It is never wise to predict the final outcome in a case before the Supreme Court based on the oral argument, and today’s argument in Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7 (U.S.), is no exception to that rule. At the outset, the justices were skeptical about the petitioner’s initial argument that any theory of implied falsity has no place in False Claims Act (“FCA”) jurisprudence. On the other hand, as the argument progressed, several of the justices also expressed skepticism about the broad scope of the implied false certification theory of FCA liability, under which, according to the respondents’ and the government’s argument, virtually any regulatory violation could be used to establish that a claim is “false or fraudulent” under the FCA and thus to impose the FCA’s harsh treble damages and per-claim penalties. Based on today’s questions, it appears that the justices are struggling to find a workable test to limit the “implied false certification” theory, and they are mindful that the rule they establish in this case will be applied in many other FCA cases. Today’s questioning reflected in microcosm the same dilemma that courts have been facing for roughly the past 20 years since this theory came into broad use by qui tam relators and the government.

Questions and Answers

Responses to the invalidation argument. Several justices expressed skepticism at the petitioner’s initial argument that the implied false certification theory incorporates an implied duty to disclose that is not found in common law tort definitions of “false” or “fraudulent,” and thus cannot be used to establish liability based on those terms under the FCA. Justice Ginsburg noted that the common law definitions of those terms encompassed “misleading” or “deceptive.” Tr. 4. Justice Breyer further noted that, under the common law, “fraud” could include an implicit representation that, under certain circumstances, it is reasonable to assume the government contractor met in seeking payment of a claim. Tr. 6. Justice Breyer explained that he was not interested in invalidating the FCA that has been used to recover billions of dollars lost by the federal government due to fraud. Tr. 19. Instead, Justice Breyer expressly asked for a sentence to use in the opinion that would not fundamentally change the theoretical underpinnings of “fraud” under the FCA, but that would limit an expansive theory like the implied false certification theory. Tr. 20-21. For example, Justice Breyer asked whether the principle of materiality from contract law could be used as a limiting principle for the theory. Tr. 10.

Some suggested limiting principles. The Chief Justice also signaled his interest in identifying a limiting principle to the implied false certification theory. He pressed respondents’ counsel on whether every material breach of a contract gives rise to an FCA violation, noting his concern that “there are thousands of pages of regulations under Medicaid or Medicare programs.” Tr. 24-25. The Chief Justice further noted that the theory already incorporates several limitations: (1) that the claimant has to know about the regulatory requirement, (2) that the claimant must know that the requirement is material to the government—i.e., “that the government could reject payment on this basis”—and (3) that the claimant has to omit telling the government about it. Tr. 25-27. The second of these limitations was referenced in United States v. Science Applications International Corp., 626 F.3d 1257 (D.C. Cir. 2010). See FraudMail Alert No. 10-12-06.

The Chief Justice also listed as a possible limitation that liability extends only to the false aspect of the claim, not to the entirety of the claim, Tr. 44, a principle recently elucidated in United States ex rel. Wall v. Circle C Construction, LLC, 813 F.3d 616 (6th Cir. 2016). See FraudMail Alert No. 16-02-10. The problem with the limitation in Wall is that, while it greatly limits the damages recoverable, the claims would still be “false,” so it would allow penalties to be recovered in addition to the limited damages. That would raise serious concerns under both the Excessive Fines and Due Process Clauses. A more important limiting principle, essentially ignored at the oral argument, is that factually false claims are, and indeed always have been, violations of the FCA, but implied false certification claims that are not based on clear preconditions to payment (i.e., legally false claims) are beyond the scope of the statute. The broad implied certification theory advocated for by counsel for the relators and the government would treat both of these two types of certifications the same under the FCA, a result that seemed to make the justices uncomfortable.

Scienter and materiality concerns. In the final moments of the questioning, Justice Kagan got to the nub of the problem with using materiality as a limiting factor, as counsel for the respondents and the government argued. Justice Kagan asked the government counsel from the Solicitor General’s Office whether he could provide any examples of terms or conditions that the government would consider “immaterial.” Tr. 45. The government’s counsel had difficulty answering that question:

I mean, I don’t know if there are any terms that are wholly immaterial, because if there were, presumably they wouldn’t be in the -- the agreement or the -- regulations. But there are certainly terms that would be immaterial to particular claims.

Tr. 45. That response raises the key issue for the Court to resolve: how does the Court articulate a test which allows FCA recovery where there is “real” fraud but does not also sweep into the FCA’s ambit mere regulatory violations that are not so critical to performance that they are conditions of payment, and for which other regulatory or contract based remedies are available?

Conclusion

Prior to bringing their qui tam suit in Escobar, the relators initiated a state administrative action against the clinic, which resulted in one individual’s agreement to pay a $1,000 fine and the clinical director’s agreement to a supervised probationary period of two years. See FraudMail Alert No. No. 15-12-09. The state agency ultimately concluded that the evidence was insufficient to find that there was “abuse” by the caregiver. In short, the state never asked for its money back, yet the relators here are seeking millions in FCA damages and penalties.

In arguing against the implied false certification theory, the petitioner and amici in Escobar cited the theory’s overbreadth and principles of basic fairness. Indeed, it is unfair to use the violation of a regulatory requirement that is ancillary to, and separate from, the claim itself to deem a government contractor’s accurate claim for payment “false or fraudulent.” The relators and the government argued in Escobar that the FCA’s scienter and materiality requirements alleviate any due process concerns regarding providing notice to government contractors as to which regulatory violations are material and which are immaterial. But the government’s and relators’ continued attempts to water down the FCA’s scienter requirement, and the inherent factual determination that underlies the scienter question, demonstrate that such defenses are not enough to avoid unfairness and abuse in FCA enforcement. Today’s argument in Escobar suggests that the Supreme Court will struggle to find a workable test that limits this theory in a manner that is consistent with the FCA’s statutory text.