This morning Justice Thomas announced a unanimous opinion in Universal Health Services, Inc. v. United States ex rel. Escobar. The Supreme Court held that implied certifications can violate the False Claims Acts in limited circumstances—when the “rigorous” and “demanding” materiality standard is met.

The Court’s Ruling

More specifically, the Court explained that implied certification is a viable False Claims Act theory of liability when at least two conditions are met:

  1. The claim does not merely request payment, but also makes specific representations about the goods or services provided; and
  2. The defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading.

This materiality requirement is “rigorous” and “demanding.” The Court rejected the First Circuit’s overly broad standard that found materiality if the Government was entitled to deny payment had it been aware of the violation. According to the Court, this standard impermissibly transformed the FCA into an “all-purpose antifraud statute” or “a vehicle for punishing garden-variety breaches of contract or regulatory violations.” The Court’s test imposes a more functional approach, which directs lower courts to assess whether “the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.”

Importantly, this suggests the demise of legal arguments about the distinctions between conditions of payment—which under the laws of many circuits support FCA liability—versus conditions of participation, which do not support such liability. Under Escobar, whether a requirement is labeled a condition of payment is but one factor in determining whether compliance is material, but it is not dispositive. This means that the fact that a legal requirement is not expressly labeled a condition of payment does not mean a violation cannot serve as the basis for an FCA violation. But conversely, it also means that the fact that a requirement is expressly designated as a condition of payment does not mean that a violation is necessarily material within the meaning of the FCA. As Justice Thomas explained:

Defendants can be liable for violating requirements even if they were not expressly designated as conditions of payment. Conversely, even when a requirement is expressly designated a condition of payment, not every violation of such a requirement gives rise to liability. What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.

In evaluating whether compliance is material, the Court offered examples of relevant information, including “evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.” Evidence that “the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated,” or that “the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position,” would undermine a finding of materiality.

Implications of the New Framework

The Supreme Court has established that the implied certification theory is viable in limited circumstances. But the opinion raises a host of issues that will be litigated for years to come in the lower courts.

  • Although the opinion does not refer to the “express certification” theory of liability, the Court’s opinion suggests that there is no longer any significant distinction between the express certification and implied certification theories. That is, whether a defendant is deemed expressly or impliedly to certify compliance with a requirement, courts must independently determine whether compliance is material to determine whether FCA liability attaches.
  • The Court’s formulation of the materiality requirement suggests that determining materiality can be a fact-specific inquiry. The Court emphasized, however, that this standard is not “too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment.” Indeed, plaintiffs must plead “facts to support allegations of materiality” that satisfy Rule 8’s plausibility requirement and Rule 9’s particularity requirement in order to get past a motion to dismiss.
  • Is it sufficient for a plaintiff to prove that a legal requirement allegedly violated was material, or must the plaintiff also prove that the defendant “knew” that the requirement was material? The opinion suggests the latter, which would provide some additional protections to defendants where the materiality of a particular requirement can reasonably be disputed.
  • The lower courts will have to reassess decisions that were made under the old materiality standard. For instance, many courts had held that violations of the Anti-Kickback Statute were per se material, without any “rigorous” assessment of the kind now required by the Supreme Court.

A copy of the Court’s opinion can be found here.