False Claims Act: Supreme Court Decides Implied Certification Case

Why it matters: On June 16, 2016, the Supreme Court decided Universal Health Services v. U.S. ex rel. Escobar, holding that the implied false certification theory can be a basis for False Claims Act liability if a claim for payment makes specific representations about the services provided but fails to disclose noncompliance with material statutory, regulatory or contractual requirements that would render the claim for payment misleading. In spite of ruling that there is an implied certification theory that can serve as the basis of an FCA case, the Court specifically disagreed with the First Circuit’s “extraordinarily expansive” interpretation of materiality under the FCA, but instead explained that the materiality standard here is “demanding,” such that if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.

Detailed decision: On June 16, 2016, the Supreme Court handed down its decision in Universal Health Services v. U.S. ex rel. Escobar, the case involving the issues of implied certification of compliance and legal falsity in a False Claims Act (FCA) context. It was the only FCA case of the Court’s 2015-2016 term, and the Court had granted certiorari to review and resolve a multicircuit split on the question of implied certification of compliance. We covered the Court’s grant of certiorari in our January 2016 newsletter, and the oral argument before the Court in our May 2016 newsletter.

Before we get to the decision, a brief review of the facts and procedural history is in order. The case arose out of the care provided to a teenage girl at Massachusetts-based Arbour Counseling Services (Arbour), owned and operated by Universal Health Services (UHS), that allegedly led to her death in 2009. In February 2013, the girl’s parents filed qui tam lawsuits under the FCA and its Massachusetts counterpart alleging that, by submitting claims for reimbursement, Arbour had engaged in fraudulent billing by misrepresenting that it and its staff members were in compliance with the requisite legal health standards and were properly licensed and/or supervised as required by relevant law. The district court dismissed the case in its entirety, holding that the relators had not established the requisite falsity to sustain the claims. On appeal, the First Circuit reversed, finding that the relators had stated a claim for “legal falsity” under the FCA because Arbour impliedly certified its compliance with applicable law when it submitted its claims for reimbursement to the government agencies, even though the specific statutory/regulatory language did not require an express statement of compliance as a condition of payment. The Supreme Court granted certiorari to resolve a circuit split on the “validity and scope of the implied false certification theory of liability.”

In a unanimous opinion written by Justice Clarence Thomas, the Court held that:

1. The implied false certification theory can be a basis for FCA liability if a claim for payment (a) makes specific representations about the services provided but (b) fails to disclose noncompliance with material statutory, regulatory or contractual requirements that would render the claim for payment misleading:

We hold that the implied certification theory can be a basis for liability, 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.

2. Compliance with legal requirements does not have to be an expressly stated condition of payment for liability under the FCA to accrue. Rather, liability depends on whether the defendant knowingly violated and/or misrepresented compliance with a legal requirement that the defendant knew was material to the Government’s decision to pay:

We further hold that False Claims Act liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment. Defendants can be liable for violating requirements even if they were not expressly designated as conditions of payment. Conversely, even when a requirement is expressly designated a condition of payment, not every violation of such a requirement gives rise to liability. What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision…. A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable under the False Claims Act.

In elaborating on its first holding, the Court first said that, as the FCA does not provide a definition of “false” or “fraudulent,” Congress intended (absent indication to the contrary) to incorporate the common-law definitions of those terms, which include both express statements of falsity as well as misrepresentations by omission. The issue in this case turned on whether “submitting a claim without disclosing violations of statutory, regulatory, or contractual requirements constitutes such an actionable misrepresentation.” Here, the Court said that UHS used “payment codes” that correspond to specific Medicare and other federal and state counseling and medical services. By using those codes on payment claims to the federal and state governments, the Court said that UHS was in effect representing that its employees had provided legitimate medical services corresponding to the codes (such as therapy, family therapy and preventive medication counseling) by fully licensed employees. Thus the Court said that it need not reach the issue of whether all claims for payment impliedly represent that the submitter of the claim is legally entitled to payment because “[t]he claims in this case do more than merely demand payment. They fall squarely within the rule that half-truths—representations that state the truth only so far as it goes, while omitting critical qualifying information—can be actionable misrepresentations.”

In elaborating on its second holding, the Court rejected UHS’s due process notice and fairness arguments that liability under the FCA should only accrue if there are violations of expressly designated conditions of payment. First, the Court said the language of the FCA does not support such a limitation. In addition, under the materiality and scienter provisions of the FCA, “statutory, regulatory and/or contractual requirements are not automatically material, even if they are labeled conditions of payment” and “[a] defendant can have ‘actual knowledge’ that a condition is material without the Government expressly calling it a condition of payment.” Finally, the Court said that requiring the Government to expressly designate conditions of payment for every regulation would be too burdensome, and stated that the “rigorous” materiality and scienter threshold requirements in the FCA should suffice to allay UHS’s concerns.

Finally, the Court provided clarification on how the “materiality requirements” of its holdings should be enforced. The Court noted that the term “material” is defined in the FCA as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” The Court called this materiality standard “demanding” and largely dependent on the particular facts of the case rather than an objective bright-line standard, stating that:

[W]hen evaluating materiality under the False Claims Act, the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. Likewise, proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement. Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if 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, that is strong evidence that the requirements are not material.

The Court specifically disagreed with the First Circuit’s “extraordinarily expansive” interpretation of materiality under the FCA 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.” Thus the Court vacated and remanded the case to the First Circuit “for reconsideration of whether the defendants have sufficiently pleaded a False Claims Act violation” consistent with the Court’s opinion. The Court concluded:

We emphasize, however, that the False Claims Act is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations. This case centers on allegations of fraud, not medical malpractice. Respondents have alleged that Universal Health misrepresented its compliance with mental health facility requirements that are so central to the provision of mental health counseling that the Medicaid program would not have paid these claims had it known of these violations. Respondents may well have adequately pleaded a violation of §3729(a)(1)(A) [of the FCA.] But we leave it to the courts below to resolve this in the first instance.