Earlier this month, the U.S. Supreme Court granted cert in U.S. ex rel. Escobar v. Universal Health Services Inc., 780 F.3d 504 (1st Cir. 2015), to resolve the long-standing circuit split over whether the implied certification theory is a viable approach for establishing liability under the civil False Claims Act. The case is a highly anticipated development in False Claims Act jurisprudence, as the Supreme Court will decide once and for all whether plaintiffs can rely on assumption and implications, or must instead identify an actual express or overt lie to satisfy the falsity requirements under the FCA.  The Supreme Court’s ruling on this critical issue will determine the validity of the implied certification theory and, thus, the very contours of the FCA.  And because many states have enacted their own versions of the FCA, the Supreme Court’s ruling could also impact actions brought under those statutes.

First, some background on the underlying facts in Escobar.  Relators alleged that their daughter—who died of a seizure in 2009—was treated by various unlicensed and unsupervised staff at a mental health center owned and operated by defendant Universal, in violation of state regulations.  780 F.3d at 508.  The complaint alleged that the purported noncompliance by the mental health center with various supervision and licensure requirements rendered its reimbursement claims submitted to the state Medicaid agency actionably false under both the federal and Massachusetts False Claims Acts.  The district court dismissed the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), finding that there was “no indication” in the text of any of the pertinent regulations that they were intended as conditions of payment.  Id. at 507, 511.  The First Circuit, however, disagreed, holding that the relators adequately pleaded that Universal’s claims for reimbursement were false within the meaning of the Act in that they implicitly misrepresented compliance with a condition of payment, i.e., proper supervision. Id. at 514-15.

The First Circuit’s ruling in Escobar deepened the circuit split over the viability of the implied certification theory of FCA liability, which has long been controversial.  (Although recognized by a majority of circuits, including now the First Circuit, implied certification has been rejected by the Fifth Circuit and most recently by the Seventh Circuit.)  Critics argue that the theory improperly converts the original purpose of the FCA from an anti-fraud statute into an overly broad catchall that punishes errors or mistakes in connection with any contractual, regulatory, or statutory dispute or irregularity as opposed to genuine fraud where the contractor knowingly lied to the government.  Indeed, given the Act’s qui tam provisions, the implied certification theory arguably incentivizes the filing of broad lawsuits that attempt to convert contract disputes into fraud cases.

The stated purpose of the FCA is to punish contractors who lie to the government when providing goods or services. Thus, where a contractor makes an express statement of compliance that is false, liability can attach under the FCA.  In such cases, the statement itself can demonstrate whether (i) the contractor acted intentionally or recklessly in submitting claims for payment, and (ii) whether the statement was material such that the government would still have paid had it known the statement was inaccurate.  Put another way, liability should not attach under the FCA absent an intentional, culpable act.

Implied certification, however, does not require an intentional, culpable act; and that’s the problem.  Even where there are no express misrepresentations made to the government, cases can proceed under a theory of implied certification because the submission for payment implies that the contractor believes it has met all preconditions for payment and is thus entitled to payment. Under this theory, if the contractor is alleged not to have met all such requirements, it arguably knew or should have known that its decision to seek payment evinces intentional or reckless misconduct under the FCA.

It should come as no surprise that the Relator opposed Universal’s petition for cert.  Implied certification has been one of the inroads that the government and relators’ bar have used to expand the scope and reach of the FCA.  Should the Court reverse the First Circuit, it would represent a setback to the relators’ bar and the government.  More importantly, it would bring the FCA back to its original intent: attacking knowing fraud against the government.  Stay tuned.