In a unanimous ruling handed down last week, the US Supreme Court settled an existing circuit split in favor of those seeking to expand the False Claims Act’s reach by recognizing the “implied certification” theory as a valid basis for False Claims Act liability. In doing so, the Court emphasized the act’s requirement that an undisclosed violation of a statutory, regulatory, or contractual provision must be actually material to the government to be actionable.
The materiality requirement may prove beneficial to defendants at the later stages of any litigation, but will provide little benefit to efforts to defeat a False Claims Act case at the motions stage because materiality is typically an issue of fact that courts leave to be resolved by a jury. The Court, however, provided some ammunition to defendants by seemingly limiting liability for implied certification to requests for payment that make specific representations about goods or services.
In Universal Health Services, Inc. v. United States ex rel. Escobar, a qui tam relator sued a Massachusetts medical services provider for allegedly submitting false Medicaid claims for mental health counseling services performed by employees who were not licensed mental health professionals. 579 U.S. ___, slip op. at 4-5 (Jun. 16, 2016). The Massachusetts Medicaid program required mental health counselors to be licensed, and Universal Health purportedly used billing codes associated with licensed mental health professionals to secure payment. Id.
The Court held that “the implied certification theory can be a basis for liability, at least where two conditions are satisfied[.]” Id. at 11. “[F]irst, the claim does not merely request payment, but also provides 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 misrepresentations misleading half-truths.” Id. Here, Justice Clarence Thomas, writing for the Court, looked to the history of both the False Claims Act and common law fraud and observed that the Medicaid claims in this case “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.” Id. at 9-10. This is the first time that the Court recognized a False Claims Act violation without an express false certification to the government.
Importantly for government contractors, the Court suggested that, to trigger liability, a request for payment must make “specific representations about the goods or services provided.” Id. at 11. The Court’s limitation seems to make representations about the goods or services themselves a necessary element of an “implied false certification” theory, which is notable because not all requests for payment are accompanied by such representations. The Court went on to explain that “noncompliance” with legal requirements must somehow make “misleading” a government contractor’s representations about the goods or services provided. Id.
The Court also noted that a sin of omission does not by itself condemn a government contractor to False Claims Act liability because “a misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable under the False Claims Act.” Id. at 14 (emphasis added). The Court described at length what the “demanding” materiality standard might look like, suggesting that contractual language identifying certain provisions as a condition of payment may not be dispositive and that courts should consider any history of the government paying despite knowledge of a certain violation as “very strong evidence” of immateriality. Id. at 16. Moreover, the Court pointed out that a defendant must “have ‘actual knowledge’ that a condition is material” to be liable, though that knowledge can be found where “the defendant knows that the Government routinely rescinds contracts” for the statutory, regulatory, or contractual violation at issue. Id. at 12-13.
Universal Health’s focus on materiality will not be much consolation for government contractors facing a False Claims Act case, as materiality is a largely factual issue that defendants will be forced to litigate. At the motions stage, the materiality language is helpful to a defendant only insofar as materiality is an element of a fraud claim which, like all elements of a fraud claim, must be pled with particularity under Rule 9(b) of the Federal Rules of Civil Procedure. See, e.g., U.S. ex rel. Bogina v. Medline Indus., Inc., 809 F.3d 365, 370 (7th Cir. 2016) (“Allegations based on ‘information and belief’ thus won’t do in a fraud case—for ‘on information and belief’ can mean as little as ‘rumor has it that....’”).
While the Universal Health opinion acknowledges “implied certification” as a valid theory for False Claims Act liability, it also seemingly requires “specific representations” about the product or service at issue, and emphasizes the act’s provision that the misrepresentation be “material” to the Government’s decision to pay. Thus, the decision provides important clarifications of the law for pending and future False Claims Act cases.
At bottom, though, the Court’s recognition of “implied certification” theory resolves a circuit split in favor of a more expansive view of the Act. In sum, neither the government nor qui tam relators need to show that a contractor made an express false certification that it complied with a statutory, regulatory, or contractual requirement to make that contractor liable under the False Claims Act.