On April 19, 2016, the U.S. Supreme Court (the Court) heard oral arguments in Universal Health Services (UHS) v. Escobar, a case that will decide whether "implied certification" will remain a viable theory of liability under the federal False Claims Act (FCA). Under the theory, a claim for payment can be considered "false" when the individual or entity seeking payment is noncompliant with a statutory, regulatory, or contractual provision, even if compliance with the provision is not an express condition of payment. The case could have far-reaching effects for nonprofit grant recipients of federal funds that are subject to innumerable and ever-changing regulations, as well as a myriad of contractual terms. Venable has discussed the case in a previous alert.

The questions asked during oral argument suggested that the Justices will accept the implied certification theory. However, the Court wrestled with how to establish an appropriate standard for distinguishing a violation of the FCA from a simple regulatory noncompliance. Drawing from the common law for contracts, the Justices suggested that the distinguishing factor could be whether the regulation was "material" to the government's decision to pay the grantee. Given the differences between contracts and grants, this standard would be very difficult for the grant world to implement. By regulation, costs that are noncompliant are never allowable, meaning that arguably all noncompliances could be construed as material to the government's decision to pay.

Venable will continue to monitor the UHS v. Escobar case. We expect a decision toward the end of the Court's term in late June. We will provide additional guidance at that time.

Regardless of what the Court decides, given the federal government's continued focus on the FCA as a recoupment tool, nonprofit grantees should consider the following:

  • Establish your intent to comply. This will be more important than ever. Nonprofit grantees should document all decisions, as well as the supporting rationale, to demonstrate their deliberate, good faith efforts to comply with all regulatory and contractual provisions.
  • Review your certification process. Determine who will be charged with ensuring that the organization is up to date on its certification requirements. Are they the right people? Do they have the appropriate knowledge to make the certification?
  • Maintain a written dialogue with your government customer. Consider whether to obtain government buy-in for tricky compliance decisions.
  • Develop a crisis mitigation plan. When you receive a report of noncompliance, document your response and work to resolve the issue.
  • Assess your weaknesses. Ethical grantees seek not only to respond to issues as they arise, but to proactively determine where they are uniquely vulnerable to potential fraud, waste and abuse. What are the red flags of fraud in your industry? In particular, revisit your fraud awareness program on an annual basis, and if you have not established one, now would be a good time to think about making that investment.

In addition to the above, the first federal agency—the Railroad Retirement Board—recently increased FCA penalties pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. We will discuss this notable development and its potential impact on nonprofits in our monthly nonprofit federal grant and contract newsletter.

To view our prior publications on nonprofit government grant and contract issues, please click here.