United States: Supreme Court To Decide Whether Implied Certification Theory Of False Claims Act Liability Is Viable With Likely Significant Impact On Contractor FCA Risk

Last Friday, the US Supreme Court granted certiorari in Universal Health Services, Inc. v. United States and Massachusetts ex rel. Escobar and Correa, No. 15-7. The Court will decide whether federal government contractors can be held liable under the controversial implied certification theory of liability under the False Claims Act (FCA). Implied certification is a judge-made theory that treats every contractor claim for reimbursement as an implicit representation that the contractor has complied with all applicable statutory, regulatory, and contractual requirements. In combination with a broad interpretation of the FCA's "reckless disregard" standard of knowledge, implied certification has become a powerful weapon that qui tam relators and the Department of Justice use to convert common contract breaches into potential fraud.

The Supreme Court will address two specific issues: (i) whether implied certification is a viable theory of liability under the FCA, and if so, (ii) whether compliance with a contract term, regulation or statute must be an express condition of payment in order to establish that the claim is legally false.

Currently, federal courts of appeals are all over the map on implied certification. Many circuits have accepted the theory in some form. The Fifth and Seventh Circuits are the only circuits that have rejected implied certification outright.

Among the circuits that have embraced implied certification, there is a split regarding whether compliance with the contractual term, regulation, or statute at issue must be an express condition of payment to establish legal falsity, or whether such a condition can be inferred. The Second and Sixth Circuits require that compliance be an express condition of payment in order to establish legal falsity. The Tenth Circuit has held that compliance must be an express condition of payment only with regard to statutory and regulatory requirements. Requiring compliance to be an express condition of payment  makes sense, as procurement contracts potentially impose an enormous number of contractual and federal, state and local requirements. Alleged noncompliance with most such requirements typically should be addressed through the ordinary contract administration process, and not treated as fraud.

On the other hand, the First, Fourth and DC Circuits do not require that compliance with the legal requirement at issue be an express condition of payment, meaning that any potential noncompliance, no matter how inconsequential to the work being performed, may constitute fraud under the implied certification theory.

The Supreme Court's decision in Universal Health Services should establish a uniform national rule that could have significant consequences for contractors. The implied certification theory long has been a favorite of qui tam relators because it effectively serves as a mechanism to treat all of a contractor's invoices as legally false, and thus fraudulent, even though the contractor did not make any misrepresentation, and regardless of whether the noncompliance had any bearing on the government's decision or willingness to pay for the goods or services rendered. Thus, the Supreme Court's acceptance of the theory would embolden relators to pursue fraud claims based on alleged noncompliance with obscure regulatory requirements. That in turn could result in an explosion of qui tam suits, and if victorious, harsh civil penalties, treble damages, and reputational harm imposed upon government contractors and subcontractors. Conversely, the Supreme Court's rejection of implied certification would be a major victory for contractors and likely result in the dismissal of numerous pending FCA complaints across the country.

Fortunately for contractors, in recent years the Supreme Court has shown a propensity to reign-in relators' efforts to expand contractor liability under the FCA. See, e.g., Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 135 S. Ct. 1970, 1974, 191 L. Ed. 2d 899 (2015) (the Wartime Suspension of Limitation Act does not toll the statute of limitations under the FCA); Schindler Elevator Corp. v. United States ex rel. Kirk, 536 U.S. 401 (2011) (strengthening the pubic disclosure bar by holding that a response to a Freedom of Information Act request is a "public disclosure"); Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (2008) (clarifying that a defendant must intend for a false record or statement be material to the government's decision to pay or approve a false claim); Rockwell Int'l Corp. v. United States ex rel. Stone, 595 U.S. 457 (2007) (public disclosure bar is jurisdictional). Based on these recent decisions, there is reason for cautious optimism that the Court may get it right in Universal Health Services.

The Petitioner's opening brief in Universal Health Services is expected to be filed in mid-January 2016. Amicus briefs supporting the Petitioner are due seven days after the Petitioner's brief is filed. Strong industry support explaining why the implied certification theory of FCA liability is legally wrong, economically and pragmatically onerous, and detrimental to the government's procurement interests should help the Court reach the right result.

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