David Yang and Christian N. Curran
On June 16, 2016, the Supreme Court issued its decision in Universal Health Services, Inc. v. United States ex rel. Escobar, holding that “implied certification” is a valid theory of liability under the False Claims Act (“FCA”), and further concluding that a failure to comply with a contract requirement, regulation, or statute may support a false claims case even if the provision is not an “express condition of payment.” While the unanimous opinion settles the debate over the viability of the implied certification theory, its reliance on a subjective materiality standard will likely make FCA cases more difficult to resolve on the pleadings and also increase the number of FCA cases filed.
In Escobar, relators alleged that Universal Health Services (“UHS”), through its subsidiary Arbour Counseling services, submitted false claims for reimbursement to the Massachusetts Medicaid program for counseling services. Specifically, relators alleged that UHS violated the FCA because the counselors were not properly licensed or authorized to provide the services that were charged. Although the claims for reimbursement did not expressly state that they were contingent on compliance with state regulations, relators argued that UHS impliedly certified compliance with those regulations when it submitted its claims. The government declined to intervene in the case.
The district court granted defendants’ motion to dismiss, finding that the regulations were only conditions of defendants’ participation in the Medicaid program, not conditions for payment. Therefore, because the regulations were not “express” conditions of payment, the court concluded that relators failed to state a claim under the FCA.
The First Circuit reversed, holding an entity “implicitly communicates” its conformity with the requirements for payment whenever a claim for payment is submitted. The First Circuit further found that regulatory and statutory violations can be material because conditions of payment may more broadly be demonstrated within those provisions, and not just in the specific sections dealing with payment.
The Supreme Court’s Escobar Materiality Standard
The Supreme Court decided two questions in Escobar: (1) whether implied certification is a viable liability theory; and, if so, (2) whether a violation of a requirement must be an express condition of payment.
On the issue of implied certification, the Court held that implied certification can be a viable basis for liability. The Court found that an omission or misrepresentation of noncompliance with regulations could support a false claim under the FCA, but that the misrepresentation must relate to “specific representations about the goods or services provided.” The Court held that UHS’s noncompliance with the licensing regulations was sufficiently detailed to survive dismissal because the provisions were specific to the services provided. Thus, by failing to indicate that the services were provided by non-qualified providers, the claims for payment could be misleading.
As for whether a misrepresentation or omission must be an “express” condition to payment, the Court rejected an objective, express precondition standard in favor of a broader and more fact-intensive materiality standard. Under the Court’s more subjective materiality approach, the fact finder must determine whether the government would have paid the claim if it knew of the contractor’s noncompliance, and also whether the contractor knew that the government would have refused to pay the claim had the information been disclosed. The Court, however, indicated that “minor or insubstantial” noncompliance was not material and that government conduct in paying claims of a similar nature, or waiving similar noncompliance, should be factored into the materiality analysis.
Navigating the FCA Post-Escobar
While the implied certification theory has been accepted in various forms by most circuits that have considered the issue, the Court’s adoption of subjective materiality and knowledge standards moves away from the more objective parameters that courts had formulated to distinguish fraud from standard contract or regulatory disputes that do not amount to false claims. The Court’s standards will, therefore, make it more difficult for defendants to resolve FCA cases earlier on, especially in non-intervened qui tam actions, on motions to dismiss or on summary judgment. The inquiries needed to determine whether an alleged noncompliance would have influenced a government payment decision (had it been disclosed), and whether the contractor acted with knowledge of how the alleged misconduct would affect that decision, will in most cases be too fact-intensive to resolve either on the pleadings or on summary judgment. In addition, the Court’s observations of minor or insubstantial violations or the government’s course of conduct as potential defenses will likely also be too fact-intensive for early resolution.
For government contractors, this new reality will likely mean more new cases filed by relators that will be more costly to defend. And, in addition to an uptick in new cases, the Court’s decision will likely result in the resurrection of previously dismissed cases. Indeed, the Court has already directed the Seventh Circuit to revive U.S. ex rel. Nelson v. Sanford-Brown Ltd. et al., which had been dismissed because that jurisdiction had previously rejected the implied certification doctrine. Moreover, lower courts may themselves review cases that they dismissed prior to Escobar.
In the wake of Escobar, contractors must more than ever heed best practices. The uptick in FCA litigation will emphasize the need for regular compliance reviews and for contractors to make mandatory disclosures on a timely basis. While mandatory disclosures are already required under the Federal Acquisition Regulation and in most government contracts (and come with their own penalties for nondisclosure), affirmative disclosures may be useful in demonstrating favorable government courses of conduct in continuing to pay claims after the disclosure and, therefore, show that the noncompliance was not material to a payment decision and that the contractor did not engage in knowing conduct. In the meantime, contractors will need to closely monitor post-Escobar FCA rulings by the courts to see how the case continues to shape the FCA landscape.