After being fired as its CEO, Angela Parato filed a False Claims Act action against her former employer, Unadilla Health Care Center, Inc. (UnaHealth). Parato alleged, among other things, that UnaHealth, a Federally Qualified Health Center, made false certifications in its applications for grants under Section 330 of the Public Health Service Act to the Department of Health and Human Services. Essentially, Parato claimed that UnaHealth promised, in its application, that it would prohibit future conduct by employees constituting a conflict of interest. On UnaHealth’s summary judgment motion, the court dismissed this “promissory fraud” claim. The court did permit Parato’s claims against UnaHealth for retaliation under the FCA and breach of contract under state law to survive. See United States ex rel. Parato v. Unadilla Health Care Center, Inc., Case No. 5:07-CV-76 (MTT), 2011 WL 1196067 (M.D. Ga. Mar. 28, 2011).

UnaHealth first applied for a grant from the Department of Health and Human Services in November 2003. In that application, UnaHealth certified that it “will establish safeguards to prohibit employees from using their positions for a purpose that constitutes or presents the appearance of personal or organizational conflict of interest, or personal gain and that it will comply with all applicable requirements of all other federal laws, executive orders, regulations and policies governing this program.” In December 2004, UnaHealth hired an interim CEO, Dr. Bruce Whyte. In January 2005, UnaHealth purchased over $109,000 of computer equipment and services from Companion Technologies Corporation with grant money, while Whyte was allegedly serving as a consultant for this company. Parato was hired as the permanent CEO in July 2005, and UnaHealth submitted a second application for grant money in August 2005. This timeline makes it very difficult for a plaintiff to establish a false certification in violation of the FCA, referred to by the court as “promissory fraud”, and ultimately proved fatal to Parato’s claim.

The court held:

Although courts have held that promissory fraud can give rise to an FCA claim, it is a difficult theory under which to proceed…for a claim of promissory fraud to be actionable, the Plaintiff must show that the “promise” was false when made…Parato must show that, at the time UnaHealth submitted its Section 330 grant applications, UnaHealth had no intention of fulfilling the assurances or complying with applicable HHS regulations and requirements.

The Court explained that UnaHealth could not have made false promises regarding Whyte’s conduct in its November 2003 application because UnaHealth had not even contemplated hiring him. Additionally, the assurances in the August 2005 did not apply to Whyte’s purchase in January 2005, since the purchase was past conduct. The certification applies to future conduct. This case highlights important limitations on false certification/promissory fraud theories. Scienter is an element of any FCA claim. The defendant has to “knowingly” make a “false” or “fraudulent” statement, which means that the defendant knew the statement was false at the time it was made. Since certifications in applications usually apply to future conduct, a plaintiff may need to establish that the defendant intended to commit fraud from the very beginning or long before the allegedly fraudulent claim arises.