June 17, 2016
Government Investigations & White Collar Defense Alert
The United States Supreme Court has announced that a controversial theory of False Claims Act liability—implied certification—is now the law of the land. This means that corporations or individuals who face False Claims Act scrutiny will need to be fully aware of the material terms of the statutes, regulations, or contracts under which they operate, and be in compliance with them before they submit claims for payment. The Court’s definition of “materiality,” however, will not be defined by the plain language of statutes, regulations, or contracts, but rather will be ascertained in a time intensive, fact-based inquiry.
In a decision that will significantly impact companies that contract with the government or face heavy scrutiny under the False Claims Act (“FCA”), the United States Supreme Court, in a unanimous opinion authored by Justice Thomas, upheld the “implied false certification” theory as a viable theory of liability under certain circumstances. As explained below, the Court’s opinion in Universal Health Services v. Escobar(June 16, 2016)sets a standard of liability that will hinge on the particular facts of each case, rather than on the plain language of a statute, regulation, or contract. Despite the Court’s stated effort that its decision will provide fair notice and cabin open-ended FCA liability, in reality, the application of the Court’s materiality and knowledge standards will continue to make it time consuming and difficult for companies and individuals to proactively assess and minimize FCA liability and risk.
The case arose when a teenage girl received deficient treatment from five mental health professionals at a Massachusetts mental health facility. After the patient’s death, related to misdiagnosis and improperly prescribed medication by unqualified care providers, the patient’s parents brought this qui tam action claiming that when the facility submitted claims for Medicaid reimbursement, it impliedly certified that its staff was licensed as required by Medicaid regulations. Because the staff was neither properly licensed nor supervised, the petitioners claimed the facility had made material misrepresentations that defrauded the government, thereby violating the FCA.
After the United States government declined to intervene in the matter, the United States District Court for the District of Massachusetts dismissed the complaint based on a finding that the applicable regulations violated by the facility were not express conditions of payment. The district court’s decision was then reversed by the First Circuit, which found that the regulations at issue imposed compliance with those regulations as a condition of payment and that by submitting a claim for payment, the health facility falsely implied certification with those regulations. The Supreme Court granted certiorari in order to review the viability of the implied false certification theory of liability.
The FCA imposes liability on those who collect payment from the government based on fraud. Under the theory of implied false certification, “when a defendant submits a claim, it impliedly certifies compliance with all conditions of payment. But if that claim fails to disclose the defendant’s violation of a material statutory, regulatory, or contractual requirement . . . the defendant has made a misrepresentation that renders the claim ‘false or fraudulent’ under [31 U.S.C.] § 3729(a)(1)(A).” Opinion at 1. This theory was explicitly rejected by the Seventh Circuit, which required express or affirmative falsehoods. Other courts have required that the violated regulations, statutes, or contracts be express conditions of payment.
First, the Court accepted the implied certification theory of liability in certain circumstances. The Court found that in submitting claims for payment, the mental health clinic had used payment and other codes that corresponded to specific counseling services as well as National Provider Identification numbers corresponding to specific job titles. The Court found these representations to be “clearly misleading in context.” Id. at 10-11. Because of these representations as well as the defendant’s failure to disclose noncompliance with applicable regulations, the Court held that the implied certification theory can be a basis for FCA liability where the claim submitted for payment “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.” Id. at 11. The Court declined to decide whether “all claims for payment implicitly represent that the billing party is legally entitled to payment” when no representations in the submission for payment are made. Id. at 9.
Second, the Court found that a condition of payment need not be expressly stated as such in the statute, regulation, or contract. Despite the defendant’s argument that a condition of payment must be expressly stated in order to provide fair notice and prevent open-ended liability, the Court held that these concerns can be “effectively addressed through strict enforcement of the Act’s materiality and scienter requirements.” Id. at 13-14.
The Court then clarified how the FCA’s materiality requirement should be enforced. In defining materiality, the Court looked not only to the FCA’s statutory definition of materiality, but also drew from common law tort and contract definitions. Id. at 14-15. The Court stated that the materiality standard is “demanding” and that the FCA is “not ‘an all-purpose antifraud statute’ . . . or a vehicle for punishing garden-variety breaches of contract or regulatory violations.” Id. at 15. The Court stated that “the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive” to the decision to pay. Id. at 16. Furthermore, proof of materiality can include evidence as to whether the government routinely pays claims despite knowledge of noncompliance, or if the government routinely refuses to do so. Id.
The Court also found that a defendant can have knowledge of materiality without the government expressly identifying a condition of payment as such. Especially telling is the Court’s analogy to a contractor who submits a claim to the government for a guns order knowing, but not disclosing, that the guns do not shoot. The Court used this analogy as an example of a requirement that, while perhaps not explicitly a condition of payment, is so material that failure to know the requirement “would amount to ‘deliberate ignorance’ or ‘reckless disregard’ of the truth or falsity of the information even if the Government did not spell this out.” Id. at 13.
At the end of its opinion, the Court emphasized that not every requirement of the myriad regulations and contractual requirements that companies and individuals are often required to follow will be material. Specifically, the Court stated that “if the Government required contractors to aver their compliance with the entire U.S. Code and Code of Federal Regulations, then under this view, failing to mention noncompliance with any of those requirements would always be material. The False Claims Act does not adopt such an extraordinarily expansive view of liability.” Id. at 17. The Court also stated, “We emphasize, however, that the [FCA] is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations.” Id. at 18.
Accordingly, the Supreme Court vacated the finding of the First Circuit, and remanded for reconsideration based on the Court’s new analysis.
While at first glance it may be a relief to companies and individuals to hear the Court say that FCA liability will not arise for every possible instance where a company fails to comply with contractual, statutory, or regulatory requirements, determining what is or is not a material requirement, or whether a company acted with the requisite knowledge, is sure to be argued and litigated by plaintiffs’ lawyers and whistleblowers. Resolving these questions likely will require a case-specific, fact-based analysis and may lead to increased discovery from all parties as well as relevant government agencies and players. Despite the Court’s efforts to say that garden-variety breach of contract cases or insignificant regulatory violations will not give rise to FCA liability, the Court has opened the door for plaintiffs’ lawyers and whistleblowers to argue that every statutory, regulatory, or contractual violation is a material one.
Because the Court declined to resolve the question of whether all claims for payment implicitly represent that the billing party is legally entitled to payment, the particulars of individual claims will become focal points of FCA cases. Litigants in FCA cases resting on the implied certification theory will have to wrestle with the claims not only for purposes of satisfying Federal Rule of Civil Procedure 9(b)’s heightened pleading standard, but also for determining what the billing party did or did not represent when submitting a claim for payment. This requirement may pose a challenge for plaintiffs who do not have access to claims information, particularly in healthcare cases where FCA defendants, such as pharmaceutical or medical device manufacturers, are not the billing party. How courts will approach these cases remains uncertain, but actual claims submission will become doubly important in FCA cases where the implied certification theory of liability has been raised.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
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