In a highly anticipated ruling, the Supreme Court imposed important limits on the implied certification theory of liability under the False Claims Act (FCA). The Court’s decision should go a long way toward limiting some more aggressive uses of the FCA, under which any violation of any governmental or contractual requirement was alleged to make a claim “false.” By refocusing on the basic question – was the United States knowingly and materially misled about the goods or services for which it paid? – the Court’s decision could bring some refreshing common sense into this frequently abused area of the law. How the lower courts will apply these conditions is something that should be closely monitored by those who do business with the United States.

In Universal Health Services Inc. v. U.S. et al. ex rel. Escobar et al., the Court ruled that in certain circumstances “the implied certification theory can be a basis for FCA liability when a defendant submitting a claim makes specific representations about the goods or services provided, but fails to disclose noncompliance with material statutory, regulatory, or contractual requirements that make those representations misleading with respect to those goods or services.” The Court also ruled that liability does not hinge upon whether the requirements “were expressly designated as conditions of payment.” Instead, what matters is whether the violated requirement was material to the Government’s decision to pay the claim.

The Court’s formulation of the implied false certification theory differs from the various formulations previously offered by the lower courts.

First, the Court rejected the view (held by the Second and Ninth circuits) that a violated requirement can be “material” to the government’s payment decision only if the government has expressly characterized the requirement as a “condition of payment.” But the Court also rejected the view that an express “condition of payment” is always material.

Second, the Court held that actual payment decisions are highly relevant to whether a violated requirement is “material” to the Government’s decision to pay. As the Court explained, “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. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.” Some courts of appeals had held that the only issue was whether a false representation had a “natural tendency” to affect the Government’s payment decision, ignoring what the Government actually did.

Third, the Court held that implied false certification exists only if “the claim does not merely request payment, but also makes specific representations about the goods or services provided.” Most lower courts had sharply distinguished between false representations about the “goods or services provided” – which were treated as factually false representations – and false representations about compliance with legal requirements – which were treated as legally false representations. The Court’s decision makes representations about the goods or services themselves a necessary element of an “implied false certification” theory. Significantly, the Court never mentions “factual falsity” as a theory of liability under the FCA: The Court may be signaling that it does not see a meaningful distinction between factual and legal falsity.

Fourth, the Court held that implied false certification exists only if “the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.” “Those representations” refers to “specific representations about the goods or services provided.” In other words, the defendant’s “noncompliance” with legal requirements must somehow make “misleading” its representations about the goods or services provided.

The FCA violations alleged in the instant case involve claims that “do more than merely demand payment. They fall squarely within the rule that half-truths – representations that state the truth only so far as it goes, while omitting critical qualifying information – can be actionable misrepresentations.” Specifically, the claims were submitted to Medicaid with payment codes that corresponded to specific services and National Provider Identification numbers that corresponded to specific job titles. The Court ruled that these “representations were clearly misleading in context” because in many instances the treating counselor did not have the requisite specialized training and experience or the prescribed qualifications for the job. Accordingly, it was the defendant’s omission about its noncompliance with the regulatory requirements for treatment of patients that made its Medicaid claims misleading as to the services provided to the patients.

The United States had pushed for a much broader theory of falsity, arguing that claims should be deemed “false” even if the non-compliance did not make “misleading” any representation about the goods or services provided. In the Government’s example, a healthcare provider could be liable for falsely certifying compliance with an “American staplers only” requirement, even though violating that requirement did not make “misleading” any representations about the healthcare being provided.

Following the Escobar decision, lower courts should enforce the new reasonable limits when using the implied false certification theory as a basis for FCA liability. Those who do business with the government should monitor these decisions to ensure they are able to anticipate and prioritize compliance obligations.