A business may now not know whether it committed fraud until the government chimes in.

There are thousands of regulations with which businesses need to comply. If you recklessly (or perhaps worse, intentionally) miss one—regardless of which one—and it proves to be material to the government’s decision to pay you, you might be on the hook for fraud.

The analysis used to turn on whether the government had labeled that regulation a “condition of payment.” However, with today’s Supreme Court’s decision in Escobar, the analysis has shifted to whether there was an intent to mislead and whether it was material to the government’s decision to pay.

In its unanimous decision, the Supreme Court concluded that what matters is not what label the government attaches to a particular requirement, but whether a party knowingly violated a requirement they know to be material to the government’s decision to pay.

The Court upheld the potential for implied certification, providing a basis for liability under circumstances in which two conditions are met:

  1. The claim does more than simply request payment but includes specific representations about the goods or services provided; and
  2. The failure to disclose noncompliance with statutory, regulatory or contractual requirements would make the representations a misleading half-truth.

The potential for False Claims Act (FCA) exposure has been expanded—but the bar has been raised for both sides. The Court clarified that plaintiffs will have to “plead their claims with plausibility and particularity,” including pleading facts to support the claim of materiality.

The Court declined to extend FCA liability for insignificant regulatory or contractual violations, commenting that “billing parties are often subject to thousands of complex statutory and regulatory provisions. Facing False Claims Act liability for violating any of them would hardly help would-be defendants anticipate and prioritize compliance obligations.”

The Court has described the materiality standard as a rigorous one. Nevertheless, the practical impact seems to raise the bar for both sides of the “v” and for the courts. Plaintiffs must plead with “plausibility and particularity,” but defendants may find it harder to resolve cases early. Courts will have to perform meaningful evaluations to explain their decisions because there is no longer a bright-line test.