Companies doing business with the government are facing an unprecedented increase in liability risk as federal authorities and individual whistleblowers (called “relators”) aggressively use the Federal False Claims Act (“FCA”), 31 U.S.C. §§ 3729-3733, to allege an array of frauds on a broad range of government programs. The FCA exposes companies to millions of dollars in potential penalties and treble damages, not to mention potential suspension or debarment from federal contracting—a death sentence for companies in certain industries, especially for health care companies doing business with the Centers for Medicare and Medicaid Services, TriCare, and Medicaid.

The FCA imposes liability upon any “person” (company or individual) who, among other things, knowingly submits a false or fraudulent claim to the government. It is the federal government’s most widely utilized anti-fraud tool. Indeed, FCA recoveries have topped $35 billion since 1986, with $3.5 billion in settlements and judgments in fiscal year 2015 alone. In addition to the Federal FCA, 29 states, the District of Columbia, and seven municipalities (including New York and Chicago) have enacted FCAs to police fraud on the state and local level.

On April 19, 2016 the U.S. Supreme Court heard oral argument in Universal Health Services, Inc. v. United States ex rel. Escobar, a case that may decide how far the FCA stretches. The question the case presents is whether a person can be liable under the FCA not because they make an explicitly false claim for payment but because of an “implied certification” that, in providing services to the government, they have complied with all potentially applicable legal requirements. As a practical matter, Escobar may determine how easily defendants can win dismissal in FCA litigation, before going through the expensive and disruptive discovery process.

At the oral argument, it was clear that some Justices—at least Chief Justice Roberts and Justice Breyer—were struggling to draw a workable line between claims that combat fraud against the government and those that excessively punish noncompliance with minor requirements in thousands of pages of regulations. Based on their comments, Justices Kagan and Sotomayor appeared to find the issue to be more straightforward—in favor of implied certification. A decision is expected sometime in June.

Universal’s Argument

Counsel for Petitioner/Defendant Universal Health Services, Inc. (“Universal”), one of the largest hospital management companies in the United States, argued there could be no “false or fraudulent claim” without some affirmative misstatement, and therefore no implied certification. Instead, it argued, basic legal principles of fraud should govern, such that claims cannot be “false or fraudulent” without a false statement or a duty to disclose some other fact, even if the person fails to satisfy every potentially applicable regulatory or contractual requirement.

Justice Breyer, in particular, indicated he was attempting to balance competing interests, even asking Universal “[w]hat is the sentence you want me to write?” to identify where and how the line should be drawn. Perhaps driven by the dramatic allegations in Escobar—specifically that a mental health facility in Lawrence, Massachusetts owned by Universal failed to provide properly licensed and supervised mental health services in violation of Massachusetts Medicaid regulations, which resulted in a teen’s death—Justices Kagan, Sotomayor, and Kennedy each seemed convinced that such regulatory noncompliance certainly could be a violation of the FCA. Justice Sotomayor posed a blunt hypothetical drawing upon a breach of contract, and the FCA’s Civil War origin in 1863: “So providing a gun that doesn’t shoot to the Army is simply a contract breach?” After some jousting, Universal conceded such conduct may be fraudulent, but it distinguished the facts alleged in Escobar by denying they contain anywhere near as direct a representation of compliance with regulatory or contractual requirements as the gun analogy. Justices Kagan, Sotomayor, and perhaps Kennedy appeared unpersuaded.

Relators’ Argument

Counsel for Relators/Respondents Julio Escobar and Carmen Correa (“Relators”) argued that a claim seeking government funds is false and fraudulent when a claimant fails to disclose that it has knowingly violated the government’s “material payment conditions.” Chief Justice Roberts expressed concern that the FCA may be too harsh a tool for punishing minor instances of regulatory noncompliance, given the myriad regulations governing public health care and other government programs (many of which are hyper-technical, esoteric, and subject to disagreement and changing agency interpretation). Roberts suspected that most cases are more complicated than Escobar, “and that’s where the difficulty comes in[,] when you have hundreds, thousands of pages of regulations.” Relators responded that the FCA already requires proof of “knowledge” of a false claim, and that the falsity is important enough to be considered “material” to the government’s payment decision. Justice Breyer wondered what difference there was between the fraud principles that Universal argued should apply and the knowledge and materiality requirements held up by Relators, or whether they are just using different words. His observation reflected a frustration among the Justices with the technical labels currently used to analyze FCA claims (including implied certification, among others).

Reading the Tea Leaves

Predictions are difficult. Judging by the parties’ arguments and the Justices’ reactions, however, the Court may well uphold the validity of the implied certification theory. With Justice Scalia’s absence, only four votes are necessary to leave in place the First Circuit decision backing that theory, though a 4-4 decision would not create new Supreme Court precedent. The specific scope and bases for the Court’s ruling await the issuance of its written decision.

This article originally appeared on CorporateCounsel.com.