False certification cases brought under the civil False Claims Act are based on the theory that claims for payment for goods or services delivered to the Federal government can be considered "false" under the FCA if the defendant, in the course of performance, fails to comply with a statute, regulation, contract provision or other legal requirement, and the defendant either expressly or implicitly "certifies" compliance with that legal requirement. These cases, commonly also called "legally false" claims (to distinguish them from "factually false" claims―billing for goods or services never delivered), are among the most vigorously debated and hotly contested cases in FCA jurisprudence because the key to the cases is which legal requirements, if violated, render a claim "false," and which legal requirements do not. For many years, the battleground over which this question was fought was the concept of "materiality"��that is, if the false certification was "material" to the government’s decision to pay the claim, then the false certification would render the claim false; if it was not "material," then the violation would not render the claim false. As more and more courts, and eventually Congress, adopted a “weaker" test of materiality, this distinction broke down, leading to the prospect that, unless the courts developed a more stringent standard in false certification cases, the FCA would become a vehicle for wanton and unfair punishment for minor legal violations in the course of performing government contracts, grants, or providing Federally-funded medical services.
In a remarkable decision, the Fifth Circuit has now provided that more stringent standard. In United States ex rel. Steury v. Cardinal Health, Inc., No. 09-20718, 2010 WL 4276073 (5th Cir. Nov. 1, 2010), the Fifth Circuit ruled that a defendant can be liable under the FCA for a false certification of compliance with a regulatory requirement―even one that is “material” to the government's decision to pay the claim―only if the payment by the government agency is conditioned on compliance with the statute, regulation, or contract provision. If this requirement is not met, the Fifth Circuit concluded, “it is not fair to infer such certification from a mere request for payment,” and the underlying claim for payment is “not ‘false’ within the meaning of the FCA if the contractor is not required to certify compliance in order to receive payment.” Steury, 2010 WL 4276073, at *4 (emphasis added). In reaching its decision, the Fifth Circuit cited with approval the Second Circuit's decision many years ago in United States ex rel. Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001), which had also required that the false certification must be a "prerequisite for payment" in order to support an FCA violation. The Fifth Circuit's ruling is a welcome, common sense decision that imposes the concept of fundamental fairness on False Claims Act enforcement and insures that minor legal violations will not be the basis for punitive FCA judgments.
A Brief History of “Prerequisite to Payment” under the FCA
The concept of prerequisite to payment nearly always has been litigated in the context of materiality, with defendants generally arguing that “prerequisite to payment” was the proper test for materiality. After a long period of denial that materiality was a required element of FCA liability (whatever the proper test), the government finally agreed that it was required, but argued that the proper test was not as stringent as the “prerequisite to payment” test. Courts unanimously adopted a limitation on FCA liability that required violations of a contract term, regulation, or law to be “material” to the government’s payment obligation for FCA liability to attach, but differed on the proper test. See, e.g., United States v. Data Translation, Inc., 984 F.2d 1256 (1st Cir. 1992); United States ex rel. Harrison v. Westinghouse Savannah River Co., 176 F.3d 776 (4th Cir. 1999); Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (U.S. 2008). See also John T. Boese, Civil False Claims and Qui Tam Actions, §2.04 (Aspen Publishers, Wolters Kluwer Law & Business) (3d ed. 2006 & Supp. 2010-1). The concept of prerequisite to payment as a basis for FCA liability, however, became less relied upon as the courts adopted a more lenient test for materiality which held that a false certification only had to have a "natural tendency to influence" or be "capable of influencing" the government's decision to pay the claim. In 2009, Congress, at the urging of the DOJ, adopted the "natural tendency" definition of materiality. See Fraud Enforcement and Recovery Act of 2009 (“FERA”), Pub. L. No. 111-21 (2009) (defining “material” in 31 U.S.C. § 3729(b)(4)).
Factual Background in Steury
The relator in Steury alleged that the defendants falsely and implicitly certified compliance with an implied warranty of merchantability by submitting claims for payment for intravenous fluid pumps under a Veterans Administration contract. Relator generally alleged that the pumps were defective and caused dangerous air bubbles to be released in certain patients, but without specifying that any of the pumps at VA hospitals were defective. The Justice Department investigated the allegations and declined to intervene in the qui tam case. The district court then dismissed the allegations for failure to comply with Rule 9(b). The Fifth Circuit affirmed the Rule 9(b) dismissal, but its decision is far less about Rule 9(b) and much more about what is substantively required to hold a defendant liable under the FCA in a "false certification" case.
The Fifth Circuit’s Decision in Steury
At the outset, the Fifth Circuit found that FERA’s legislative history reflected congressional intent to overrule Allison Engine’s intent requirement, and it ruled that FERA’s amendment to Section 3729(a)(2)―now Section 3729(a)(1)(B)―applied retroactively to claims after June 7, 2008. Thus, the liability standard that the Fifth Circuit applied (without determining the constitutionality of its conclusion) did not include Allison Engine’s intent requirement. Rather, the Fifth Circuit recognized that it must determine both whether the certification was "false" and whether it was “material” to the claim.
The court began by citing prior Fifth Circuit precedents requiring FCA liability to be based only on false certifications that violate conditions of payment―that is, precedents under which the statute, regulation or contract provision alleged to be violated must be a "prerequisite for payment" in order to render a claim "false" under the FCA. Steury at *4 (citing United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 902-03 (5th Cir. 1997); United States v. Southland Mgmt. Corp., 326 F.3d 669, 675 (5th Cir. 2001)). The court further determined that these precedents were applicable despite FERA’s more expansive definition of “material.” Acknowledging that the FCA (as amended by FERA) now defined “material” as having a “natural tendency to influence or be capable of influencing, the payment or receipt of money or property,” the court nonetheless held that the issue of "prerequisite for payment" is not just a materiality question, but more fundamentally, it is a question of "falsity":
The prerequisite requirement has to do with more than just the materiality of a false certification; it ultimately has to do with whether it is fair to find a false certification or false claim for payment in the first place. As already discussed, when payment is not conditioned on a certification of compliance, it is not fair to infer such certification from a mere request for payment. Similarly, even if a contractor falsely certifies compliance (implicitly or explicitly) with some statute, regulation, or contract provision, the underlying claim for payment is not "false" within the meaning of the FCA if the contractor is not required to certify compliance in order to receive payment. See Southland Mgmt., 326 F.3d at 675 (“There is no liability under this Act for a false statement unless it is used to get [a] false claim paid."). In short, a false certification of compliance, without more, does not give rise to a false claim for payment unless payment is conditioned on compliance.
Steury at *4.
In the course of determining whether the claim in Steury was "false," the Fifth Circuit first found that there was no indication that the government conditioned payment for these intravenous pumps on a warranty of merchantability simply because that warranty was standard in contracts under the Federal Acquisition Regulation (FAR). To assert that the pumps must comply with the warranty of merchantability simply because the government's standard commercial acquisition contracts include this warranty would, the court concluded, allow “private litigants . . . to pursue FCA claims whenever the Government acquired noncompliant commercial items” and “substantially compromise” the government’s ability to pursue a range of remedies contemplated under the FAR. Id. at *5.
The Future Impact of the Steury Decision
What is extraordinary about the Steury case is the holding that, in order to violate the FCA, a "false certification" has to be a "prerequisite for payment." This analysis previously has been part of the question of "materiality," which both Congress and the Fifth Circuit have significantly weakened. Importantly, nearly 10 years ago, the Second Circuit came to almost the same conclusion in Mikes v. Straus, holding that the implied certification theory of liability "is based on the notion that the act of submitting a claim for reimbursement itself implies compliance with governing federal rules that are a precondition to payment." 274 F.3d at 699. In Mikes, the Second Circuit refused to base its decision on any concept of materiality, and, like the Fifth Circuit in Steury, applied this principle to determine falsity. The Steury case is so important because the Fifth Circuit joins the Second Circuit in holding that this issue of "prerequisite for payment" is not a materiality question at all, but a fundamental question of falsity.