Last month, Lindsey provided readers of the Drug and Device Law blog with an overview of United Health Services, Inc. v. U.S. ex rel. Escobar, a False Claims Act (FCA) case that was bringing the implied certification theory of FCA liability before the U.S. Supreme Court for review.

The FCA imposes liability on anyone who knowingly presents, or causes to be presented, false or fraudulent claims (or requests) for payment to the federal government. Under the implied certification theory, when a company submits a claim for payment to the government, it implies through this submission that it is in compliance with applicable contractual, regulatory or statutory requirements. If the company isn’t in compliance, it may find itself facing FCA liability. This has led to numerous FCA cases against companies in the life sciences and health care industry.

In January, members of Reed Smith’s global regulatory enforcement and appellate groups submitted an amicus brief on behalf of the National Association of Criminal Defense Lawyers in the Escobar case. The brief argued that the Court should reject the implied certification duty in its entirety absent the existence of a defined and legally cognizable duty to disclose noncompliance that is expressly stated in a contract, regulation, or statute as a precondition to payment from the government. The brief also emphasized the serious fair notice and due process concerns with the First Circuit’s decision, concerns the Court expressed in its opinion in Escobar.

On June 16, 2016, the Supreme Court issued its ruling in Escobar and, unfortunately, as Lindsey noted in a second Drug and Device Law post, the implied certification theory lives, but it does so with new limits. In its unanimous opinion, the Court issued three principal holdings:

First, the Court adopted a new, but qualified, version of the implied certification theory.

Implied certification theory is now the law of the land. This in itself is not a significant change since most of the federal circuit courts of appeal already had adopted the theory, and only one circuit had rejected it. What is significant is how the Court defines and constrains the implied certification theory; its decision now requires that “two conditions” be satisfied before the failure to disclose noncompliance to the government can lead to FCA liability:

  1. “the claim does not merely request payment, but also makes specific representations about the goods or services provided”
  2. “the defendants’ failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths”

Merely requesting payment—without also making “specific” statements about the goods or services the company is providing—is no longer enough to establish implied certification liability.

Second, the Court rejected the “express condition of payment” limitation on implied certification adopted by some lower courts.

A company’s failure to disclose violations of legal requirements also can now lead to implied certification liability even if the requirements “were not expressly designated as conditions of payment.”

This is a change from the law in several circuits, which had adopted the “express condition” limitation to confine implied certification liability and enable companies to determine precisely what requirements could trigger it. The Court did stress, however, that “even when a requirement is expressly designated a condition of payment, not every violation of such a requirement gives rise to liability.”

Third, the Court laid out a new materiality requirement that relators must satisfy.

The Court emphasized that misrepresentations about compliance must be material to the government’s decision to pay since the FCA is not an “all-purpose antifraud statute” or a “vehicle for punishing garden-variety breaches of contract or regulatory violations.” The Court ruled that a “misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment.” The Court also stated that a requirement is not material simply because the government “would have the option to decline to pay if it knew of the defendant’s noncompliance.” Finally, the Court found that “minor or insubstantial” noncompliance is not material.

Given these definitions, the Court proceeded to specifically reject the government’s and First Circuit’s definition of materiality, which provided “that any statutory, regulatory, or contractual violation is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation.”

What are the implications of this decision?

For a deeper look at the implications of Escobar, be sure to read our client alert, “U.S. Supreme Court Adopts a Limited Implied Certification Theory of FCA Liability, and Establishes a Robust New Materiality Requirement.” However, one key takeaway is that this decision likely means an increase in the filing of new FCA suits across all industries, especially those where companies customarily make specific statements to the government about the goods and services they are providing.