Yesterday the Supreme Court issued its long-awaited opinion in the False Claims Act case, Universal Health Services, Inc., v. United States ex rel. Julio Escobar and Carmen Correa, 579 U.S. __ (2016), often referred to as the "Escobar case." The Court's unanimous opinion resets how False Claims Act ("FCA") liability is determined for legally false claims, i.e., those claims based on false certifications, express or implied, made by a provider or contractor in conjunction with submitting claims for payment to the Government. Essentially, Escobar seeks to anchor the FCA's prohibition against "false or fraudulent" claims in the common law definition of fraud. Common law fraud encompasses either affirmative misrepresentations or misleading omissions. For fraud to occur, however, the Court stressed that misrepresentations or omissions relating to a statutory, regulatory, or contractual requirement must be material to the Government's payment decision. At the same time, the Supreme Court "clarified" that materiality is a "rigorous" requirement, and determining what is or is not material does not "depend on what label the Government attaches to a requirement."
The Supreme Court initially affirmed that FCA liability can be based on an "implied false certification" based on dramatic facts relating to counseling and medical treatment provided by a mental health care facility to a teenage patient which led to her death. In Escobar, the facility represented in its claims to Medicaid that it had provided specified therapies and other types of treatment to the beneficiary. In reality, the facility had not provided the therapies and treatment it billed for because many of its personnel were neither licensed or qualified to provide these services and in fact had misrepresented their qualifications and licensing status to the government to obtain provider numbers that permitted them to submit claims to Medicaid. The Court found that the facility's Medicaid claims "do more than merely demand payment." Rather, the claims were "actionable misrepresentations" because they contained "half truths" while "omitting critical qualifying information." Escobar held that the implied certification theory could be a basis for FCA liability "at least where two conditions are satisfied: first, the claim 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."
In the second half of its opinion, the Supreme Court addressed whether FCA liability can be based only where a defendant fails to disclose that it has violated an "expressly designated condition of payment." Escobar essentially rejected the express condition of payment/condition of participation dichotomy developed by the appellate courts in false certification cases, finding instead that FCA liability arises only if the defendant fails to disclose in submitting a claim that it has violated a material condition of payment. And then it threw a curve ball: "statutory, regulatory, and contractual requirements are not automatically material, even if they are labeled conditions of payment." In fact, the Court noted that if FCA liability depended only on violating express conditions of payment,"[t]he Government might respond by designating every legal requirement an express condition of payment. But billing parties are often subject to thousands of complex statutory and regulatory provisions. Facing [FCA] liability for violating any of them would hardly help would-be-defendants anticipate and prioritize compliance obligations."
The FCA's "materiality standard," the Supreme Court pointed out, is "demanding." The Court explained further: "[t]he [FCA] is not an all-purpose anti-fraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations. A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory regulatory, or contractual requirement as a condition of payment. Nor is it sufficient for finding of materiality that the Government would have the option to decline to pay if it knew of the defendant's noncompliance. Materiality . . . cannot be found where noncompliance is minor or insubstantial." (internal quotes/citations omitted).
Noting that the FCA's definition of materiality "descends from common-law antecedents," the Supreme Court then looked to common-law characterization of materiality to define it. Citing Williston on Contracts, Escobar explained that "[u]nder any understanding of the concept, materiality looks[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation." Looking to the Restatements on Torts and Contracts, the Court identified two key criteria for determining materiality: "(1) if a reasonable man would attach importance to [it] in determining his choice of action in the transaction; or (2) if the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter in determining his choice of action, even though a reasonable man would not." (internal quotes/citations omitted).
In a footnote, Escobar rejected the appellant's assertion that "materiality is too fact intensive for courts to dismiss [FCA] cases on a motion to dismiss or summary judgment." The Court explained further that "[FCA] plaintiffs must also plead their claims with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b) by, for instance, pleading facts to support allegations of materiality."
The Court's opinion ended with a reminder that the FCA "is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations. This case centers on allegations of fraud, not medial malpractice."
Overall, Escobar contains something for relators, defendants, and the government. By rooting FCA liability to the common law definition of fraud, the Supreme Court seeks to apply the FCA to serious frauds and effectively prevent it being used as a weapon to police technical violations and contractual disputes. Having given broad guidance and repeated injunctions as to the "rigorous" standard for materiality, it is up to the courts below to further expand and apply these principles.