Over a year ago in June 2016, the Supreme Court in Universal Health Servs. v. United States, 136 S. Ct. 1989 (2016) upheld the implied certification theory of liability under the federal False Claims Act (“FCA”) while also laying the groundwork for a demanding materiality standard.   Universal Health has had major implications on lower courts analyzing claims based on the implied certification theory.  Although many courts have permitted cases to proceed under this theory based on the Supreme Court’s reasoning, many others have applied Universal Health’s materiality standard to cabin the scope of the FCA and ensure it is narrowly targeted to prevent fraud, rather than used as a tool to punish mere regulatory violations.  In analyzing materiality, courts have focused on whether the agency took any action in response to the alleged fraud, whether the fraud went to the “heart of the bargain,” and the contractor’s incriminating behavior in covering up its non-compliance.


Implied Certification And Universal Health On Remand


The theory of implied certification posits that contractors submitting a claim for payment implicitly certify compliance with all applicable statutes, regulations, and contract terms.  Contractors may be found liable for fraud if they submit a claim while not in compliance with these requirements.  The implied certification theory was tested in Universal Health when parents brought an FCA claim against a healthcare clinic after their daughter died while under the care of unlicensed clinic staff, claiming that the clinic failed to comply with state regulations governing qualifications and supervision of staff members.  The Supreme Court endorsed implied certification but clarified the standards, holding that a contractor may be liable under the theory when it makes specific representations about the goods or services provided, but knowingly fails to disclose noncompliance with a statutory, regulatory, or contractual requirement.  Such noncompliance must be measured against a “demanding” materiality standard, which considers, among other things, whether the government would have paid for the claims had it known about the noncompliance.


After validating the implied certification theory, the Supreme Court remanded the case to the First Circuit to determine whether the relators had sufficiently pleaded an FCA violation.  The First Circuit held that the healthcare provider’s misrepresentations met the “demanding” materiality standard developed by the Supreme Court.  Notably, the court interpreted Universal Health as mandating a “holistic approach” to determining materiality, finding that “materiality cannot rest ‘on a single fact or occurrence as always determinative.’”  The court also noted that materiality is more likely to be found “where the information at issue goes ‘to the very essence of the bargain.’”  Based on that standard, the court had “very little difficulty” in finding the healthcare provider’s misrepresentations to be material.  Not only was regulatory compliance a condition of payment, but the licensing and supervision requirements in the regulatory program went to the “very essence of the bargain.”  Thus, a failure to comply would influence the government in deciding whether to pay the claims.


Applications of Universal Health


Several courts re-visited their decisions in light of the Supreme Court’s holding in Universal Health.  For example, prior to Universal Health, the Fourth Circuit in United States v. Triple Canopy, Inc., 857 F.3d 174 (4th Cir. 2017) found FCA liability against a security firm which falsified its guards’ marksmanship scorecards to conceal its failure to meet the standards under the contract.  After Universal Health, the Fourth Circuit affirmed its decision on the basis of implied certification, finding that its analysis was consistent with the Supreme Court’s opinion.  Although the contractor argued that Universal Health required “specific representations” about the services above and beyond simply submitting invoices listing the number of guards and hours worked, the court disagreed, claiming that the “rule is not as crabbed” as the contractor claimed.  Rather, such “half-truths” are sufficient to incur liability.  The court was guided by both “common sense” and incriminating evidence that the contractor had attempted to cover-up its noncompliance.


Decisions post-Universal Health also reveal that the government’s decision to continue paying claims after learning about alleged fraud will strongly weigh against a finding of liability.  For example, a former employee alleged that a drug manufacturer falsely represented to the FDA that an anti-cancer drug was “reasonable and necessary” for certain at-risk Medicare patients by suppressing information about side-effects which would have caused doctors to prescribe a lower dose, thus ultimately saving the government money.  United States ex rel. Petratos v. Genentech Inc., 855 F.3d 481 (3d Cir. 2017).  Relying on the Universal Health materiality standard, the Third Circuit held that the relator could not establish materiality because he had conceded that the government would have paid the claims even with full knowledge of the alleged noncompliance.  This fact alone “doomed” the relator’s case.


Courts analyzing materiality after Universal Health have also considered whether the agency took action upon learning about the alleged non-compliance.  In United States v. Sanford-Brown, Limited, 840 F.3d 445 (7th Cir. 2016), the relator alleged that a college fraudulently retained students which would have rendered the school ineligible to receive federal subsidies.  In rejecting liability, the Seventh Circuit found it persuasive that federal agencies had investigated the school several times and concluded that neither administrative penalties nor termination was warranted.  At most, the relator’s allegations showed that the government could have declined payment due to the noncompliance, which was clearly insufficient to trigger liability under Universal Health.


The First Circuit similarly rejected liability based on the FDA’s inaction in the face of knowledge of a contractor’s alleged fraud.  Several doctors claimed that an artificial hip manufacturer falsely secured FDA approval for a defective product by asserting that the product was equivalent to a previously approved product and had an artificially low failure rate.  United States ex. rel Nargol v. Depuy Orthopaedics, Inc., No. 16-1442, 2017 WL 3167622 (1st Cir. July 26, 2017).  The court rejected this theory of fraud because the FDA never withdrew its approval for the product, even after it was made aware of the doctors’ claims.  The court considered this fact to be a “break in the causal chain between the alleged misstatements and the payment of any false claim,” thus rendering “a claim of materiality implausible.”  The court, however, imposed liability on alternative grounds based on the company’s fraudulent scheme whereby it “palmed off” the defective product on unsuspecting doctors who in turn submitted claims for payment.


In contrast to the above cases, the Ninth Circuit found a drug company liable for making false statements to the FDA about its compliance with regulations, despite the FDA continuing to approve the drug.  United States ex rel. Campie v. Gilead Sciences, Inc., No. 15-16380, 2017 WL 2884047 (9th Cir. July 7, 2017).  The drug company acquired an unapproved ingredient from a Chinese supplier, re-labeled it to conceal its true nature, falsified test results that showed it was contaminated, and then used the ingredient in drugs for which payment was requested and received.  The court imposed liability under implied certification based on the company’s submitting claims for reimbursement for drugs that were adulterated and misbranded.  Although the FDA continued to reimburse claims after learning about the company’s non-compliance, the court determined that the FDA’s continued approval was not dispositive and refused to allow the company to rely upon its fraudulently-obtained FDA approval as a shield to FCA liability.  Like the Fourth Circuit in Triple Canopy, the court also pointed to the various steps the company took to perpetuate its fraud, including altering results, batch numbers, and claiming the ingredient came from approved facilities.


Courts have also been careful to scrutinize the connection between the alleged false statement and the resulting increase in cost to the government.  For example, a former employee alleged that a contractor providing recreational facilities for the military inflated “headcount” data which purported to track how many troops frequented its recreation centers.  United States ex rel. McBride v. Halliburton Co., 848 F.3d 1027 (D.C. Cir. 2017).  Like other courts, the D.C. Circuit noted that the investigating agency had reviewed these allegations but never disallowed or challenged any of the amounts the contractor had billed for services.  Further, the government did not require headcount data to be maintained or produced—the contractor voluntarily undertook to track this data.  Although the relator claimed that the contractor inflated headcounts to justify higher staffing which would increase personnel costs, there was no evidence that staffing was excessive.  Without a connection between headcounts and cost, the court determined that false headcounts could not be relevant or material to the government’s decision to pay.




As courts continue to interpret Universal Health, contractors will better understand the confines of implied certification and the type of actions that may potentially trigger FCA liability.  Although the continued vitality of implied certification may cause concern for contractors, it is clear that courts post-Universal Healthcare have applied this theory in light of the Supreme Court’s insistence upon a “demanding” materiality standard.