• High Court Addresses Key False Claims Act Issues: Implied Certification Theory Upheld, but High Bar Set for Materiality Requirement
  • July 12, 2016 | Authors: William W. Horton; Nadia M. de la Houssaye
  • Law Firms: Jones Walker LLP - Birmingham Office; Jones Walker LLP - Lafayette Office
  • In Universal Health Services, Inc. v. United States ex. rel. Escobar (June 16, 2016), a unanimous Supreme Court handed down a significant interpretation of the False Claims Act (31 U.S.C. §3729, et seq.), resolving conflicts among the federal circuit courts of appeal concerning the validity and scope of the “implied certification” theory of False Claims Act liability. At the same time, the Court established a relatively high bar for determining whether a false or fraudulent statement was material to the payment of a claim and thus could form the basis for False Claims Act liability.

    The Court ruled unanimously that either an implied or express false certification of a fact can, under certain circumstances, violate the Act, regardless of whether that fact related to a condition of payment or a condition of participation in the relevant government program. That is, liability may exist for a violation of statutory, regulatory, or contractual requirements, even if the government did not expressly identify such requirements as a condition for the payment of claims. However, the Court stressed the violation must be “material” to the government’s payment decision and provided clarification as to how that materiality determination must be made.

    Escobar involved alleged Medicaid fraud by a mental health care provider who submitted claims for reimbursement under the Massachusetts Medicaid program without disclosing that its staff was not fully qualified or licensed to provide the services for which payment was claimed under applicable state law. Compliance with those state requirements was not an express condition of payment in this case. A patient died as an alleged result of the diagnosis and treatment by unlicensed employees of the defendant. Investigation by the patient’s parents revealed that employees of the defendant apparently routinely misrepresented their qualifications and licensing status to obtain provider numbers that were then used to submit claims for Medicaid reimbursement. The parents filed complaints with various state agencies and ultimately brought a qui tam suit under the False Claims Act.

    The False Claims Act prohibits the knowing submission of a false or fraudulent claim for payment by a government program. The Act provides for significant per-claim penalties and treble damages, and violations of the Act may also form the basis for exclusion from participation in federal contracting and payment programs such as Medicare and Medicaid. False Claims Act cases may be brought directly by the United States or by individual “relators,” such as the parents here, who sue on behalf of the United States and are entitled to a share of the government’s recovery.

    Here, the defendant argued that liability under the False Claims Act could only arise if it had submitted the Medicaid claims without disclosing violations of requirements expressly designated by the Massachusetts Medicaid program as conditions of payment-that is, where applicable laws, regulations, or contractual provisions expressly provided that the program would not pay a claim where those requirements had been violated and the submission of the claim amounted to an express certification that no violations existed. The relators argued that the Act instead required only that submission of the claim imply that the underlying services had been provided in compliance with applicable laws, regulations, and contractual provisions and that such compliance was material to the program’s decision to pay the claim, even if there were no express certification of compliance.

    The Court, in an opinion by Justice Thomas, found that the defendant’s failure to disclose that the claims represented services provided by persons who were not licensed or qualified to provide them was an “actionable half-truth.” Thus, the Court held, the implied certification theory would support liability under the False Claims Act where
    • the claim in question “does not merely request payment, but also makes specific representations about the goods or services provided”; and
    • the failure of the defendant “to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”
    The Court’s ruling represents a clear and unequivocal affirmation of the implied certification theory of liability, which certainly expands the scope of potential claims under the False Claims Act. However, although that expanded scope benefits the government and qui tam relators, the second prong of Escobar is considerably more favorable to potential defendants.

    First, the Court decisively rejected the distinction between “conditions of participation” and “conditions of payment” that had been developed in some lower-court cases, finding no support for that distinction in the language of the Act. Liability, the Court said, did not turn on whether the requirements allegedly violated were expressly designated as conditions of payment or not; rather, the Court held, the key question was the whether the defendant knowingly violated a requirement that the defendant knows is material to the decision to pay the claim, regardless of how the claim was designated.

    The Court described this materiality standard as “demanding.” It is not enough, the Court said, that compliance with a requirement is designated as a condition of payment under a program, nor that the government would have the option not to pay the claim if it knew of the defendant’s noncompliance. Such facts are relevant, “but not automatically dispositive.” Further, a failure to disclose “minor or insubstantial” noncompliance will not support liability under the False Claims Act. Proof that the defendant knew that the government “consistently refuses to pay claims” based on noncompliance with a particular requirement would tend to show that the defendant knew that such noncompliance was material, and proof that the government regularly pays a particular type of claim “despite actual knowledge that [certain] requirements were violated, and has signaled no change in position,” would be “strong evidence” that it did not consider such requirements material. Justice Thomas specifically rejected an argument advanced by the government saying, in essence, noncompliance with any requirement, no matter how small or non-substantive, could by definition support liability under the Act; Justice Thomas likewise rejected the argument that the defendant’s knowledge that the government could reject a claim for noncompliance with a particular requirement, without more, was enough to meet the Act’s materiality threshold.

    Thus, although Escobar widens the playing field for the government and relators by endorsing the implied certification theory, it also gives defendants significantly more room to argue the materiality issue. Indeed, the fact-specific nature of the materiality question, combined with the factual questions of whether a defendant both knew of the violation of a requirement underlying a particular claim and knew that compliance with that requirement would be material with the government’s decision to pay the claim, may offer defendants increased leverage in trying to resolve False Claims Act cases on more favorable terms.

    As is often the case, the Court’s “clarification” of difficult questions may simply shift the argument to new difficult questions. Certainly, the rejection of a bright-line distinction between conditions of payment and conditions of participation in the False Claims Act context may in fact muddy the materiality analysis. However, while the government and relators’ counsel will doubtless by pleased by the endorsement of the implied certification theory, the Court’s willingness to impose what amounts to a facts-and-circumstances test on the materiality standard should be welcomed by healthcare organizations and other government contractors as a limit on the government’s practical ability to successfully use the False Claims Act to pursue incidents of technical noncompliance. Escobar thus offers something for everyone in the False Claims Act arena, and its ultimate significance will play out over future cases for many years to come.