The U.S. Supreme Court recently held oral arguments in the case of Universal Health Services, Inc. v. U.S. ex rel. Escobar, No. 15-7, which is set to decide the viability of implied certification under the FCA. As discussed in our last update on the Escobar case, implied certification is a judicially-created theory under the FCA that establishes liability for a provider or contractor, that, although delivering or performing the materials or services claimed, violated a contract, statute or regulation as a condition of payment even though the provider or contractor did not expressly certify such compliance as a condition of payment. Implied certification has been a split issue among the circuit courts and a source of frustration for providers. Escobar’s broad reach has drawn significant attention to the case, including numerous amicus briefs seeking to restrict the potential for perceived limitless exposure under the FCA. Should the Supreme Court move to strike implied certification, many pending FCA cases quickly could become unsustainable.

A Morass?

“[i[It proves my point, Your Honor, that this is a morass.”Roy T. Englert, Counsel for Universal Health Services

The justices were particularly attuned to the theory of implied certification in light of the facts at hand, as opposed to considering the global consequences of the theory. In one exchange, Justice Sonia Sotomayor said that she had “a very hard time accepting that if you provide – if you claim money for a service ... [without] a qualified individual, unsupervised by a qualified individual, which is a requirement specifically in the regulations, I’m having a hard time understanding how you have not committed a fraud.”

Counsel for Universal Health Services, Roy T. Englert, responded by noting the difficulty in such a sweepingly broad theory of liability, correctly pointing out that the very regulation the First Circuit Court of Appeals relied upon in finding fraud was not once cited by the petitioners in the seven complaints to the administrative agencies or in the complaint that was the basis of the federal action, which had been amended several times over. Mr. Englert stated, “[i[It proves my point, Your Honor, that this is a morass. And for one to think, after the fact, this is basic and central and this is fraud, is a plaintiff’s lawyer’s game.”

What Constitutes a Fraudulent Claim?

“In demanding payment for satisfaction of the contract, you are not making a recommendation that you have satisfied the contract?”Justice Elena Kagan

In another exchange, Justice Kagan pressed Mr. Englert on what would constitute a fraudulent claim. In comparing the current case to hypotheticals stemming from Civil War-era cases where the government is paying for guns that do not shoot, boots that fall apart, and food that cannot be eaten, Justice Kagan stated, “I would think that this is the exact same, [in] that the contract was for a doctor’s medical care, and a doctor’s medical care was not provided. A nondoctor’s care was provided.” Mr. Englert aptly responded that none of the hypotheticals relied upon from the Civil War era involved an implied certification, which is what is at issue in Escobar, because implied certification did not arise under the FCA until 1994 in the Ab-Tech Construction case.

Materiality

“Is every material breach of a federal contract an FCA violation?”Chief Justice John G. Roberts

The respondents and government relied extensively on the requirements of materiality and knowledge to act as sufficient safeguards against the perceived issues with implied certification. David Frederick, counsel for the whistleblowers, stated that the “two elements of materiality and knowledge are going to solve the vast [majority] of the problems.” Justice Anthony Kennedy appeared to agree “[i]It seems to me we just can’t think about fraud unless we have materiality in some sense. Otherwise, it seems to me, fraud doesn’t make much sense.”

Justice Roberts provided the only significant resistance to Mr. Frederick’s claims regarding knowledge, noting “[t]That causes concern, of course, because there are thousands of pages of regulations under Medicaid and Medicare programs.” Mr. Englert later echoed the issue, stating that “[t]his morass of regulations, bluntly, is worse than the Internal Revenue Code. It’s full of cross-references; it’s full of contradictions, as the First Circuit itself acknowledged…”

Roadmap for Fraud?

“How do you distinguish between those regulations, breach of which are fraudulent when you breach them … from those that are not?”Justice Stephen G. Breyer

Evidenced by the oral arguments are the drastically opposing views of implied certification and its potential reach in the case. Looking to draw on middle ground, several justices inquired about a legal concept that would trigger liability only from violations that were explicit on conditions of payment. Ultimately, the justices seemed uncertain, however, about instituting such a form of liability which Mr. Frederick argued would create a “roadmap for fraud.”

Looking Ahead

The arguments by Universal Health Services were generally met with skepticism by the majority of justices, who appeared hesitant to dismiss implied certification as a basis of liability under the FCA. In the hour-long session, a preponderance of the criticisms stemmed from the traditionally left-leaning justices – namely Justice Kagan and Justice Sotomayor. Although for providers following the case, the most troubling skepticism came from Justice Kennedy, who could be pivotal in reaching a majority decision.

A decision is expected to be handed down at the end of the Supreme Court’s term in late June. With the recent passing of Justice Antonin Scalia, a 4-4 split is very possible. If that happens, the First Circuit’s ruling would likely be affirmed, and the distinct split among the circuit courts would remain.