In a highly anticipated decision, the United States Supreme Court issued a unanimous opinion in Universal Services, Inc. v. United States ex rel. Escobar that threw out existing law related to the implied certification theory of liability under the False Claims Act.
Lower courts were split as to whether FCA liability existed for implied certifications of statutes, regulations, and contractual requirements that are conditions of payment and the existing law focused on whether representations were express or implied and whether they were specifically tied to a condition of payment. Background analysis regarding the case can be found here.
Both expressly and impliedly, the Supreme Court found that the analysis of FCA liability does not have to be so complicated. Instead, the analysis should focus on well-established, fundamental principles of fraud and contract law to determine whether there is an actionable misrepresentation that is both knowingly false and material. In other words, half-truths can be actionable under the FCA if they are both false and material to the government’s payment decision. This is a sea change for FCA jurisprudence that will lead to significant new case law on what omissions are actionable, what evidence satisfies the “rigorous” and “demanding” materiality standard under the FCA, and potentially significant discovery on both issues. The health care industry, government contractors, and other highly regulated businesses that rely on government funding will need to monitor how this decision is applied as it could have far-reaching consequences for what is actionable under the FCA.
The basic takeaways from the decision are as follows:
- An Implied Certification Can Be Actionable – But Not For the Reasons Lower Courts Think. Under the implied certification theory, a failure to disclose a violation of a material statutory, regulatory, or contractual requirement, whether express or implied, that is a condition of payment is a misrepresentation that is actionable under the FCA. Op. at 1. Instead of choosing sides in the split between the lower courts, the Supreme Court set aside the existing case law and focused on existing principles of fraud and contract law. As a result, an implied certification can be actionable under the FCA, but not simply because it is an implied certification. What matters is whether the misrepresentation is actionable as fraud. And an omission can be actionable fraud if “the defendant’s representations [are] misleading with respect to the goods or services provided.” Op. at 8. In other words, “half-truths” that omit “critical qualifying information – can be actionable misrepresentations.” Op. at 9-10. Lower courts will need to determine what constitutes “critical qualifying information” – including the lower court in Universal Health on remand because the lower court and the First Circuit applied the wrong standard.
- The Supreme Court Established a “Rigorous” and “Demanding” Materiality Standard. The Supreme Court pronounced that lower courts should not expend their energy determining whether the statute, regulation or contract requirement is “expressly designated a condition of payment.” Op. at 12. While such an analysis is relevant, it is not dispositive. The key question is whether the misrepresentation at issue is “material.” The materiality standard is rigorous and turns on the effect on the recipient of the alleged misrepresentation. Op. at 14. Materiality can be established with “evidence that the defendant knows that the Government consistently refuses to pay claims” based on noncompliance with the particular statutory, regulatory, or contractual requirement. But the opposite is also true that if the Government pays in full despite knowledge that the requirements at issue were violated, that is “very strong evidence” that the requirements are not material. Op. at 16. Future cases will involve significant discovery and interpretation by trial courts as to knowledge of the defendant and whether or not the government pays when certain requirements are violated.
- Minor Non-Compliance – No FCA Liability. The Supreme Court also addressed the policy concerns raised by Universal Health regarding the potential arbitrariness of decisions on FCA liability. Those “concerns about fair notice and open-ended liability 'can be effectively addressed through strict enforcement of the Act’s materiality and scienter requirements.' Those requirements are rigorous.” Op. at 13-14 (citation omitted). As a result, the FCA “is not an all-purpose anti-fraud statute, or a vehicle for punishing garden-variety breaches of contract or regulatory violations.” Op. at 15. In other words, “the False Claims Act is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations.” Op. at 18. FCA defendants will seize on this language in the future to argue that the violations pled against them are trivial or insignificant that do not warrant liability under the FCA. Trial courts will have broad discretion to determine what is and is not actionable based on existing fraud and contract law.
- Get Ready to Litigate. The Supreme Court established new rules for liability under the FCA that will have to be litigated in trial courts and interpreted by appellate courts. There will be significant discovery on issues regarding what is “critical qualifying information” for representations to be actionable, whether the government does or does not pay for a violation of the relevant requirement, and whether the defendant had actual knowledge of that fact. Also, trial courts will have significant discretion to serve as the gatekeepers for fraud claims under the FCA and determining whether alleged violations are “garden-variety breaches of contract or regulatory violations” or satisfy the rigorous materiality and scienter requirements of the FCA. We will continue to monitor these developments and their effect on highly regulated businesses that rely on government funding.