The Supreme Court’s decision in Universal Health Services v. United States ex rel. Escobar reframes when falsity may be implied under the False Claims Act (FCA) and raises the bar for materiality under the statute. Though the Court upholds the controversial theory of implied false certification, Escobar limits it to situations where both (1) a claim makes specific representations about a good or service (as opposed to merely requesting payment) and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those specific representations “misleading half-truths.” The Court emphasizes that not all instances of noncompliance can trigger FCA liability; instead, only those instances that are material to the government’s payment decision are actionable under the statute.

Most importantly, Escobar adjusts the materiality standard under the statute so that it is based on the “likely or actual behavior” of the government if it knew about the alleged noncompliance rather than merely whether the government “would be entitled to refuse payment” if it knew about the alleged noncompliance, as has been the government’s position in these cases in the past. Escobar expounds on how this new “demanding” and “rigorous” materiality standard should be applied, stating that “garden-variety breaches of contract or regulatory violations” would not trigger liability, nor would “minor or insubstantial” noncompliance, nor would the government’s option to decline to pay if it knew of the noncompliance. Whether a specific statutory, regulatory or contractual provision is explicitly denoted as a condition of payment is relevant but not determinative of whether the provision is material to the payment decision. The Court also expressly notes that if the government paid or regularly pays claims despite actual knowledge of noncompliance, it would be “very strong evidence” against materiality.

With regard to broad, general certifications of compliance with statutes and regulations, the opinion indicates that only noncompliance found to be material under this new standard will be actionable regardless of the breadth of the certification. To hold that a broad certification of compliance automatically results in FCA liability for noncompliance with any requirement covered by the certification would be an “extraordinarily expansive view of liability” which “the False Claims Act does not adopt.”

For those in the financial services industry faced with FCA litigation, the newly heightened materiality requirement opens the door for arguments for dismissal either (1) where materiality has not been pled with sufficient plausibility or particularity under Federal Rules of Civil Procedure 8 and 9(b) or (2) where the specifics of the claim submission and consideration process foreclose the materiality of a specific noncompliance as a matter of law. In cases that survive a motion to dismiss, defendants may use Escobar as a basis for seeking affirmative discovery from the government into the claim consideration process. Information about how the government considers claims generally and how it has considered other claims with similar issues of noncompliance could support summary judgment arguments that the government did not treat the noncompliance as material to its payment decisions as a factual matter.

Additional information about the briefing and argument in the Escobar case may be found here.