Why it matters: This month we discuss two interesting court cases involving the False Claims Act (FCA). On April 19, 2016, the Supreme Court heard oral argument in Universal Health Services v. U.S. ex rel. Escobar, a case involving the issues of implied certification of compliance and legal falsity in an FCA context. This was the only FCA case as to which the Supreme Court granted certiorari this term, and the Supreme Court's decision will resolve a multicircuit split on these issues. We review the oral argument here. In addition, we discuss a recent Ninth Circuit decision addressing the question of whether the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (a.k.a. Fannie Mae and Freddie Mac, respectively) constitute "federal instrumentalities" for purposes of the FCA. Short answer: They don't. Last, the DOJ announced a couple of significant FCA resolutions in connection with FHA-insured mortgage loans and sleep apnea masks—read on for a recap.
Oral argument in Universal Health Services v. U.S. ex rel. Escobar: On April 19, 2016, the Supreme Court heard oral argument in the only FCA case of the current term. The Court had granted certiorari in December 2015 to review the question of implied certification of compliance under the FCA and to resolve a multicircuit split on the issue (we covered the Court's grant of certiorari in our January 2016 newsletter).
To briefly recap the relevant facts and procedural history, the case arose out of the care provided to a teenage girl at Massachusetts-based Arbour Counseling Services (owned and operated by Universal Health Services) that allegedly led to her death in 2009. In February 2013, the girl's parents filed qui tam lawsuits under the FCA and its Massachusetts counterpart alleging that Arbour, by submitting claims for reimbursement, had engaged in fraudulent billing by misrepresenting that it and its staff members were in compliance with the requisite legal health standards and were properly licensed and/or supervised as required by relevant law. The district court dismissed the case in its entirety, holding that the relators had not established the requisite falsity to sustain the claims. On appeal, the First Circuit reversed, finding that the relators had stated a claim for "legal falsity" under the FCA because Arbour impliedly certified its compliance with applicable law when it submitted its claims for reimbursement to the government agencies, even though the specific statutory/regulatory language did not require an express statement of compliance as a condition of payment. The questions presented in the cert petition as to which the Court heard oral argument—which reflect the multicircuit split created by the First Circuit's holding, are (1) "Whether the 'implied certification' theory of legal falsity under the FCA—applied by the First Circuit below but recently rejected by the Seventh Circuit—is viable"; and (2) "If the 'implied certification' theory is viable, whether a government contractor's reimbursement claim can be legally 'false' under that theory if the provider failed to comply with a statute, regulation, or contractual provision that does not state that it is a condition of payment, as held by the First, Fourth, and D.C. Circuits; or whether liability for a legally 'false' reimbursement claim requires that the statute, regulation, or contractual provision expressly state that it is a condition of payment, as held by the Second and Sixth Circuits."
On to the oral argument. As one observer commented in his analysis on Scotus.blog, "[a]bout the only thing clarified by yesterday's oral argument in Universal Health Services v. United States ex rel. Escobar is that the Court is unlikely to issue a unanimous opinion. The visceral reactions of the Justices on the merits of the case could hardly be more disparate."
The Justices certainly subjected the attorneys for both sides to lively questioning. Roy T. Englert, Jr., the attorney for Universal Health Services, began by arguing that the theory of implied certification improperly expands the reach of the FCA beyond the legislative intent, stating that "the entire case turns on four words of the [FCA] statute: 'False or fraudulent claim,' " and that in this context, as construed by Court precedent, the term " '[f]alse' means false." Justice Ruth Bader Ginsberg pushed back on this notion, asking "[s]o 'false' can only mean false? It can't mean deceptive, misleading?" This set off a long back-and-forth between the Justices and Englert about the meanings of the terms "false," "fraudulent" and "material" under the FCA and the common law of contracts and torts (with much quoting from the Restatements of such laws), and as such terms have been interpreted by the Court and the lower courts in different contexts and hypotheticals (such as "material" misstatements and omissions in securities law).
Much of the oral argument was devoted to the concept of materiality, and the fact that, taken to its most extreme, a company can be in breach of a government contract, or be accused of filing a "false" claim for reimbursement under the FCA, for a violation of an immaterial regulation. As Englert argued, in this case the First Circuit improperly found implied fraud based on an immaterial "single alleged regulatory violation involving a regulation not cited in the complaint, not cited in any appellate brief, not cited in the amicus brief of the Commonwealth of Massachusetts." Chief Justice John Roberts seemed sympathetic to this argument in questioning and hypotheticals, and Justice Stephen Breyer said "[t]hat's to me what's at the heart of this. How do you distinguish those regulations, breach of which are fraudulent when you breach them, and implicit promise not to, from those that not? There are millions of regulations. That's what all the amici are worried about."
David C. Frederick, the attorney for the relators, argued that "[w]hen a claimant asserts a right to government funds without disclosing that it has knowingly violated the government's material payment conditions, that claim is both false and fraudulent regardless of whether it contains …express false statements." To this, Chief Justice Roberts asked, "[s]o is your position that every material breach of a contract gives rise to a claim under the False Claims Act as false and fraudulent?" There followed another long back-and-forth with hypotheticals under government contracts generally (e.g., contracts to supply guns to the army which malfunction was a hypothetical that was returned to throughout the oral argument) and specifically with respect to the requirement in the FCA that false claims be made with respect to something "material" and be made "knowingly" (as defined in the FCA). Here, the argument turned to the facts of the case where the relators were arguing that the facility billed the government entitlement program for medical services when it "knew" that its staff wasn't in compliance with a material condition of payment, i.e., that the staff providing the medical treatment be properly licensed. At one point, Justice Sonya Sotomayor posed the issue this way (which was echoed by Justice Elena Kagan in a similar line of questioning): "I always thought that when you asked for payment, you're making a promise: I did what I agreed to do. Pay me, please. That's, to me, what's sort of understood. If I hired you to provide me with doctor services, you ask me for money, I'm assuming you provided me with doctor services. And you know you didn't. Why isn't that a fraud?"
Frederick also rebutted the argument that the theory of implied certification has improperly expanded liability under the FCA, citing to findings by an amicus expert that "not only has there been no spike as a result of the implied certification theory having been adopted, but that, in fact, the problems that are identified don't actually come to pass because the vast bulk of the cases that are not intervened in by the government, in fact, are done at a motion to dismiss." Deputy Solicitor General Malcolm L. Stewart, arguing for the government in support of the relators, summed it up by saying that, even though the theory of implied certification has only been around for 25 years, "the concept that a person can be held liable for fraud even though he says nothing explicitly false but labors to create a false impression, that's been around for ages."
We will be awaiting the Court's decision with avid interest and report back.
United States ex rel. Adams v. Aurora Loan Services: On February 22, 2016, the Ninth Circuit affirmed a Nevada district court's dismissal of an appeal brought by relators against various lenders and loan servicers in an FCA suit. The relators had argued that the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are "federal instrumentalities" for purposes of the FCA and thus false certifications made by the defendants regarding loans purchased by Fannie Mae and Freddie Mac fell under FCA purview. The Ninth Circuit disagreed, holding that Fannie Mae and Freddie Mac are private companies, "albeit companies sponsored or chartered by the federal government," and thus are not "federal instrumentalities" or "officers, employees, or agents" of the United States for purposes of the FCA.
- On April 15, 2016, the DOJ announced that New Jersey-based Freedom Mortgage Corporation (Freedom) agreed to pay $113 million to resolve violations of the FCA by knowingly originating and underwriting single family mortgage loans insured by the U.S. Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements for the FHA insurance program. As part of the settlement, Freedom admitted to the following facts: (a) between 2006 and 2011, it certified mortgage loans for FHA insurance that did not meet HUD underwriting requirements and were therefore not eligible for FHA mortgage insurance; (b) between 2006 and 2008, it failed to adhere to FHA's quality control (QC) requirements by, among other things, not sharing its early payment default (EPD) QC reviews with production and underwriting management; (c) between 2008 and 2010, due to staffing limitations it did not always perform timely QC reviews or perform audits of 100% of the EPD loans, as required by HUD; (d) between 2006 and 2011, it failed to report any improperly originated loans to HUD even though the EPD QC reviews that it did perform revealed high defect rates exceeding 30%; and (e) in 2012, after identifying hundreds of loans that "possibly should have been self-reported to HUD," it reported only one.
- On March 23, 2016, the DOJ announced that Respironics Inc. (Respironics) agreed to pay $34.8 million to resolve FCA and Anti-Kickback violations related to the payment of kickbacks in connection with the sale of masks designed to treat sleep apnea. The allegations, which were neither admitted nor denied by Respironics, centered around free call center services which it provided from 2012 to 2015 to durable medical equipment (DME) suppliers that bought Respironics' masks for patients with sleep apnea. The call center services, which were allegedly provided to "meet …patients' resupply needs," were free of charge "as long as the patients were using masks that Respironics manufactured; otherwise, the DME companies would have to pay a monthly fee based on the number of patients who used masks manufactured by a competitor of Respironics." Qui tam whistleblower to receive award of $5.38 million.
See (1) here to read the transcript of oral argument before the Supreme Court in Universal Health Services v. U.S. ex rel. Escobar, (2) here to read Ronald Mann, "Argument analysis: Justices display disparate views on implied fraud under False Claims Act," SCOTUSblog (4/20/16), and (3) here to read a discussion of the Escobar case in Manatt's January 2016 newsletter in the article entitled "Spotlight on the False Claims Act."
See here to read the Ninth Circuit's 2/22/16 opinion in United States ex rel. Adams v. Aurora Loan Services.
See here to read the DOJ's 4/15/16 press release entitled "Freedom Mortgage Corporation Agrees to Pay $113 Million to Resolve Alleged False Claims Act Liability Arising from FHA-Insured Mortgage Lending."
See here to read the DOJ's 3/23/16 press release entitled "Respironics to Pay $34.8 Million for Allegedly Causing False Claims to Medicare, Medicaid and Tricare Related to the Sale of Masks Designed to Treat Sleep Apnea."