On June 16, 2016, the US Supreme Court issued its eagerly awaited opinion in Universal Health Services v. Escobar. The unanimous decision about the False Claims Act (FCA) will impact every provider of goods and services to the federal government, from defense industry contractors to life sciences companies to healthcare providers. In addition, the ruling likely will affect providers of goods and services to state governments, whose courts often follow FCA case law for similar state statutes. Although the decision provides some protection from FCA whistleblowers, providers still must create vigorous compliance programs in order to prevent potentially ruinous liability.
Court Accepts Implied Certification Theory
The relators, Julio Escobar and Carmen Carrea, sued Universal Health Services when their teenage daughter died after being treated by staff at a mental health facility. The relators asserted that Universal Health Services violated the FCA by miscoding services and by allowing their daughter to be treated by ``unlicensed, unqualified, and unsupervised `counselors' . . . in clear violation of several express requirements of the Massachusetts Medicaid program.''
Though it did not reach the merits of the parents' claim, the Supreme Court agreed with several lower courts that the FCA can be violated when a provider submits a claim for payment to the government that contains misleading omissions about material statutory, regulatory or contractual requirements (what is commonly referred to as the "implied false certification theory"). The decision included the example of an applicant for a college teaching position whose resume "lists prior jobs and then retirement, but fails to disclose that his `retirement' was a prison stint for perpetrating a US$12 million bank fraud."
Materiality Is the Focus
While rejecting suggestions from providers that it jettison the implied certification theory, the Court shifted the focus from whether a misrepresentation was implicit or explicit to whether it was "material" to the government's payment decision. Relying on a variety of sources, the Court held that "under any understanding of the concept, materiality looks to the effect on the likely or actual behavior" of the party receiving services. In other words, a reasonable person must believe that the service was deficient in a way that would be important to the government's decision whether to pay. For a misrepresentation to be material, it must have "a natural tendency to influence, or be capable of influencing" the government's payment decision.
A plaintiff cannot prove materiality merely by showing that the government "would have the option to decline to pay if it knew of the defendant's noncompliance." On the other hand, if the government chooses to "pay 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."
Materiality and Falsity Scienter Must Be Shown
The Court went out of its way to make clear that the materiality standard is a high one by repeatedly describing the burden as "demanding" or "rigorous." The Court emphasized that the FCA is not "an all purpose antifraud statute" or a means for punishing "gardenvariety breaches of contract and regulatory violations." While a defendant may not deliberately ignore (or recklessly disregard) the truth of the information it submits, this standard does provide some protection from liability under the FCA.
In addition to proving materiality, a plaintiff seeking to recover on an FCA claim must also allege the provider "knowingly" submitted a false or fraudulent claim. In a reference to the Civil War activity that led to creation of the statute, the Court said a provider of firearms could face liability under the FCA for guns that do not fire if (1) it has actual knowledge that the government "routinely rescinds contracts if the guns do not shoot" or (2) a "reasonable person would realize the imperative of a functioning firearm."
Nonetheless, despite the materiality and scienter requirements, providers may still face uphill battles when facing FCA suits as noted in the brief of Universal Health Services, these "elements are often ill suited for resolution on a motion to dismiss." Moreover, the brief cautioned that "[a]s a practical matter, the extraordinary cost of discovery in FCA litigation and the risk of treble damages, per-claim civil penalties, and the opprobrium of being said to have `defrauded' the government place strong pressure to settle on even defendants with meritorious defenses."
Although, at first glance, the decision could be seen as approving the expansion of FCA liability because the Court accepted the implied certification theory, the decision provides protection to providers by emphasizing the "demanding" materiality standard and "rigorous" scienter requirement. The Escobar decision still shows providers, however, that the best protection against the risk of expensive and burdensome FCA lawsuits is implementation of an effective compliance program.