On Tuesday April 19, 2016, the Supreme Court heard oral arguments in Universal Health Services v. Escobar, a case that will decide whether "implied certification" will remain a viable theory of liability under the False Claims Act (FCA). Under the theory, a claim for payment can be considered "false" when the individual or entity seeking payment is noncompliant with a statutory, regulatory, or contractual provision, even if compliance with the provision is not an express condition of payment. The case could have far-reaching effects for any recipient of federal funds that is subject to innumerable and ever-changing regulations as well as a myriad of contractual terms. Venable discussed the case in a previous alert.
While the questions asked during oral argument seemed to suggest that the Justices will accept some version of the implied certification theory, the Court wrestled with how to establish an appropriate standard for distinguishing actual fraud—the target of the FCA—from simple regulatory noncompliance or breach of contract. Drawing on the common law of contracts, many Justices suggested that whether the noncompliance was genuinely "material" to the government's decision to pay would be the proper measure for determining liability under the False Claims Act, notwithstanding the fact that the FCA already contains a materiality requirement.
The conceptual problem with embracing an implied certification theory that would employ a "materiality" standard as the distinguishing factor between fraud and regulatory/contractual noncompliance is that, under both regulation and common law, only violations of "material" regulatory or contractual provisions, as a practical matter, are actionable and warrant significant remedies (e.g., termination for default or withholding of payment). If the Court employs the same materiality standard for imposition of FCA liability under an implied certification theory, it will blur the distinction between fraud and regulatory/contractual noncompliance, and authorize far more draconian remedies—including treble damages and civil penalties—for exactly the same conduct, even in those situations where the contractor or grantee delivers the promised goods or performs the promised services.
There is also a practical problem. Whether noncompliance is "material" to payment is a fact-intensive question. Therefore, adoption of an implied certification theory pegged to "material" noncompliance will make trial courts loath to dismiss FCA claims at the outset of litigation, when a plaintiff's factual allegations (including allegations of materiality) generally must be accepted as true, and will instead require trial courts to allow FCA claims to proceed through discovery. To reduce or avoid litigation costs, contractors and grantees, even those with entirely valid defenses, will feel compelled to settle.
Regardless of the implied certification standard the Court adopts, Venable recommends that contractors and grantees do the following:
- Establish your intent to comply. This will be more important than ever. Contractors and grantees should document all decisions, as well as the supporting rationale, to demonstrate their deliberate, good faith efforts to comply with all regulatory and contractual provisions.
- Review your certification process. Determine who will be charged with ensuring that the company is up to date on its certification requirements. Are they the right people? Do they have the appropriate knowledge to make the certification?
- Maintain a written dialogue with your government customer. Consider whether to obtain government buy-in for tricky compliance decisions.
- Develop a crisis mitigation plan. When you receive a report of noncompliance, document your response and work to resolve the issue.
- Assess your weaknesses. Ethical contractors and grantees seek not only to respond to issues as they arise, but to proactively determine where they are uniquely vulnerable to potential fraud, waste and abuse. What are the red flags of fraud in your industry? In particular, revisit your fraud awareness program on an annual basis, and if you have not established one, now would be a good time to think about making that investment.