U.S. Supreme Court clarifies, blurs scope of FCA liability

A highly anticipated ruling by the U.S. Supreme Court both clarifies and blurs the line concerning when a company can face liability under the False Claims Act.

As one of the government’s chief weapons against fraud, the False Claims Act (FCA) imposes liability on companies that knowingly make, or induce the submission of, false or fraudulent claims for payment or reimbursement to the federal government. Gradually, however, a split has developed among circuit courts hotly contesting an expanded theory of FCA liability: the so-called “implied false certification” theory.

Such a theory—backed by the Department of Justice and whistleblowers—holds that any entity that submits a claim for payment to the government implicitly certifies compliance with all material statutory, regulatory, or contractual requirements; if that representation is “false or fraudulent,” FCA liability applies. 

Corporate defendants, on the other hand, repeatedly have argued that liability applies only to a failure to disclose violations of requirements that the government has “expressly” designated as a “condition of payment.”

In a rare unanimous decision, the U.S. Supreme Court this month in the case of Universal Health Services v. United States ex rel. Escobar upheld the viability of the implied certification theory. At the same time, however, the court armed healthcare providers, government contractors, and others that conduct business with the government ammunition to more easily battle minor regulatory and contract violations or allegations that lack merit.

The ruling has both plaintiffs’ attorneys and FCA defense attorneys claiming victory. “It was a win and loss for both sides,” says Jeffrey Wertkin, a former trial attorney in the Justice Department’s Civil Division and now a partner at law firm Akin Gump. “The fact that the court came together on a divisive issue—something that very rarely happens—is perhaps the best indication that the decision reflects a compromise position and a partial win for defendants.”

The case involved a claim filed against Universal Health Services (UHS), a mental health services provider, by the family of a patient who fatally suffered an adverse reaction to medication prescribed by a counselor represented as a licensed psychiatrist. The family brought a whistleblower lawsuit under the FCA alleging that UHS made material misrepresentations in its Medicaid reimbursement claims by failing to disclose that certain services billed for were provided by unqualified, unlicensed, and unsupervised staff.

The U.S. District Court for the District of Massachusetts dismissed the case, ruling that the implied certification theory didn’t apply because compliance with the relevant regulations was not an express “condition of payment by Medicaid.” The First Circuit Court of Appeals reversed, holding that a failure to disclose non-compliance with a “condition of payment”—express or not—rendered the claim false under the FCA, because UHS failed to inform the government that it violated regulations requiring healthcare providers to adequately supervise unlicensed staff.

“It was a win and loss for both sides.”
Jeffrey Wertkin, Partner, Akin Gump

In an effort to resolve a circuit split, the U.S. Supreme Court, in an opinion authored by Justice Clarence Thomas, affirmed the general theory that “at least in certain circumstances, the implied false certification theory can be a basis for liability.” Two conditions must be satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the failure to disclose non-compliance with material statutory, regulatory, or contractual requirements makes those representations “misleading half-truths,” the court said.

The court rejected the “express condition of payment” limitation that had been adopted by several circuit courts. “Contrary to Universal Health’s contentions, FCA liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment,” the court said.

The court noted, however, that “even when a requirement is expressly designated a condition of payment, not every violation of such a requirement gives rise to liability.” In other words, the issue isn’t what label the government attaches to a particular requirement, but rather whether the entity knowingly violated a requirement that is “material” to the government’s decision to pay.

From a legal standpoint, the government and whistleblowers that bring claims on behalf of the government now have a high burden to “plead their claims with plausibility and particularity,” the court said, such as “facts to support allegations of materiality.”

SUPREME COURT DECISION

The excerpt below from Universal Health Services v. Escobar explains the U.S. Supreme Court's decision in the case.
We first hold that, at least in implied false certification theory can be a basis for liability. Specifically, liability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement. In these circumstances, liability may attach if the omission renders those representations misleading.
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.
Source: Universal Health Services v. Escobar

In Escobar, specifically, the court ruled that making claim submissions for treatments without disclosing violations about staff licensing requirements potentially could qualify as misrepresentations giving rise to FCA liability. Thus, the court remanded the case back to the lower courts to decide whether those misrepresentations were material to the government’s decision to pay.

The court went on to clarify how the materiality standard should be enforced. Emphasizing that the materiality standard is “rigorous” and “demanding,” the court stressed that the FCA is not “an all-purpose antifraud statute” or a “vehicle for punishing garden-variety breaches of contract or regulatory violations.”

Practical implications

For FCA defendants, the decision is both a victory and a wash. For one, the court ruled that the government and whistleblowers can’t bring FCA claims for insignificant regulatory or contractual violations. “From a compliance perspective, there should be a deep exhale that every regulatory misstep can’t convert to a False Claims Act case,” says Mark Silberman, a partner at law firm Duane Morris and co-chair of its national healthcare fraud audit, compliance, and enforcement group.

The reality is that healthcare providers, federal contractors, and other highly regulated entities that do business with the federal government have to comply with thousands of regulations on a day-to-day basis. “It would be almost impossible to go forward with your business knowing that any violation could give rise to a claim for fraud,” says John Petrelli, a partner at law firm BakerHostetler.

In the same aspect, some FCA defense counsel say the decisions effectively means they will have to spend more time and resources getting cases dismissed at the motion-to-dismiss stage, due to the highly fact-intensive nature of pleading materiality. “We’re going to have to spend a lot more time talking discovery and defending these cases,” Silberman says. “The reality is the financial impact of that on defendants can be substantial.”

From the perspective of healthcare providers, in particular, the decision “hasn’t provided a tremendous amount of comfort,” Petrelli says. To realize the benefit of the balance the court has struck, he says, healthcare providers still will likely have to incur the costs of discovery and litigating a case further—rather than at the motion-to-dismiss stage—before they can get a decision on the materiality standard.

Silberman agrees that even with the court’s ruling, FCA defendants are still tasked with making the same tough decision: settle a case to avoid the cost and risk of litigation, or roll up their sleeves and fight. “What is the value of principle versus being practical? That’s going to be the biggest challenge to defendants.”

Ultimately, the broader implications of Escobar are not going to be realized until the district courts and circuit courts begin applying the decision going forward. “It’s a well-reasoned decision,” Silberman concludes. “It shows a good balance for the letter of the law and the spirit of the law, which means it’s going to be an absolute practical nightmare to enforce.”