On June 16, 2016, a unanimous Supreme Court issued its long-awaited decision in Universal Health Services v. United States ex rel. Escobar (“Escobar”). The Court ruled that under certain circumstances the theory of “implied false certification” can give rise to liability under the False Claims Act (“FCA”). The Court explained that, under this theory, FCA liability can attach when (1) “the claim does not merely request payment, but also makes specific representations about the goods or services provided,” and (2) the defendant’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”

At the same time, the Court limited the scope of the FCA by imposing a “rigorous” and “demanding” standard of materiality and explicitly rejecting the United States’ “extraordinarily expansive view of liability” asserted in its briefs and at oral argument. Critically, the Court held that the defendant must both knowingly violate a material requirement and must know that the requirement is material to the Government’s payment decision. Mintz Levin has been following the Escobar case closely. We discussed the theory of implied false certification and this case in our recent updates on the oral argument and the June 16th decision. In short, in Escobar the FCA complaint filed in district court alleged that a teenage beneficiary of the Massachusetts Medicaid program received counseling services, a diagnosis of bipolar disorder, treatment, and prescriptions from a satellite clinic owned by a subsidiary of Universal Health Services. The beneficiary was intermittently treated over a number of years, and in October 2009 she suffered a seizure, required hospitalization, and died. The complaint alleged that the treating practitioners lacked appropriate licensures for the treatments and prescriptions provided and that the clinic was not appropriately supervised, as required by state regulations. Because of these failures to comply with underlying Massachusetts Medicaid rules, the Complaint alleged that Universal Health Services submitted false or fraudulent claims in violation of the FCA when it submitted claims for reimbursement and impliedly certified compliance with these rules.

Implied Certification

The Court considered this case to resolve a conflict among the Courts of Appeals as to the “implied false certification” theory of FCA liability developed by the courts. Under this theory, a provider that submits a claim for payment impliedly certifies compliance with all “conditions of payment,” which can arise from statutory, regulatory, or contractual requirements. Although there were many nuances to the theory among the Courts of Appeal, one Circuit rejected this theory altogether (Seventh), two Circuits held that the theory applied only when the Government made the requirement an express condition of payment (Second and Sixth), and many other Circuits did not require a condition of payment to be expressly identified (First, Fourth, Tenth, Eleventh, and D.C.). The Court of Appeals’ decision in Escobar required only that the regulatory provisions be a condition of payment, though it also found that the regulations at issue on appeal with respect to supervision of satellite facility services were explicit conditions of payment.

Importantly, the Escobar holding rejects the limitation that narrowed liability to situations where the relevant agency designated the rule, regulation or contractual requirement an “express condition of payment.” The Court held that “[w]hether a provision is labeled a condition of payment is relevant, but not dispositive.” In other words, there may be liability when a requirement is not labelled a condition of payment, but there also may not be liability when a requirement is designated a condition of payment.

In Escobar, the Court found that Universal Health made two representations that were “clearly misleading in context:” (1) its submission of claims using specific CPT codes was a representation that it had provided specific types of mental health therapy and counseling as well as treatment; and (2) the National Provider Identification numbers on those claims were obtained by the practitioners by making representations of specific qualifications. However, as discussed above, whether liability attaches ultimately depends on whether the requirement is “material” to the payment decision.

Materiality

The Court rejected the Government’s expansive view that a violation is “material” anytime it is entitled to withhold payment. Instead, the Court adopted a standard of materiality that is more focused on the actual impact on the payment decision. The Court emphasized that this “rigorous” and “demanding” standard must be enforced to ensure that the FCA does not become an “all-purpose antifraud statute” or a “vehicle for punishing garden-variety breaches of contract or regulatory violations.” The Court further stressed that there cannot be FCA liability for “insignificant regulatory or contractual violations” – even if the government deemed them “conditions of payment.”

The Court explained that the determination as to whether the provider or contractor “knows” that the requirement at issue is material to the Government’s payment decision involves an examination of the evidence. Examples of “evidence” would be whether the Government consistently pays, or refuses to pay, claims in light of known non-compliance.

In responding to concerns raised by Universal Health and many stakeholders filing amici briefs in this case, the Court said that this “materiality” inquiry may be resolved at the stages of motions to dismiss or summary judgement and that it must be pleaded with “plausibility” and “particularly” under the Federal Rules. Ultimately, the Court vacated the decision in Escobar and remanded for proceedings consistent with its opinion.

Commentary

The Court’s decision in Escobar has resolved, for now, a key legal question. FCA liability can be imposed based on the implied false certification theory, with or without an express condition of payment, so long as the violation is “material” to the Government’s actual payment decision and the provider or contractor knows that it is material. This new approach substantially changes the standard for FCA liability in the Circuits that had rejected the legal theory or required an “express condition of payment” to impose liability.

The Court’s decision raises a number of significant practical issues for parties and the courts to address. First, the Department of Justice, or a relator proceeding in a declined qui tam, will need to allege sufficiently, and then prove, that a provider-defendant “knew” that the requirement at issue was “material” to the payment decision. Second, the Department of Justice, or a relator proceeding in a declined qui tam, will have to allege sufficiently, and then prove, that the alleged violation of a requirement was in fact “material” to the Government’s payment decision for the claims at issue, which we expect will require Government witnesses. Third, the Government’s history of payment, or non-payment, in light of the alleged type of violations will clearly be a relevant factor in this determination of “materiality.”

The decision will likely have an immediate effect on many active investigations by removing some legal barriers, but also creating new factual hurdles for the Government. It creates great uncertainty as to (1) whether the Government will apply the “materiality” standard with the strict rigor articulated by the Court in investigations and in filing cases and (2) how courts will apply the new “materiality” standard to specific allegations and facts brought before them.