The FCA: Escobar Means More Than You Think

Editor's Note: On June 6, 2016, the Supreme Court issued a unanimous decision in the Medicaid case of Universal Health Services, Inc. v. United States ex rel. Escobar, adopting a form of the "implied certification" theory of knowingly fraudulent representations under the False Claims Act (FCA). The Court's opinion, authored by Judge Clarence Thomas, confirmed that the implied certification theory "can be a basis for liability"—but did it really fully resolve the circuit split around this issue? In a recent webinar, Manatt examined the implications of the Escobar decision on implied false certification, materiality and FCA cases moving forward. Click here to view the webinar free and here to download a free copy of the webinar presentation.

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What Is the FCA?

Enforced by the Department of Justice (DOJ), the FCA is a federal statute that creates liability for any person who submits claims to the government for payment. In the healthcare space, for example, this includes healthcare providers who make claims for payment to Medicare or Medicaid. The FCA prohibits a person or entity from knowingly making a claim for payment that is false or fraudulent or that includes a false statement that is material to the claim.

The FCA has several severe financial consequences, including the potential for double or treble damages. There also are attorneys' fees provisions, as well as mandatory civil penalty provisions, which can go up to $11,000 per claim. In addition to the massive financial repercussions, companies found guilty of violating the FCA could face debarment from federal programs.

The FCA also includes whistleblower provisions, which allow private parties to bring what are called qui tam actions on behalf of the government. The government can decide to intervene in that action or decline to intervene. If the government declines, the whistleblower and the whistleblower's counsel control the case going forward.

What Is the Theory of Implied False Certification?

The Escobar decision was supposed to answer the longstanding circuit split about a particular doctrine within FCA jurisprudence known as the implied false certification doctrine. The FCA is an antifraud statute, but a species of FCA liability has emerged in which government contractors and others who get reimbursements from the government are found liable without any express statement that is deemed false or fraudulent. Rather, the theory of implied false certification means that the mere submission of a claim for payment to the government implicitly certifies that the requesting person is in compliance with material government regulations or material provisions of the relevant contract. In other words, just by submitting a request for payment or reimbursement, the requestor is implicitly representing to the government that it hasn't done anything illegal or outside of the regulatory program under which the claim is being submitted.

There's been a circuit split among the courts on how to deal with these kinds of claims. Basically, the courts have divided into two camps. There is one group, starting with the Second Circuit, that has held that it is only going to hold defendants liable under this theory where the regulation or contractual provision that they have been alleged to have violated without disclosing is itself expressly a condition of payment. In other words, there must be something in the regulation itself that says compliance with the regulation is a condition of payment. Therefore, the act of requesting payment implicitly certifies that the requestor is in compliance with the regulation. Other circuits have rejected that type of test and instead take a more expansive and fact-intensive view as to what sorts of regulations and what sorts of violations would qualify for liability under this theory.

What Happened in Escobar?

Escobar involved a healthcare provider in Massachusetts that provided mental health services to a young girl who ended up dying in its care. It turned out that a number of the mental health professionals treating the girl were not licensed and were not qualified to provide the treatment. In addition, medications were being prescribed by people who were not authorized to write prescriptions. In fact, the person who diagnosed the patient was not licensed to make the diagnosis.

In spite of these facts, the provider submitted numerous claims to MassHealth, Massachusetts' combined Medicaid and Children's Health Insurance Program (CHIP), for payment. After the patient passed away, the plaintiffs brought an action alleging under the FCA that the claims for payment were false and fraudulent because implicit in those claims was a certification that the persons providing the treatment were qualified to do so.

The district court dismissed the claim on the theory that the alleged falsities were conditions of participation and not conditions of payment. The First Circuit reversed and rejected that distinction between conditions of participation and conditions of payment. Instead, the First Circuit adopted a position that whether or not a regulatory noncompliance renders a claim for payment false or fraudulent requires a fact-specific inquiry. The reversal teed up the case for a decision by the Supreme Court as to whether or not the fact that the provider making the claims for services was not qualified to provide those services rendered the underlying claims false or fraudulent.

What Was the Supreme Court's Decision?

The Supreme Court issued a unanimous decision, written by Justice Thomas, vacating the First Circuit decision and describing the First Circuit jurisprudence as too expansive in this area. It did not adopt, however, the distinction between condition of payment and condition of participation that some of the other circuits had adopted. Instead, the Supreme Court found that FCA liability could be sufficiently pled where there was an express statement that itself was misleading due to undisclosed noncompliance. The Court further found that such a claim would have to be supported by a showing or an allegation that the undisclosed noncompliance was material to the government's decision to pay and that the defendant had knowledge not only of the undisclosed violation but also of the fact that it was material to the government's decision.

Based on that finding, the Supreme Court vacated the First Circuit decision, because the First Circuit had applied such a different standard than any other circuit had applied. The Court didn't say, however, that the First Circuit necessarily got it wrong. It vacated the decision for the First Circuit to apply that standard to the facts of that case. Perhaps predictably, both sides declared victory in the press—and the rest of us are left wrestling with what this decision really means.

What Are the Implications of the Decision?

One of the key points that comes across from the decision is that the Supreme Court upheld the possibility of an FCA violation, because there was an express statement that was essentially a half-truth, rendering it misleading. The Court expressly declined to resolve whether an implied false certification theory was viable based on the mere submission of a claim itself. That may be the unresolved circuit split that we're going to see with these cases moving forward. By relying on this sort of implied statement or half-truth, the Court was really drawing on common law roots of what can constitute a fraudulent omission, and perhaps we'll leave it to the courts or scholars to argue about other common law exceptions that might give rise to these kinds of claims.

The most interesting part of the decision relates to its materiality holding. The language isn't on point in describing what the materiality standard is, in terms of giving us a sentence we can use. It does include some language from the common law doctrine from which it draws, suggesting that the Court is very concerned with whether a particular noncompliance or a particular regulatory violation is likely to influence the government's decision to pay.

The issue of materiality is where the Escobar decision is likely to have interesting implications going forward. The Court says that materiality refers to information that is material to the decision by the government to pay the claim. Very critically, although there has been confusion in the press around this issue, the Court is explicit in stating that the defendant must have knowledge of the materiality—so would need to know that the information would be material to the government's decision to pay the claim.

The opinion goes out of its way to state that the materiality standard is demanding. The Court then goes on to define explicitly what's not material. The Court states that, in fact, "a misrepresentation cannot be deemed material merely because the government designates compliance with a particular statutory, regulatory or contractual requirement as a condition of payment." Slip Op. 15.

What the Court is saying is that the fact the government has explicitly stated that it's not going to pay isn't necessarily enough to prove materiality. "Nor is it sufficient for a finding of materiality that the government would have the option to decline to pay if it knew of the defendant's noncompliance." Slip Op. 15-16. This captures where the Court was troubled by the First Circuit's decision and how broadly the First Circuit had ruled on the definition of materiality.

Why Is a Track Record Important?

For government agencies, this decision removes the ability to "opt into" the FCA. Agencies can no longer make regulations or any particular regulation a predicate for FCA liability. The Court is saying the agency really has to act on the regulation. When Justice Thomas talks about the evidence of materiality, he really is referring to the track record. In what situations did the government actually decline payment? And in what situations did the government permit payment, even when it was aware of a violation?

There are cases in which the government knows about a regulatory violation but continues to pay. Then a relator purporting to represent the government's interest attempts to sue under the FCA. The unanimous decision makes it clear that it's very hard to believe a particular violation is material to the government's decision to pay, if the government has, in fact, kept paying, even after it was aware of the violation.

What Is the Potential Impact of the Materiality Requirement?

The interesting thing about the materiality requirement is that it's not limited to the implied false certification context. Escobar was supposed to be the decision that determined whether implied false certification was a viable theory, but the Court punted on the question. It did, however, make a very important ruling on the issue of materiality—and that issue of materiality is not limited to implied false certification claims. The fairly significant statements that the Court made on materiality—in some ways limiting materiality and in other ways expanding materiality—can be equally applicable to all sorts of FCA cases.

That comes across in a number of aspects of the decision where the Court is insisting on not deciding issues. It's a little bit tough to swallow how the logic of the decision holds up, if the Court truly is not deciding what the standard for materiality is for the FCA.

There is almost a defensiveness in footnote 6 of the decision:

"We reject Universal Health's assertion that materiality is too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment. The standard for materiality that we have outlined is a familiar and rigorous one. And False Claims Act plaintiffs must also plead their claims with plausibility and particularity under the Federal Rules of Civil Procedures 8 and 9 (b) by, for instance, pleading facts to support allegations of materiality."

Footnote 6 has been the beacon of hope for defense attorneys that they're still going to be able to win their cases on motions to dismiss—and they probably will. Beyond the footnote, the decision is really framed in terms of track records for government agencies—whether they pay or don't pay—and that is not necessarily the kind of information that defense attorneys are going to have readily available to argue from the pleadings on a motion to dismiss.

On the other hand, relators and the DOJ also are not going to have information handy on whether an agency chose to pay or not to pay when faced with similar noncompliance issues. In addition, relaters are going to have to come up with allegations that satisfy the standard of materiality that the Court has issued in Escobar—and they're going to have to do it in a way that satisfies Rule 9(b) and heightened pleading standards. Beyond that, they're going to have to allege plausibly that not only was information material to the government's decision to pay or not to pay, but that the defendant knew it was material.

As a result, it's likely that we are still going to see motions to dismiss and those motions being granted. But they're not going to look like the motions that got filed under courts that followed the Second Circuit approach. Instead, we are going to see motions to dismiss that look more like motions seen in commercial litigation cases where defendants have to catalogue the allegations and explain to the court why they are not enough.

What's Next?

The implications for the case going forward remain a bit unclear. In some ways the Court has made life harder for FCA defendants, and in some ways it's made life harder for FCA plaintiffs and the government. For now, we can just continue to watch and see how things play out moving forward.