In the Watt Tieder Winter 2015-2016 Newsletter, we previewed the Supreme Court’s much-anticipated decision regarding the viability of the “implied certification” theory under the federal False Claims Act (“FCA”). On June 16, 2016, the Supreme Court in Universal Health Services, Inc. v. United States et al. ex rel. Escobar et al., 136 S.Ct. 1989 (2016) issued its decision clarifying the scope of implied certification. Under the implied certification theory, contractors who have submitted otherwise valid claims for payment may nevertheless be subject to FCA liability if they are in violation of a material statutory, regulatory, or contractual requirement. Although the Supreme Court’s recent decision in Escobar upholds the doctrine of implied certification, there is a silver lining for those contractors who have unwittingly violated a statutory, regulatory or contractual requirement. Specifically, the court actually restricted the FCA’s potential scope through a rigorous and demanding standard of “materiality.”

 

In Escobar, parents brought a FCA claim against a clinic after their daughter died while under the care of unlicensed clinic staff. The parents claimed that the clinic failed to comply with state regulations governing qualifications and supervision of staff members. The First Circuit found FCA liability on the basis of implied certification. On appeal, the Supreme Court’s decision addressed two separate issues: (1) whether the implied certification theory is valid, and, if it is, (2) whether a contractor’s claim is false if the particular statute, regulation, or contract provision does not expressly state that compliance is a condition of payment.

 

In response to the first question, the Court held that the implied certification theory may provide a basis for FCA liability when a defendant who submits a claim for payment makes certain representations about the goods or services provided but omits violations of material statutory, regulatory, or contractual requirements. However, two conditions must be present before liability attaches. First, the claim must make specific representations about the goods or services. In other words, the claim must not merely request payment. Second, the failure to disclose noncompliance with material requirements must make the defendant’s representations “misleading half-truths.” Because the clinic submitted payment codes representing certain treatments had been provided and identifiers corresponding to specific job titles requiring a license, the Court found that the clinic’s failure to disclose its staff’s licensing violations constituted a misrepresentation.

 

The Court next considered whether liability under the implied certification theory requires compliance with a statutory, regulatory, or contractual requirement to be an express condition of payment. The Court answered this question in the negative, holding that such requirements do not have to be expressly designated as conditions of payment to be considered material to the government’s payment decision. However, the Court also noted that the government’s designation of a particular requirement as a condition of payment is not automatically dispositive of materiality. Rather, the relevant inquiry is whether the defendant knowingly violated a requirement it knew was material to the government’s payment decision.

 

The Court’s decision is notable due to its adoption of an exacting “materiality” standard. The Court explained that materiality looks to “the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” Thus, materiality is not found when noncompliance is minor or insubstantial. Nor can materiality be found simply because the government has the option to decline payment if it knew about the violation. The Court also stated that if the government pays a claim despite knowledge that requirements were violated, that constitutes “very strong evidence” that the requirement is not material. Conversely, evidence that the defendant knows the government consistently refuses to pay claims based on noncompliance with a particular requirement is evidence of materiality.

 

In sum, the Supreme Court’s decision represents a very measured approach towards implied certification. The Court has provided both a means to prevent fraud and abuse without targeting unwary contractors for simple regulatory violations. While contractors must still remain mindful of compliance with important statutory, regulatory, and contractual requirements, the Court’s decision provides protection against an overly zealous interpretation of the FCA.