Until recently, it was well-accepted that a violation of the False Claims Act (“FCA”) occurs only when there is a misrepresentation that is objectively false. Four circuits—the Fourth, Seventh, Tenth and Eleventh—had adopted this “objective falsity” standard. In March 2020, however, the Third and Ninth Circuits issued decisions departing from this view, holding that objective falsity is not required and “legal falsity” can suffice. These decisions created a stark circuit split with profound implications for government contractors, and there is now a pending petition to the Supreme Court to address and clarify the matter.
First, a refresher: The FCA does not define “false or fraudulent,” leaving courts to look to common law to interpret what constitutes a “false” claim. Many circuits had found that a representation must be objectively false to qualify as a false claim, meaning that a false claim cannot arise where there is a genuine dispute and a claim is alleged to be false based on a subjective assessment. The Third Circuit was among those endorsing this view, holding that under the FCA “a statement is ‘false’ when it is objectively untrue,” United States ex rel. Thomas v. Siemens AG, 593 F. App’x 139, 143 (3d Cir. 2014), and that “expressions of opinion, scientific judgments or statements as to conclusions which reasonable minds may differ cannot be false.” United States ex rel. Hill v. Univ. of Med. & Dentistry of N.J., 448 F. App’x 314, 316 (3d Cir. 2011).
In March, though, the Third Circuit seemingly reversed itself. In a case involving medical professionals’ hospice diagnoses in the context of Medicare claims, the court found that claims could be “legally false” if they did not meet statutory or regulatory requirements—in other words, that a false claim could arise if expert testimony reached a conclusion that contradicted a doctor’s basis for the hospice diagnosis that would make the patient eligible for the Medicare hospice benefit. United States v. Care Alternatives, 952 F.3d 89, 96 (3d Cir. 2020). Also in March, the Ninth Circuit issued an opinion perhaps going even farther, holding “the FCA does not require a plaintiff to plead an ‘objective falsehood.’” Winter ex rel. U.S. v. Gardens Reg’l Hosp. & Med. Ctr. Inc., 953 F.3d 1108, 1119 (9th Cir. 2020). The Winter case similarly addressed a Medicare provision for reimbursement of inpatient hospitalization costs where a physician certified that inpatient treatment was reasonable and necessary. The Ninth Circuit also concluded fraudulent opinions were possible.
Effect on contractors: The new standards articulated by the Third and Ninth Circuits have significant ramifications for government contractors. Abandoning an objective falsity standard could mean that the harsh remedies of the FCA could be used to punish professional business judgments that are later shown to be inexact or mistaken, or with which the government disagrees. Even when a business receiving federal funds is acting in good faith and has reached its own well-informed opinion on a matter, it could be at risk where those findings are open to interpretation. It could thus become far more likely for administrative contract disagreements between the government and federal contractors to morph into FCA claims with significant consequences.
In an attempt to head off this high-risk scenario, the defendant in Care Alternatives has filed a petition for certiorari asking the Supreme Court to weigh in on the matter—a petition supported by others, including U.S. Chamber of Commerce. In its amicus brief, the Chamber states that “[t]he Third Circuit’s rule has implications far beyond the hospice context,” because “[i]t potentially affects any entity, public or private, that receives federal funds in myriad contexts: government contractors working under cost-reimbursement contracts; medical providers delivering services based on their good-faith medical judgments; researchers submitting claims for grant funds based on their scientific opinions; and any business attempting to navigate the complex statutory, regulatory, or contractual regime that governs their receipt of government funds.” Brief Of The Chamber Of Commerce Of The United States Of America And The Pharmaceutical Research And Manufacturers Of America (PhRMA) As Amici Curiae In Support Of Petitioner, Case No. 20-371, at 4.
Next steps: If the Supreme Court grants certiorari, it has the potential to change the FCA falsity standard landscape and provide some much-needed clarity and relief for contractors. We will provide updates as this debate continues to play out—stay tuned.