HIGHLIGHTS:

  • In an 8-0 decision, the U.S. Supreme Court held that the False Claims Act can impose liability under an "implied false certification" theory. According to this theory, when a defendant submits a claim to the federal government, it "impliedly certifies" its compliance with material statutory, regulatory and contractual requirements.
  • The Supreme Court held that a material requirement is not always the same thing as an express condition of payment, saying, "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."
  • The Supreme Court described the materiality requirement as "rigorous," but gave only general guidance as to what that means, which will provide fertile ground for litigation in the future.

The U.S. Supreme Court recently issued a unanimous 8-0 decision in Universal Health Services, Inc. v. United States ex rel. Escobar. At issue in the case was the viability and scope of the so-called "implied certification" theory of False Claims Act liability. According to this theory, when a defendant submits a claim to the federal government, it "impliedly certifies" its compliance with material statutory, regulatory and contractual requirements. Those requirements can number in the thousands for those who interact with the government, such as government contractors, healthcare organizations, life sciences companies and institutions of higher learning. The implied-certification theory, if stretched too broadly, could threaten these organizations with False Claims Act liability virtually anytime they fall out of compliance with any law, rule or contract term.

In an opinion written by Justice Clarence Thomas, the Supreme Court endorsed the implied-certification theory – but also limited it. According to the Court, the False Claims Act requires the submission of a false claim, and that can include the submission of a claim where the defendant fails to disclose material information, e.g., information that it knows could potentially change the Government's mind on whether to pay. The Court was quick to stress, however, that not every "insignificant regulatory or contractual violation[]" would suffice. The Court explained that minor infractions, those that would not affect the government's decision to pay a claim, are not material.

The plaintiffs in this case alleged that their daughter had received mental-health treatment from medical professionals who were not properly licensed or supervised under certain state regulations. The plaintiffs brought a federal False Claims Act suit in Massachusetts, under the theory that bills submitted to Medicaid for the medical professionals' work were false because they failed to disclose that noncompliance with state regulations. The district court dismissed the case, reasoning that none of those state regulations were expressly listed as conditions of payment, so violation of them could not be material. The U.S. Court of Appeals for the First Circuit reversed and gave a much broader view of materiality: Any noncompliance is material, wrote the appeals court, if the defendant knows that the government could refuse payment were it aware of the violation.

The First Circuit's broad view of materiality stood in contrast to those of some other circuits, which had either rejected the implied false certification theory altogether or limited its application to those terms expressly listed as conditions of payment. The Supreme Court took up the case to resolve those differences.

The Court's Opinion

The Supreme Court first held that the implied false certification theory can be a proper basis for liability. It noted that in this case, the defendant did more than just request payment. By submitting a bill under the circumstances alleged, it also implicitly represented that it was entitled to payment. And because of that, it had a duty to disclose material information. Referencing concepts of common law fraud, the Court found that the claims fell "squarely within the rule that half-truths – representations that state the truth only so far as it goes, while omitting critical qualifying information – can be actionable misrepresentations."

The Court next held that a claim can be impliedly false even if it does not violate an express condition of payment. The Court gave the example of a contractor that bills for firearms that do not actually shoot. Even if not an express condition of payment, no reasonable contractor would believe that the firearms' inability to shoot was immaterial. The Court also reasoned that the express-condition requirement was a poor solution to limiting False Claims Act liability. The Government could simply make compliance with all laws and regulations an express condition, or it could pick and choose which laws and regulations should be made an express condition, which would be an arbitrary exercise.

The Court concluded that the better way to limit False Claims Act liability was by taking seriously its "rigorous" and "demanding" materiality requirement. According to the Court, a noncompliance with the law may render a claim false, but not materially false, which is what matters. As to what material means, the Court was less clear. It suggested, "[P]roof of materiality can include ... 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. Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material." The Court rejected the First Circuit's broader view, that any noncompliance is material if the government could reject a claim on that basis; instead, there must be some consideration of whether the government does reject claims on that basis.

What the Decision Means

The Universal Health decision rejects the distinction, employed until now by many courts, between provisions that are express conditions of payment and those that are not. Instead, it places the focus squarely on the statute's longstanding materiality requirement. In so doing, the court has further aligned the False Claims Act with common-law definitions of fraud and with the standards applied to other fraud-based statutes.

This new framework is likely a mixed bag for defendants. The decision applies nationwide, so defendants can no longer apply what may have been a more favorable standard in their particular jurisdictions. Although the decision aligns interpretation of the False Claims Act with longstanding and well-understood notions of common-law fraud, it does not further refine the standard for what is "material." The Court repeatedly emphasized that the False Claims Act is not meant to punish "insignificant regulatory or contractual violations," but without further definition, the materiality standard makes it difficult to determine which violations are "insignificant" and which are not. This combination provides fertile ground for litigation. However, it also may allow defendants to draw from a much deeper pool of federal case law that is addressed more broadly to the fundamental concepts of fraud.

In the end, the decision almost certainly will make it more difficult for defendants to dispose of False Claims Act lawsuits at the motion-to-dismiss stage or on summary judgment. The question of whether a noncompliance was an express condition of payment is often a legal question which can be resolved early. The question of whether a noncompliance was material, however, is fact-bound and subject to convenient testimony from government officials.

In the final analysis, Universal Health moves materiality to the center stage. False Claims Act defendants will need to adjust their strategies accordingly. As the court suggested, this might include, among other things, showing that the government paid a defendant's or others' claims despite knowing of the noncompliance at issue. It also opens the door more widely for "expert" battles involving former government officials. Finally, it is worth noting that the relator and the government have the initial burden of proving materiality and it is arguable that a statute's statement that compliance is a condition of payment is not sufficient. Putting the government and relators to the test on the materiality element certainly will feature prominently in any False Claims Act defense.