• High Court Clarifies False Claims Act Ramifications for Government Contractors and Others
  • July 19, 2016 | Authors: Stanley A. Millan; Chad V. Theriot
  • Law Firms: Jones Walker LLP - New Orleans Office; Jones Walker LLP - Atlanta Office
  • Universal Health Services, Inc. v. United States, Ex. Rel. Julio Escobar, --- U.S. ---(June 16, 2016), 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. This follow-up Alert emphasizes possible ramifications on any federal contractor or grantee, though the underlying facts centered on health care.

    To reiterate, the Court ruled unanimously that either an implied or expressed false certification can under certain circumstances violate the Act. That is, implied liability may exist for violating statutory, regulatory, or contractual requirements, whether or not they are an expressed condition of payment by the federal government on various claims. However, the Court stressed the statutory, regulatory, or contractual violation must be “material” to the government’s payment.

    The Escobar case involved alleged Medicaid fraud by a mental health care provider who did not disclose to the government in its reimbursement claims that its staff was not fully supervised, qualified, or licensed in Massachusetts, where it provided the specified health care. State qualification was not an expressed condition of payment in this case. A patient died allegedly as a result of the poor treatment by defendant, which led to the private qui tam lawsuit, but medical malpractice is not a requirement for liability under the Act. Liability under the Act relates to a claimant’s knowing or reckless, but not negligent, submission of false claims for payment against the federal government in several contexts, including Medicare, federal contracts and subcontracts, federal grants, and so forth.

    The Act provides for significant penalties, treble damages, private qui tam actions with “bounties,” government lawsuits, and, if violations of the Act are upheld, possible later termination of participation in or suspension and debarment from federal government programs, including federal contracts and subcontracts, state contracts with federal funding, etc. There has been a flood of private and federal lawsuits under the Act over the past decades.

    The Court found the provider, Universal Health Services’ misleading half-truth violations to be a garden-variety type of misrepresentation under the Act, as the defendant impliedly certified with its claims that it performed services with qualified and licensed personnel. Therefore, the Court held that an implied certification theory is actionable under the Act where,

    1) more than a mere request for payment is made but a specific representation about goods or services is also made (here provider codes for qualified personnel were presented with the claim), and

     2) there is a failure to disclose noncompliance with a material requirement (e.g., no qualified personnel). The Court remanded the case to the First Circuit on the issue of Escobar’s pleading materiality of the alleged violation(s). The case arose from a motion to dismiss Escobar’s Complaint.

    Of course, if there is an express false claim, e.g., a statutory requirement for certifying in a large contract dispute claim that the claim is submitted in good faith for a sum certain in damages, but for which damages have not actually been suffered at all, the first component above is likely automatically satisfied. Materiality would still be an issue but is also likely satisfied in our example.

    The Court offered guidance on the materiality requirement. The Court stated that not every non-compliance of a condition of government payment or of a statutory, regulatory, or contractual requirement is a violation of the Act. Material rules may or may not relate to payment, participation in a program, or otherwise. The statutory, regulatory, or contractual requirement violated must be “material” to the government’s decision to pay. The Court stated that materiality is rigorous and is not minor or insubstantial. The Court stated that the government’s knowledge of the non-compliance and its payment anyway is evidence of non-materiality.

    The Escobar case confirms a cause of action for knowingly false and implied certifications, but it also gives to defendants the defense of “materiality” to argue. The defense of lack of materiality is not a clear standard and may be litigated for years.

    The opinion’s author, Justice Thomas, provided an example of materiality-a deviation from his normal strict style of writing-of a minor and insubstantial non-compliance. For instance, it is not material if a health care provider violates a government requirement to use American-made staplers on its paperwork, and then fails to disclose it used foreign staplers in its work when it later submits a claim for payment for its main medical services. Additional examples occur to us, such as if a construction contractor with domestic sourcing requirements for materials, as in the above example, uses foreign staples on its paperwork without disclosing that to the government; the construction contractor would likely have incurred an immaterial violation. Contrariwise, a government contractor who submits a progress payment request for a certain percentage of work or milestone accomplished, but who in fact is recklessly and substantially short and/or is using defective or unsuitable material without disclosing those facts, may have a material contractual violation.

    However, health care providers, contractors, grantees, etc., have to comply with thousands of rules, and determining which ones if violated are “material” may be a fact-intensive inquiry, requiring plaintiffs to plead their claims with added particularity. Not all applicable rules are just boilerplate; they have to be screened. One should ask, does the potential rule or provision violated matter to the government in a particular payment situation?

    Examples of the broad scope of the case draw from many of the amicus briefs filed in the case: Coalition of Government Procurement, Association of Private Sector Colleges and Universities, Chamber of Commerce of the United States of America, CTIA - The Wireless Association, Association of Criminal Defense Lawyers, individuals, etc. The Coalition of Government Procurement’s brief cites numerous laws and regulations contractors have to confront, including but not limited to affirmative action plans and reports, special policies for hiring former veterans, Buy American Act, small business subcontracting plans and goals, federal labor statutes for services and construction (classifications, wages, fringes, postings, etc.), new Executive Orders on labor (minimum wage, paid sick leave, etc.), Federal Acquisition Regulations and agency supplements (including certifications and representations to be posted on the System of Award and Management, at certain dollar thresholds allowable costs, ethics programs and self-reporting, etc.), unspecified requirements read into government contracts under the Christian case doctrine, and so forth. Often these requirements are flowed down to subcontractors. Government grantees have similar burdens. And other programs could become implicated, such as the RESTORE ACT’s federal funding for coastal restoration projects following the BP oil spill.

    It is doubtful the government can shore up the Act’s requirement for materiality by requiring more and more express compliance with numerous regulations as a condition of payment, because it is the substance and not the form of requirement which determines materiality of a violation in the Court’s view. However, to obviate a threat of a false claim, contractors, grantees, health care providers, etc. may consider early self-disclosing of their own serious violations that they detect.

     The Court’s decision offers guidance which may be dicta, but it does show the Court with eight members is now trying to be more cooperative and not debate in many of their opinions different philosophical views