With its June 8, 2015 ruling in United States ex rel. Nelson v. Sanford-Brown Ltd., No. 14-2506, 2015 WL 3541422 (7th Cir. June 8, 2015), the Seventh Circuit erected a stop sign that halts efforts to expand acceptance of the so-called doctrine of implied false certification under the False Claims Act (“FCA”). Using clear and direct language that ended years of uncertainty within that jurisdiction, the Nelson court rejected the “blanket theory of FCA liability” that has become the hallmark of implied false certification liability theories:

[W]e conclude that it would be equally unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the [Title IV Program Participation Agreement] are conditions of payment for purposes of liability under the FCA. Although a number of other circuits have adopted this so-called doctrine of implied false certification, we decline to join them and instead join the Fifth Circuit.

Nelson, 2015 WL 3541422, at *12 (internal citations omitted). Rejecting the position of both the qui tam relator and the Department of Justice, the Seventh Circuit sensibly held that the FCA is not the appropriate vehicle to enforce compliance with every contractual, regulatory, or statutory provision that can be considered a condition of participation in a government program. Instead, that type of enforcement falls within the province of the affected government agency and its administrative remedies.

The Implied False Certification Doctrine

In analyzing the FCA, a number of courts have identified two types of possible false claims: (1) factually false claims, such as billing for services not provided or invoicing for goods that do not meet specified requirements, and (2) legally false claims, such as billing where the services were provided and the goods met the specifications, but some other underlying contractual, statutory, or regulatory requirement was not satisfied.

With respect to legally false claims, courts have identified two types of certifications that could result in FCA liability: (1) express false certifications, where the party submitting a claim for payment expressly certifies compliance with the legal requirement allegedly violated, and (2) implied false certifications, where the party submitting a claim for payment does not directly certify compliance with the requirement allegedly violated. In FCA cases relying on the latter (i.e., the implied false certification doctrine), the key question often is whether FCA liability can or should attach where the underlying “legal” violations are not clearly tied to claims for payment or the government’s decision to pay.

While many circuit courts have recognized the so-called implied false certification doctrine, several limit its application to situations where compliance with the particular statute, regulation, or contract provision is a clear condition or prerequisite of payment. See, e.g., United States ex rel. Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001); United States ex rel. Wilkins v. United Health Group, Inc., 659 F.3d 295 (3d Cir. 2011); United States ex rel. Chesbrough v. Visiting Physicians Ass’n, 655 F.3d 461 (6th Cir. 2011); United States ex rel. Conner v. Salina Reg’l Health Ctr., 543 F.3d 1211 (10th Cir. 2008). See also FraudMail Alert No. 13-04-04; FraudMail Alert No. 11-08-31. Other circuits have recognized the implied false certification doctrine, or something akin to it, but with varying standards for application. See, e.g., Ebeid v. Lungwitz, 616 F.3d 993 (9th Cir. 2010) (adopting the implied false certification theory without deciding whether to adopt a requirement that the underlying statue “expressly” condition payment on compliance); United States ex rel. Hutcheson v. Blackstone Med., Inc., 647 F.3d 377 (1st Cir. 2011) (adopting its own “misrepresentation” of a “material condition of payment” doctrine).

The Fifth Circuit has not recognized the implied false certification doctrine, and instead has determined that “unless the Government conditions payment on a certification of compliance, a contractor’s mere request for payment does not fairly imply such certification.” See Steury v. Cardinal Health, Inc., 625 F.3d 262, 268 (5th Cir. 2010). See also FraudMail Alert No. 10-11-03. It is the Fifth Circuit’s approach that the Seventh Circuit adopted with its decision in Nelson.

Background in Nelson

Nelson worked as an administrator at a for-profit higher education institution—Sanford-Brown—for a brief period of time in 2008 and 2009. A few years after resigning from that position, Nelson filed a qui tam suit alleging that Sanford-Brown lied to the Department of Education in order to obtain certain federal subsidies, including grants and student loans. In particular, Nelson alleged that Sanford-Brown reneged on promises it had made in its Program Participation Agreement (“PPA”) when applying for the program under Title IV of the Higher Education Act, including paying improper employee bonuses that were tied to securing admissions and financial aid, and falsifying attendance records.

The United States declined to intervene in the qui tam suit, but Nelson continued with the case. The district court then issued a number of orders that limited and narrowed the claims—including rulings under Rule 9(b) and the “public disclosure” bar—before ultimately granting summary judgment to Sanford-Brown. In that summary judgment decision, the district court rejected the theory of implied false certification.

Nelson appealed to the Seventh Circuit on a number of the issues, including the district court’s implied false certification holding. The United States filed an amicus brief and argued, both in the brief and at oral argument, that the Title IV requirements in the PPA were conditions of participation and conditions of payment and that “a claim for payment is ‘false’ when the goods or services provided to the government do not satisfy all relevant conditions of payment.” Brief for the United States of America as Amicus Curiae Supporting Appellant, at 20, Nelson, No. 14-2506 (7th Cir. Oct. 6, 2014).

The Seventh Circuit’s Decision in Nelson

Nelson and the government argued to the Seventh Circuit that a violation of a PPA condition caused false claims. They acknowledged that the requirements at issue were conditions of participation, but contended that they also were conditions of payment, since Sanford-Brown had to comply with them in order to maintain its eligibility to receive federal subsidies. But the Seventh Circuit disagreed. It pointed out that this theory would mean that “the PPA serves as a trigger poised to impose FCA liability at some indefinite point in the future, because continued lawful receipt of the federal subsidies depends on continued compliance with the PPA.” 2015 WL 3541422, at *10. The court also reasoned that the theory was at odds with the basic principle that FCA liability is not imposed for mere breaches of contract.

Ruling that the theory lacked “a discerning limiting principle,” the court concluded that it would be “unreasonable” to hold that continued compliance with “the thousands of pages of federal statutes and regulations incorporated by reference into the PPA” were conditions of payment under the FCA.  Id. at *12. To further illustrate this point, the court named “just a few” conditions incorporated in the PPA— including Title VI of the Civil Rights Act of 1964, as amended, together with its implementing regulations, Title IX of the Education Amendments of 1972 and the implementing regulations, and Section 504 of the Rehabilitation Act of 1973 and the implementing regulations. Id. at *8 n.4.

Finally, while recognizing that a number of other circuits have accepted the implied false certification theory, the court declined to join them and instead adopted the Fifth Circuit’s approach in Steury. Consistent with Steury, the Seventh Circuit concluded that the FCA is not the proper enforcement mechanism for violations of conditions of participation in a program participation agreement. In reaching its conclusion, the court also relied on Mikes, in which the Second Circuit reasoned that the FCA is not appropriate “for use as a blunt instrument to enforce compliance with all [ ] regulations.” Nelson, 2015 WL 3541422, at *12 (quoting Mikes, 274 F.3d at 699).

Importance of the Nelson Decision

The Seventh Circuit’s reliance on the Fifth Circuit’s Steury decision and the Second Circuit’s Mikes decision indicates that the reasoning of those courts applies to FCA cases outside of the healthcare context. Likewise, the Seventh Circuit’s reasoning and rejection of the implied false certification doctrine should apply far beyond the educational program context.