On Thursday, June 16, 2016, the US Supreme Court issued its much anticipated decision in Universal Health Services v. Escobar on the “validity and scope” of the implied false certification theory of False Claims Act (FCA) liability. Siding with the Department of Justice, the Court upheld the validity of the theory, concluding that the “implied false certification theory can, at least in some circumstances, provide a basis for liability.” The Court, however, emphasized that the implied false certification theory was circumscribed by a “rigorous materiality requirement,” agreeing in part with the D.C. Circuit‘s decision in United States v. SAIC, 626 F. 3d 1257 (D.C. Cir. 2010).

Implied false certification has been a hotly contested theory of FCA liability in the Circuit Courts. According to this theory (advocated by the Department of Justice and counsel for whistleblowers), any entity that submits a claim for payment to the government impliedly certifies compliance with all conditions of payment and, as a result, “if that claim fails to disclose the defendant’s violation of a material statutory, regulatory, or contractual requirement, . . . the defendant has made a misrepresentation that renders the claim ‘false or fraudulent’” under the FCA.

In a unanimous decision, the Supreme Court agreed that FCA liability can be premised on an implied false certification theory, stating:

Specifically, liability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant’s noncompliance with a [material] statutory, regulatory, or contractual requirement. In these circumstances, liability may attach if the omission renders those representations misleading.

However, while the Court upheld the validity of this theory, the Court did not embrace the government’s overly broad theory that every claim for payment could provide a basis for liability. Instead, the Court limited its holding to address the facts in this case, explaining that implied certification can be a basis of liability, “at least where two conditions are satisfied:”

  1. the claim does not merely request payment, but also makes specific representations about the goods or services provided, and
  2. the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.

The Court had little difficulty concluding that the claims at issue in the case “do more than merely demand payment” and were “actionable” half-truths by making specific representations while omitting critical facts. The petitioner in Escobar had allegedly submitted claims for payment under Medicaid “using payment codes that correspond to specific counseling services” and professional titles without disclosing that the staff lacked the licensing or qualifications to perform those services.

The Court also held that the second condition is subject to a “demanding” and “rigorous” materiality standard necessary to prove liability. In reaching this ruling, the Court downplayed the significance of whether or not a contractual, statutory, or regulatory provision is a “condition of payment” – a concept that had been the touchstone of implied certification theories adopted by several lower courts. In emphasizing materiality, the Court again reiterated that the FCA is not “an all-purpose antifraud statute” or “a vehicle for punishing garden-variety breaches of contract or regulatory violations.”

Recognizing perhaps that materiality is heavily fact-driven, the Court’s opinion described several key facets of materiality as applied to an implied false certification theory case:

  • The government’s designation of a requirement as a condition of payment is “not automatically dispositive,” but only one consideration in the question of materiality under the FCA;
  • The government’s option to decline to pay a claim if it knew about the entity’s non-compliance is insufficient to establish materiality;
  • Minor or insubstantial noncompliance with a statutory, regulatory, or contractual requirement cannot be the basis for a finding of materiality;
  • Proof of materiality can include evidence that a the government “consistently refuses to pay claims based on noncompliance with the particular statutory, regulatory, or contractual requirement;”
  • Very strong evidence of non-materiality can include evidence that the government “pays a particular claim in full despite its actual knowledge that certain requirements were violated” or where the government “regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position . . . .”

While the implied certification theory of liability has now survived a challenge before the Supreme Court, the Court’s opinion is not an outright win for the government. The Court’s opinion suggests that, for liability to attach, a defendant must do more than merely submit a claim for payment, but also make specific representations about the goods or services provided while, at the same time, fail to disclose violations of material statutory, regulatory, or contractual requirements. The Court also embraced a broad, fact-driven materiality standard, potentially giving the government and defendants fact-specific arguments both for and against liability. In a footnote addressing the defendant’s arguments (and likely the lower courts), the Court emphasized that materiality is not “too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment,” explaining that the materiality standard is “a familiar and rigorous one” and that FCA plaintiffs must also plead their claims with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b). Nonetheless, it remains to be seen how the lower courts will implement this opinion and its impact on the growing tide of FCA cases against government contractors.