In Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (June 16, 2016), the Supreme Court unanimously set new rules for plaintiffs seeking to allege and prove False Claims Act ("FCA") liability based on alleged "implied false certifications" of compliance with ancillary laws, regulations, or contractual provisions. The Court specifically rejected Justice Department and relator attempts to rely on traditional FCA concepts of materiality and knowledge, declaring instead that stringent limitations were necessary to keep this "false certification" theory from improperly expanding the FCA's punitive sanctions. The Court then remanded for reconsideration, in light of Escobar, three other cases raising similar issues then pending before the Court. The Seventh Circuit has now issued its decision in one of those remanded cases, United States ex rel. Nelson v. Sanford-Brown, Ltd., No. 14-2506, slip op. (7th Cir. Oct. 24, 2016). Using Nelson as an early barometer of how the circuit courts will be interpreting and applying Escobar, this decision is a strong indication that the new standards established by the Supreme Court are clear and tough and will be enforced by the courts.

Escobar's Requirements

In Escobar, the Supreme Court validated the implied false certification theory, but imposed several critical limits on its scope. See FraudMail Alert No. 16-06-17. First, the Court held that implied false certification can be a basis for liability:

[A]t least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading halftruths.

Escobar, 136 S. Ct. 1989, 2001. The Court specifically rejected the contention that all claims for payment implicitly certify compliance with all ancillary regulatory, statutory, and contractual provisions. Id. at 2000. Second, the Court described the materiality requirement as "demanding." Id. at 2003. As such, materiality "look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation," and clearly does not encompass "minor or insubstantial" noncompliance. Id. at 2002. The Court emphasized that, if the government "pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material." Id. at 2003. Third, the Court held that plaintiffs cannot prove an implied certification claim without showing that the defendant knew that compliance with the obligation underlying the certification was material to the government's payment. Id. at 1996. Fourth, the Court signaled that FCA allegations relying on the implied certification theory will not withstand a motion to dismiss if the complaint does not plead facts supporting these requirements. Id. at 2004 n.6.

The Court vacated and remanded for reconsideration in light of its decision three cases (in addition to United States ex rel. Escobar v. Universal Health Services, Inc., 780 F.3d 504 (1st Cir. 2015)), and the Nelson case is one of those three. The other two are United States ex rel. Miller v. Weston Educational, Inc., 784 F.3d 1198 (8th Cir. 2015), and United States ex rel. Badr v. Triple Canopy Inc., 775 F.3d 628 (4th Cir. 2015). The remanded Escobar and Badr cases remain pending, and in a recent decision, the Eighth Circuit--without expressly interpreting the Escobar standard--issued an opinion holding that the facts demonstrated that the Title IV recordkeeping requirements in that action were material under a fraudulent inducement theory. United States ex rel. Miller v. Weston Educational, Inc., No. 14-1760, 2016 WL 6091099 (8th Cir. Oct. 19, 2016).

Thus, in Nelson, the Seventh Circuit has become the first circuit court to weigh in specifically on the importance of the Escobar requirements.

The Seventh Circuit's Application of Two Key Escobar Requirements

Nelson involved FCA claims against Sanford-Brown, a for-profit higher education institution. In a prior ruling, the Seventh Circuit had granted summary judgment to Sanford-Brown after rejecting the validity of the implied false certification theory. See FraudMail Alert No. 15-06-15. On remand, the court reconsidered the implied certification claims in light of Escobar. In analyzing the Section 3729(a)(1)(A) claim, the Seventh Circuit focused on two of the four Escobar requirements described above.

First, the court determined that Escobar's two-part test--specific representations, and the failure to disclose noncompliance with material statutory requirements--is a mandatory, threshold requirement that any false certification claim must satisfy.

Second, the Seventh Circuit concluded that Sanford-Brown was entitled to summary judgment because the relator "failed to establish the independent element of materiality," given that the relator offered no evidence that the government's "likely or actual behavior" would have been different had it known of the college's alleged noncompliance with the Title IV regulations. Nelson, slip op. at 3. Indeed, the court noted that the federal agencies involved had examined Sanford-Brown's conduct "multiple times over and concluded that neither administrative penalties nor termination was warranted." Id. The most that the relator could show was that the purported noncompliance would have entitled the government to decline payment, which is not enough under Escobar. Id.

Conclusion

The Seventh Circuit's decision is important. It confirms that FCA actions relying on the implied false certification theory are difficult to plead and prove and will face increased judicial scrutiny. The decision also is important because its holding is at odds with and undermines Justice Department and relator arguments, post-Escobar, that the Supreme Court's decision still permits FCA plaintiffs to pursue expansive implied false certification theories. See Douglas W. Baruch & Jennifer M. Wollenberg, FCA Implied Certification Claims--Justice Department's Aggressive Post-Escobar Briefing Signals Its Concern Over the Decision's Potential Impact, 58 Gov't Contractor 375 (Oct. 26, 2016).