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June 2016

  

Supreme Court Rejects Government's FCA Implied Certification Theory

  

 
 

  

     

  

 
 
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For more information about this e-Alert, please contact the author:

  

Author:

  

William D. Ezzell

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Additional FCA Defense contacts:

  

Brian F. McEvoy

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T. Jeffrey Fitzgerald

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Jonathan N. Rosen

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Additional Compliance contacts:

  

Brian D. Bewley

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Jennifer L. Evans

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The Supreme Court of the United States in Universal Health Services, Inc. v. Escobar et al., weighed in on and embraced the implied certification theory of liability within the False Claims Act (FCA).

Under the implied certification theory, a party can be held liable for the mere submission of a claim where the claim results from or is tied to the violation of a law, regulation or even a government contract. The rationale underlying this theory is that, upon submission of a claim seeking reimbursement from federal funds, the submitter is impliedly certifying that the claim does not result from the violation of any applicable law or regulation. Critics of this theory argue that it unduly expands the scope of the FCA by rendering it an enforcement tool for the violation of separately enacted laws and regulations.

It is likely that the Government and qui tam relator's bar will call this decision a "win." But the real impact of the decision is more subtle.

While the Court accepted the theory of implied certification, the Court stated that the theory only applied where two conditions were met: (1) the claim does more than request payment and makes specific representations about the goods or services provided; and (2) the failure to disclose noncompliance with material regulations or contractual provisions makes the representations "misleading half-truths." In the context of Medicare, it is far from clear whether typical Medicare or Medicaid claims meet those two elements.

Notably, the Court held that not every undisclosed violation triggers liability. This begs the question: what is a material misrepresentation that creates a misleading half-truth?

In answering this question, the Court rejected the Government's view, that something is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation. The Court also rejected another common argument used by the Government, concluding that misrepresentations cannot be deemed material simply because the Government designates a requirement as a condition of payment. Materiality also cannot be established if the Government would have the option to decline payment if it knew of the noncompliance.

Instead, the Court established what it called a "familiar and rigorous" materiality standard:

  • The Government's decision to expressly identify a provision as a condition to payment is relevant but not automatically dispositive.
  • Proof of materiality can include evidence that the defendant knows that violation is something that triggers the Government to refuse payment.
  • If the Government pays a claim in full despite its actual knowledge of violations, this is strong evidence that the requirements are not material.
  • Similarly, when the Government regularly pays a claim despite actual knowledge of non-compliance, but has signaled no change in position, this is strong evidence that the requirement is immaterial.

Importantly, the Court stated that the materiality element must be pled in the complaint with particularity under Rule 9(b). And perhaps equally important, the Court emphasized that the FCA is "not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations."

Ultimately, this decision is mixed news for federal health care program participants. The nutshell of the case is simple: FCA liability is limited to material noncompliance resulting in misleading half-truths. Application of this newly crafted standard, however, may prove to be difficult and will likely provide the basis for novel and unjustified claims under the FCA.

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