U.S. Supreme Court Permits “Implied False Certification” Theory of False Claims Act Liability in Limited Circumstances
In its highly anticipated decision in Universal Health Services, Inc. v. United States ex rel. Escobar,1 the Supreme Court held that the “implied false certification” theory—which is based on allegations that a defendant failed to disclose noncompliance with a relevant statutory, regulatory, or contractual requirement—may serve as a basis for liability under the False Claims Act (“FCA”) when certain conditions are met. Specifically, the plaintiff must show that the defendant submitting a claim to the U.S. Government made specific representations about the goods or services provided, but failed to disclose noncompliance with material statutory, regulatory, or contractual requirements that make those representations misleading. The relevant legal requirement need not be expressly designated by the Government as a condition of payment, but the plaintiff must show that the alleged misrepresentation was actually material to the Government’s decision to pay (not, as the Government argued, simply that the misrepresentation would have entitled the Government to refuse payment). The Court emphasized the “demanding” nature of this materiality inquiry.
A teenage Medicaid beneficiary, Yarushka Rivera, received mental health counseling at a Massachusetts mental health provider owned and operated by Universal Health Services (“UHS”). After being diagnosed with bipolar disorder, Ms. Rivera experienced an adverse reaction to prescribed medication and died. Her parents later learned that only one of the five counselors who treated Ms. Rivera was properly licensed.
Ms. Rivera’s parents filed a qui tam lawsuit in federal court pursuant to the FCA, which imposes liability on “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the U.S. Government.2 Plaintiffs alleged that UHS made material misrepresentations in its Medicaid reimbursement claims by failing to disclose that UHS had violated Massachusetts Medicaid regulations by employing unqualified, unlicensed, and unsupervised staff. Under this so-called “implied false certification” theory, plaintiffs alleged that UHS had impliedly (and falsely) certified that it had complied with the Massachusetts Medicaid program’s licensing and supervision requirements in connection with its submission of a Medicaid reimbursement claim. UHS, on the other hand, argued that FCA liability only attaches when a contractor fails to disclose violations of leqal requirements expressly designated as conditions of payment.
The district court dismissed the suit for failure to state a claim on the ground that none of the Massachusetts Medicaid regulations UHS allegedly violated was an express condition of Government payment.3 The U.S. Court of Appeals for the First Circuit reversed that holding, finding that when a party submits a claim, it implicitly represents that it complied with all the legal requirements of the relevant program.4 Noncompliance with any such requirement would amount to a material misrepresentation, the First Circuit held, so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation.5 The decision contributed to a split among the courts of appeals over the validity and scope of the “implied false certification” theory of FCA liability.6
THE SUPREME COURT’S DECISION
In a unanimous decision authored by Justice Thomas, the Supreme Court held that the “implied false certification” theory can provide a basis for FCA liability. The Court limited that theory, however, to claims that meet the following two conditions: (1) the claim makes specific representations about the goods or services provided, and (2) the defendant’s failure to disclose noncompliance with material legal requirements “makes those representations misleading half-truths.”7
The Court also limited the kinds of undisclosed violations that can support an “implied false certification” claim. The relevant inquiry, the Court explained, is whether the defendant knowingly violated a requirement that is material to the Government’s payment decision. The fact that the pertinent legal requirement is (or is not) expressly labeled a condition of payment is relevant to that inquiry, but it is not dispositive.8 Moreover, it does not matter whether, as the Government argued, the particular statutory, regulatory, or contractual violation would entitle the Government to refuse payment; what matters is whether the Government would likely refuse to pay if it knew about the violation.9 Thus, evidence that the Government routinely pays a particular type of claim despite knowing of similar violations may defeat a finding of materiality, while evidence that the Government consistently refuses to pay claims based on similar noncompliance will support such a finding.10
Importantly, the Court stressed that this materiality standard is “rigorous” and “demanding,” and that the FCA is not “an all-purpose antifraud statute” or “vehicle for punishing garden-variety breaches of contract or regulatory violations.”11 The Court also reiterated that FCA plaintiffs must plead their claims “with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b).”12
In this case, the Court found that UHS’s alleged claim submissions for individual therapy, family therapy, preventive medication counseling, and other types of treatment, “without disclosing [the facility’s] many violations of basic staff and licensing requirements,” could potentially qualify as misleading misrepresentations giving rise to FCA liability.13 The Court remanded the case to allow the lower courts to determine whether the alleged misrepresentations were material under the standard the Court announced.14
The Supreme Court’s decision in Escobar now allows FCA plaintiffs to proceed under an “implied false certification” theory in limited circumstances, including even when the relevant legal requirement was not specifically identified as a condition for payment in the contract. But the Court took pains to stress the “rigorous” and “demanding” nature of the materiality inquiry, specifying that materiality “cannot be found where noncompliance is minor or insubstantial.”15 As a result, FCA complaints based on an “implied false certification” theory of liability still will be subject to dismissal if they do not plausibly allege, with particularity, that the Government considers the particular undisclosed legal violation at issue to be material to its decision to pay the defendant what it otherwise owed. Although this may sound like a factintensive standard that would require evidence of prior Government payment decisions, the Court expressly stated that this determination can be made at the motion-to-dismiss stage.16