United States: Supreme Court Decides Validity Of False Implied Certification Theory In Universal Health Services v. Escobar

Last Updated: June 21 2016
Article by J. Andrew Jackson, Laura F. Laemmle-Weidenfeld and Stephen G. Sozio

On June 16, 2016, the U.S. Supreme Court decided Universal Health Services v. United States ex rel. Escobar, a widely anticipated decision with implications for health care provider and government contractor liability under the False Claims Act ("FCA"). The case addressed whether the so-called "implied false certification theory" is a valid method of establishing falsity under the FCA and, if so, under what conditions. In a unanimous opinion issued by Justice Thomas, the Supreme Court upheld the theory, at least insofar as an alleged falsity involves specific representations that omit material details. Universal Health Servs., 579 U.S. at __, Slip Op. at 3 (2016). However, the Court also separately emphasized that the FCA's materiality and scienter elements remain "rigorous" hurdles that the government and relators must satisfy. As a result, FCA litigation going forward may focus more on whether alleged violations actually mattered and were made knowingly, rather than on technical arguments over whether payment was premised on particular terms.

False Claims Act Background and Universal Health Services

The FCA imposes civil liability on any person or entity that "knowingly presents, or causes to be presented" to the United States government "a false or fraudulent claim for payment or approval." 31 U.S.C. §3729(a)(1). Some federal circuit courts previously held, with substantial variations in their reasoning, that one way of proving that a claim was "false or fraudulent" was through an implied false certification. In its purest form, implied false certification theory holds that any submission for reimbursement constitutes an implicit certification that the submitting party has complied with all applicable laws, regulations, and contract terms. Thus, if the party submitting the claim knowingly breached any one of the applicable terms, the claim is false.

Defendant Universal Health operated a mental health clinic in Massachusetts that received reimbursement under the Medicaid program, which is jointly funded by the federal and state governments. United States v. Universal Health Servs., Inc., 780 F.3d 504, 514 (1st Cir. 2015). A young woman who was a clinic patient died after receiving treatment from unlicensed and unsupervised staff, in violation of state regulations. The young woman's parents filed suit under the FCA as relators. They argued that the clinic's alleged noncompliance with supervision and licensure requirements made reimbursement claims submitted false under the FCA. Id. at 508. The district court dismissed the case, holding that only conditions of payment were actionable under the FCA, while relators alleged that conditions of participation in the Medicaid program were adequate to support FCA liability. U.S. ex rel. Escobar v. Universal Health Servs., Inc., No. CIV.A. 11-11170-DPW, 2014 WL 1271757, at *5 (D. Mass. Mar. 26, 2014).

The First Circuit reversed, holding that the clinic's payment was conditioned upon compliance with applicable regulations, including licensing and supervision of the clinic's staff. Universal Health Servs., 780 F.3d at 508. It held that "although the record is silent as to whether [the clinic] expressly represented that it was in compliance with conditions of payment when it sought reimbursement" for services, the court had not "required such 'express certification' in order to state a claim under the FCA." Id. at 514 n.14.

In its petition for certiorari, Universal Health asked the Supreme Court to review two questions: (i) "[w]hether the 'implied certification' theory of legal falsity under the FCA—applied by the First Circuit below but recently rejected by the Seventh Circuit—is viable"; and (ii) if the implied false certification theory is viable, "whether a government contractor's reimbursement claim can be legally 'false' under [implied certification] theory if the provider failed to comply with a statute, regulation, or contractual provision that does not state that it is a condition of payment." Pet. for Cert. at i, U.S. ex rel. Escobar v. Universal Health Servs., Inc., No. 15-7 (2015).

The Decision in Universal Health Services

The Supreme Court's decision held that the implied false certification theory "can, at least in some circumstances, provide a basis for liability." Universal Health Servs., 579 U.S. at __, Slip Op. at 8. The Court first recognized that the term "false or fraudulent" is not defined by statute. It therefore looked to background common law principles for guidance. All parties agreed that the common law clearly recognized fraud by omission. As a result, the dispute focused on whether submission of a claim for payment was actually a representation at all, such that knowing omission of material information would constitute fraud.

The Court stated that it "need not resolve whether all claims for payment implicitly represent that the billing party is legally entitled to payment" because the claims actually submitted by Universal Health were clearly "half-truths." Id. at 9. It pointed to payment codes submitted by Universal Health that corresponded to specific counseling services and the defendant's use of National Provider Number codes corresponding to specific job titles of those providing the services. It explained that anyone informed of those representations would have believed that Universal Health's staff, in fact, were qualified to perform the services rendered and had the skills corresponding to the titles they claimed. The Court explained its holding as allowing the implied false certification theory "at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths." Id. at 11.

Turning to the second question presented in the case, the Court held that liability does not turn on whether an alleged violation was expressly designated as a condition of payment. Instead, designation of a term as a condition of payment is relevant but not dispositive of the term's materiality.

The Court explained that nothing in the FCA's text dictates that liability is limited to violations of express conditions of payment. While misrepresentations must be material and must be made with scienter, alleged violations can be both without being made explicit conditions of payment.

The Court also rejected Universal Health's policy arguments that fair notice required cabining liability to terms actually linked to payment. It pointed out that the statutory text did not support this claim. Further, such a rule might give the government the perverse incentive of designating all terms as conditions of payment, eliminating any benefit of notice entirely. Instead, the Court stated that the FCA's "rigorous" materiality and scienter requirements should address these policy concerns.

The Court then proceeded to "clarify how that materiality requirement should be enforced." Id. at 14. It repeatedly noted that the FCA's "materiality standard is demanding," flowing from the fact 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." Id. at 15 (quoting Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 672 (2008)). Under the FCA, at common law, and in both torts and contract, materiality depends on the likely or actual behavior of the recipient of the alleged misrepresentation.

As a result, government designation of a term as a condition of payment is not dispositive of materiality, for materiality "cannot be found where noncompliance is minor or insubstantial." Id. at 16. Although designation of conditions of payment may be evidence of materiality, courts may not rely exclusively upon such designation. Other factors could include proof that the government routinely does or does not make payments in the face of violations of a particular term. Similarly, materiality may be implicated where "the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position." Id. The Court emphasized that it still expects lower courts to be able to dismiss claims that fail to plead materiality with particularity and to resolve cases at summary judgment based on materiality. Id. at 16 n.6

In reaching this conclusion, the Court rejected the government's and First Circuit's position that any violation "is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation." Id. at 17. The Court explained that this argument swept too broadly, pointing to the government's concession at oral argument that it would impose FCA liability on a contractor for health services even if the only violation were an undisclosed failure to comply with a requirement to buy American-made staplers. The Court rejected that view of FCA liability as "extraordinarily expansive."

In light of its decision, the Court vacated the First Circuit's decision and remanded for further proceedings.


The Supreme Court's decision did not provide the clarification that a bright-line test for FCA falsity could have provided. Nor did it definitively resolve whether implied false certification is proper in all cases or for all alleged regulatory violations. Instead, the Court's falsity discussion carefully stated that implied false certification is permissible "at least" where there are specific representations that are made misleading based on failure to disclose material noncompliance. That holding tracks a narrow reading of the facts of the case, which did not necessarily require the Court to address the full implications of implied false certification. As a result, the Court's decision establishes that a request for payment need not expressly incorporate false information to trigger liability under the FCA, but it does not establish the full extent of that rule.

At the same time, the Court's references to scienter and materiality provide continuing strong arguments for defendants seeking to limit FCA liability. Particularly in the materiality context, the Court went out of its way to emphasize that actions speak louder than words. Thus, if defendants cannot necessarily escape liability for contractual, statutory, or regulatory requirements based on the four corners of their payment requests, neither can the government (or, by extension, relators) definitively impose liability on that basis. Similarly, the government's actions and contractors' knowledge of them will now be subject to renewed scrutiny to determine whether the government actually cared about alleged violations. Government indifference now seems firmly established as a basis for attacking materiality of purported fraud.

Finally, the Court's pronouncements come against a backdrop of repeated, strong statements that FCA liability targets fraud, not contractual or regulatory foot faults. Whether lower courts will take those statements to heart is to be seen, but a fair reading of the Court's decision suggests that limiting liability is appropriate.

Going forward, litigation may focus more on whether alleged violations actually mattered and were knowing, rather than technical arguments over terms of payment. Relators may find it harder to transform mere errors into fraud under the Court's practical and commonsense emphasis.

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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J. Andrew Jackson
Laura F. Laemmle-Weidenfeld
Stephen G. Sozio
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