In the highly anticipated decision in Universal Health Servs., Inc. v. United States ex rel. Escobar, 579 U.S. ____ (2016), the United States Supreme Court unanimously embraced the implied certification theory of liability under the False Claims Act, which could significantly expand healthcare providers' and other government contractors' potential exposure to expensive litigation and paralyzing judgments. Resolving a split among the circuits regarding this theory's scope and validity, the Court held that implied false certifications can be a basis for liability if two conditions are met:

  • A claim to the government for payment must make "specific representations about the goods or services provided," which is often the case by default if the contractor utilizes standard, government-issued billing or reimbursement forms; and
  • The contractor knowingly fails to disclose noncompliance with material statutory, regulatory, or contractual requirements, rendering those representations "misleading half-truths."

Thus, a viable false claim complaint can now be crafted out of mere contractual, statutory, or regulatory noncompliance, so long as the noncompliance is alleged to be misleading and material to the government's decision to pay. In endorsing this broad formulation, the Court further dispensed with the objective, bright-line standard for materiality applied by some lower courts that limited contractors' liability to misrepresentations about express conditions of payment.

The increased potential for liability, however, will come with increased scrutiny of the alleged claims. The Court strengthened the materiality defenses available at summary judgment and trial for contractors compelled to defend themselves. The Court emphasized that "[t]he False Claims Act is not an all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations." Instead, the materiality standard is "demanding." What is important is not the government's label or its mere option to refuse payment for noncompliance, but rather how the specific violation impacts payment in the real word. Lower courts, therefore, should review whether violations are material under the False Claims Act with a more commonsense approach. Relevant considerations include whether violations involve explicit conditions of payment, whether the government usually reimburses contractors when aware of similar violations, and whether a contractor knows that its violations would jeopardize reimbursement in the "mine run of cases."

Although the full impact of the Escobar decision will not become apparent for some time, the Court's endorsement of a broad formulation of the implied false certification theory and the subjective nature of its ruling means:

  • Contractors may be liable under the False Claims Act if they violate legal requirements that are not related to conditions of payments. It is paramount that contractors periodically re-examine their compliance programs in an effort to minimize risk. Representations, warranties, and other contractual provisions – even those relevant to participation in the government program as opposed to technical terms of payment – cannot be dismissed as boilerplate.
  • More cases will survive motions to dismiss given the intensely factual issues of materiality and scienter. This opens the door for greater discovery into government payment decisions, but also the potential for significant costs.
  • Increased scrutiny into materiality – and greater emphasis on how noncompliance impacts payment in the real world – gives rise to new arguments for contractors. It will be more difficult for relators and the government to transform mere errors or misunderstandings into fraud, but proving that a given regulatory or contractual violation is not "serious enough" to warrant liability is a messy, fact-based inquiry.

The Court's complete decision may be viewed here.

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