Round One of Escobar: Petitioner and Amici Urge Court to Eliminate Controversial Theory of FCA Liability



February 09, 2016

Government Investigations & White Collar Defense Alert

Author(s): Brian T. Kelly, Emily Crandall Harlan

Petitioner and industry amici recently filed opening briefs in a case before the Supreme Court that has potentially dramatic implications for False Claims Act cases. Asking the court to reject or significantly limit the controversial theory of implied certification, which expands the reach of the False Claims Act to claims that are factually accurate on their faces, the petitioner, an owner of health care facilities, dubs the theory a “Frankenstein’s monster” that has distorted the intent of the law.

After tackling two procedural issues concerning the False Claims Act (“FCA”) last term[1], the Supreme Court is currently poised to weigh in on one of the thorniest and most controversial aspects of the FCA: the theory of implied certification. The Court’s highly anticipated decision in Universal Health Services v. United States ex rel. Escobar (“Escobar”), which should resolve a split among the circuit courts, arises in the context of health care but will have broad implications for all who do business with the federal government and are within the frequently expanding reach of the FCA.

As we reported previously, the Supreme Court granted certiorari in Escobar in December 2015. The case presents two questions for the Court to decide: (1) whether implied certification is a viable means of demonstrating legal falsity; and (2) if so, whether the statute, regulation or contractual provision on which the implied certification is based must expressly state that compliance with it is a condition of payment. As described in our earlier alert, implied certification theory concerns the falsity element of False Claims Act liability. As currently applied by the courts that endorse the theory, a contractor can be held liable for seeking and/or receiving payment from the government when the contractor does not affirmatively disclose that it is not fully compliant with a statute, regulation, or contractual provision that governs its work. Some courts require that the statute, regulation, or contractual provision must expressly state that compliance is a condition of payment of the claim; others agree that compliance must be a condition of payment (and not one of mere participation), but do not require there to be express condition-of-payment language.

In Escobar, these questions arise in the context of mental health treatment provided to relators’ daughter at a facility in Massachusetts. Relators allege that the facility, which receives both state and federal funding, was not in compliance with a number of regulations, including regulations concerning the licensing and supervision of its providers. The appeal to the high court arose after a March 2015 ruling by the First Circuit that reversed a district court holding in the facility’s favor and rejected a finding that the regulations at issue were conditions of participation, not payment. In its opinion, the court scrutinized the regulations and determined them to be conditions of payment, notwithstanding the fact that no express language identified them as such. United Health Services (“UHS”), the owner of the facility, appealed to the Supreme Court. On January 19, 2016, UHS filed its opening brief with the Court. More than a dozen amicus curiae briefs from industry amici and other interested entities supporting the petitioner have followed, underscoring the broad application of the Court’s forthcoming decision.

In its brief, UHS urges the court to reject the implied certification theory of falsity, which it dubs a “Frankenstein’s monster” that distorts the congressional intent behind the FCA. As an initial matter, UHS argues, the implied certification theory is inconsistent with the text of the FCA, in particular the statute’s use of the terms “false” and “fraudulent” to describe the claims that are within its reach. The implied certification theory relies upon statements that were not made (i.e., non-disclosure of a failure to comply with a statute or regulation), as opposed to relying on the actual representations in the claim for payment. UHS argues that this is inconsistent with the text of the FCA and with the common understandings of the terms “false” and “fraudulent.” Moreover, the act of submitting a claim for payment does not confer upon the contractor an obligation to disclose violations of a statute, regulation, or contractual provision. Additionally, UHS argues, the implied certification theory distorts the intent behind the FCA. The purpose of the FCA is to punish fraud, but not all regulatory non-compliance constitutes fraud.

Addressing an argument advanced by supporters of the implied certification theory, UHS acknowledges that a finding of legal falsity is not on its own enough to cause FCA liability to attach. Other elements, including materiality and knowledge, must be proven in addition to falsity. But, UHS argues, the practicalities of disproving those other elements—which are usually fact questions decided at trial—translate to pressure to settle even meritless FCA claims rather than engage in protracted litigation and face the risk of the crippling fines, potentially trebled damages and attorneys’ fees—not to mention possibly fatal reputational harm—associated with losing at trial.

If the Court is not willing to reject the implied certification theory entirely, UHS argues, it should at minimum limit the application of the theory to situations where compliance with the statute, regulation, or contractual provision is clearly stated as a precondition to payment. This limitation would exclude claims based on non-compliance with regulations or provisions that are conditions of participation in a government program, as opposed to conditions of payment. In many cases, non-compliance with a statute, regulation, or contractual provision can affect a contractor’s ability to participate in a government program, but does not prohibit the contractor from receiving payment for work that was otherwise sufficient. UHS argues that limiting implied certification-based claims to those in which the contractor was expressly notified that compliance was a condition of payment would eliminate the existing unfair risk of surprise that contractors face.

Industry amici, including numerous health care providers, are likewise urging the court to rein in this expansive application of the FCA. Citing the complex, regulation-dense environments in which they operate, the providers and related entities argue that the FCA is not intended to police compliance with complex and often ambiguous regulations, particularly where there is no express condition of payment language in the regulation or provision. Industry amici note that adverse FCA judgments can easily ruin health care companies due to their substantial participation in government programs (and their reliance on that participation for viability).

Relators will address these hotly contested issues in their forthcoming brief, which is due in mid-February. We will continue to provide updates on this milestone case as it progresses.



  1. Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 135 S. Ct. 1970 (May 26, 2015).
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