Adding its voice to an issue soon to be argued before the Supreme Court, an Alabama federal court recently dismissed a False Claims Act (“FCA”) complaint, holding that complying with a federal disclosure regulation was not a “condition of payment” in the defendant’s contracts with the United States. The decision adds another case to the defense quiver in FCA cases — but the Supreme Court will soon speak on the issue.

On March 31, 2016, in Marsteller et al. v. Tilton et al., Case No. 5:13-cv-00830, the court dismissed a FCA suit filed by MD Helicopters Inc.’s former employees. The employees accused the company and its CEO of failing to disclose an unethical relationship with a then-U.S. Army colonel, which allegedly enabled defendants to overbill the Army for helicopters it had purchased for foreign governments.

The former MD employees accused the company and its CEO of using her relationship with a colonel to overbill the Army for helicopters purchased through a foreign sales program. The relators alleged that these activities violated a federal regulation requiring that contractors disclose any “credible evidence that a principal, employee, [or] agent . . . had committed . . . a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code.” The relators contended that violating this regulation gave rise to claims under the FCA.

The suit, which was unsealed in 2014 after the federal government declined to intervene, claimed that the CEO promised the colonel a job and, in exchange, he helped MD receive preferential treatment for contract awards. The colonel has pleaded guilty to improperly negotiating his post-retirement job with the company.

The court held that relators failed to show that the Army’s payments were expressly conditioned on the company’s reporting unethical conduct. The court explained that to meet the requirements of the FCA, the relators had to show that compliance with a law or regulation was a condition of payment: “To establish that compliance with a statute or regulation is a ‘condition of payment,’ relators are required to plead that the government . . . would have necessarily terminated the contract [or withheld payment] based on [MD’s] violations[.]”

The court explained that even if the company failed to disclose the allegedly unethical conduct, compliance with that regulation is not expressly required for the Army to pay under the contracts. “Having carefully reviewed [the contracts],” the judge wrote, “the court notes that there is no provision in any of them that prohibits payment in the event of noncompliance.” The judge also dismissed the former employees’ claims that MD violated the Truth in Negotiations Act (“TINA”) by failing to give the Army accurate pricing data for the helicopters, for the same reason: The relators did not show that compliance with TINA was a prerequisite for payment.

This opinion emphasizes the continuing distinctions courts are drawing between conditions of participation required to be involved in a government program, and conditions of payment under the FCA. Many of the courts of appeals have accepted an implied certification theory for years and it has thus become a common basis for asserting FCA liability. However, the courts permitting FCA liability based on a theory of implied certification differ in its application. Many that have endorsed the doctrine of implied false certification restrict its use to instances in which the implied certification concerns a condition of payment, rather than a condition of participation. However, even then they disagree over whether the certification must involve a provision that expressly states it is a condition of payment. The Supreme Court will hear oral argument on this issue on April 19, 2016. The Supreme Court’s decision will have a substantial impact on the scope of FCA liability and relators’ ability to assert claims under the FCA.