United States: FCA Implied Certification, The Slim, Early Elvis Version

What follows is the promised second guest post from Reed Smith's Lindsey Harteis concerning the UHS v. Escobar False Claims Act case. Lindsey's first post set the stage. The Supreme Court decided Escobar yesterday, so now she's back with her take on the version of FCA "implied certification" that the unanimous Supreme Court recognized.

As always our guest posters deserve all the credit, and any blame, for the contents of their posts.

***

To someone born in 1984, the phrase "Elvis Lives" is tough to figure out. We don't know what things were like back when he was alive and on TV (from the waist up). But we do get the general concept that something can live on after death, just in a different way. And we definitely enjoyed the trio of violin-playing Elvises in a Coldplay music video a few years back. So, Elvis is still around. Just in a different way.

Unfortunately for us defense bloggers, so is the implied certification theory. Yesterday the Supreme Court handed down its opinion in Universal Health Services, Inc. v. Escobar, No. 15-7, slip op. (U.S. June 16, 2016). This is the pending Supreme Court decision we blogged about last month (here) that has determined both the scope and validity of the implied certification theory of False Claims Act liability. While the theory survived, the opinion is not all bad news. In fact, it should have relators all shook up more so than defendants. So we'll get going with a little less conversation and try to ease your suspicious minds about how a case that allows a pro-relator theory of liability to survive can actually still be good.

The case is overall good for FCA defendants because the Supreme Court emphasized just how rigorous the materiality threshold is in these cases. The bad news is that the implied certification theory is still (at least in some circumstances) valid. (As a quick refresher, implied certification cases are founded on the idea that when a provider submits a claim for payment to the Government, that claim impliedly certifies compliance with all conditions of payment. Thus, the theory goes, if the claim fails to disclose the defendant's violation of a material statutory, regulatory or contractual requirement, that claim is false and actionable under the FCA.)

Most, although not all, lower courts had already allowed some version of implied certification under the FCA. So, while the case is not a total defense win, UHS is a net gain in most places, since the cause of action is significantly narrower than what many courts – including the First Circuit below – have allowed. Questions about implied certification's scope, in addition to its overall validity, needed attention. Courts of appeals were in disagreement over such issues as whether statutory, regulatory, or contractual compliance needed to be an express condition of payment in order for undisclosed noncompliance to trigger liability. UHS answered those questions, too, and we generally like those answers.

Here are the key takeaways:

(1) Even though implied certification is valid sometimes, it is no longer defined in terms of whether compliance was or was not an express condition of payment.

For the Government and relators, the theory remains available provided two conditions are met: (1) the claim does not merely request payment, but also makes specific representations about the goods or services provided; and (2) the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths. Slip op. at 11.

(2) The materiality requirement is demanding.

To the Court, materiality doesn't result simply where the Government designates compliance with a particular statute, regulation or contract term as a condition of payment. Nor would materiality result where the Government gives itself the option to decline payment in the event of noncompliance. Slip op. at 15-16. Nor is noncompliance that is "minor" or "insubstantial" enough to satisfy the materiality element. Slip op. at 15-16. The Court acknowledges that, although not dispositive, the Government's decision to pay a claim with knowledge of noncompliance, or its decision to make compliance a condition of payment are still relevant. Slip op. at 16.

One wrinkle with this theory is that materiality has usually been defined in terms of the Government's point of view. Under the contract principles cited by the Court, misrepresentations are material only where they would "likely ... induce a reasonable person to manifest his assent ... or the defendant knows that for some special reason [the representation] is likely to induce the particular recipient to manifest his assent to the transaction." That's reasonable "person," not just the government. In FCA cases where the Government doesn't intervene, then it should be easy to hold the statutory, regulatory or contractual infractions immaterial. But it remains to be seen how the new standard for materiality is applied when the Government isn't seated at counsel table.

Although the First Circuit will get one of the first opportunities to apply the ruling in the context of the remand of this case, it will do so after being unanimously spanked by the Supreme Court;

[We] disagree with the Government's and First Circuit's view of materiality: that any statutory, regulatory, or contractual violation is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation.

Slip op. at 17. We can draw three preliminary conclusions from Court's materiality holdings: (1) a vigorous materiality element should forestall class actions and other attempts (as the First Circuit in particular has been known to do) to adjudicate FCA implied certification claims on an aggregated basis; (2) elimination of the "entitled" standard means that, implied certification FCA claims should not lie at all where the government continues to reimburse that type of claim (such as particular off-label use); and (3) no longer can the Government sue and satisfy materiality simply by pleading it. In cases where the Government intervenes, Defendants will be entitled to seek discovery concerning payments, denials of payment and regulatory compliance of other parties who are or have been submitting claims for payment in similar situations. Defendants will have a better chance to undercut materiality by taking a hard look at how, in practice, the Government has historically responded to the alleged statutory, regulatory or contractual breach when paying claims for payment by other parties.

Thus, while we would rather have been able to write the demise of "implied certification" altogether, that clearly wasn't in the cards, given the unanimous result. Nonetheless, the Court significantly clipped this cause of action's wings. For that, we'll quote the King. "Thank you veryyyyy much." Stay tuned as we eagerly await this (and other cases applying the UHS definition of implied certification and materiality) and report back.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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