United States: Implied Certification And The FCA: Legally False Or A False Legality? The Supreme Court Is Set To Decide

The United States Supreme Court recently granted certiorari in the case of Universal Health Services, Inc. v. U.S. ex rel. Escobar, No. 15-7, which places implied certification under the False Claims Act (FCA) squarely in the judicial crosshairs. Implied certification is a frustrating theory of liability for providers and contractors that receive government reimbursement, due to the broad, almost limitless liability it can create, and the circuit courts are split on the issue. With this case, the Supreme Court has the opportunity to eliminate, or at least significantly limit, the confusion and breadth of liability that has been created by the application of implied certification.

The Supreme Court's grant of certiorari in Escobar will address two questions on review. The first is whether implied certification is a valid theory of legal falsity under the FCA. Assuming the first issue is answered in the affirmative, the second issue will be to resolve the split among the circuits that have adopted it. In other words, is the theory of implied certification available only when the contract, statute, or regulation expressly conditions payment on compliance? This will probably be where the Supreme Court draws the line.

The Circuit Split

Implied certification is a judicially created theory under the FCA that establishes liability for a provider or contractor that, although having delivered or performed the materials or services claimed, violated a contract, statute, or regulation as a condition of payment even though the provider or contractor did not expressly certify compliance with the contract, statute, or regulation as a condition of payment.

In most circuits, implied certification has been adopted in one form or another; however, most recently, the Seventh Circuit expressly rejected the theory, noting that it "lack[ed] a discerning limiting principle." U.S. v. Stanford-Brown, Ltd., No. 14-2506, 2015 WL 3541422, at *12 (7th Cir. June 8, 2015). The Seventh Circuit was the first circuit to outright reject the theory of implied certification altogether.

While other circuits have not rejected it, they have attempted to place some limits on its breadth. For example, the Second and Sixth circuits still enforce a theory of implied certification but do so with some form of transparency and notice for providers and contractors. These circuits recognize that a provider or contractor impliedly certifies compliance with a contract, statute, or regulation for purposes of FCA liability only if the government expressly conditions payment on compliance. In other words, compliance with the legal obligation of the contract, statute, or regulation in question must explicitly be designated as a condition of payment.

However, in circuits such as the D.C., First, and Fourth, implied certification has evolved into its broadest form of liability. In those circuits, a defendant can be found liable under the FCA based on violations of statutes, regulations, and contractual provisions as conditions for payment, even where the contract, statute, or regulation does not expressly identify the legal obligation as a condition of payment.  Rather, federal courts in these circuits may find an implied condition of payment without any basis in the text of the relevant contract, statute, or regulation.

The Escobar Case

Specific to Escobar, implied certification was alleged by the parents of a patient who died following treatment in a mental health facility that received federal and state reimbursement through the Medicaid program. Allegations included that the mental health facility failed to properly supervise caregivers and did not employ a board-certified or board-eligible psychiatrist and a licensed psychologist in violation of state health regulations. Relators also alleged that compliance with the regulations was a condition to payment, despite the fact that the regulations were silent on the payment issue.

The district court dismissed the relators' complaint, but the First Circuit reversed, finding that it was not necessary for defendant to make express certifications or statements of compliance to create FCA liability under legal falsity, nor was it necessary for the contracts, statutes, or regulations to expressly set forth the conditions of payment. The mere allegation of non-compliance with the contractual, statutory, or regulatory terms was sufficient. The fact that the state health regulations relied upon by relators did not contain an express condition of payment was inconsequential for the court.

Considering the vast divergence between the Seventh and First circuits' interpretation of implied certification, Escobar provides a logical jumping-off point for the Supreme Court to finally decide the issue.

Going Forward

Given the importance and reach of Escobar, the Supreme Court will unquestionably hear from interested parties supporting both sides. Oral argument is expected in April, with a decision to follow by the conclusion of the Court's term in June. BakerHostetler's Healthcare Industry team will continue to monitor developments, including the filing of amicus briefs, and will provide periodic updates as the case progresses through the Supreme Court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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