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.
Implications
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.