s decision will not be precedent on the other circuits, which would leave the current circuit split unresolved. The Court’s decision is expected by June 2016. Crowell & Moring plans to monitor developments closely and will provide an updated post when the Court’s decision is announced.

Brian Tully McLaughlin
Partner – Washington, D.C.
Phone: +1.202.624.2628

David W. O'Brien
Retired Partner – Washington, D.C.
Phone: +1.703.307.1977