In the most closely watched False Claims Act case in recent memory, the Supreme Court issued a unanimous opinion1 yesterday upholding the concept of “implied certification” as a basis for False Claims Act (FCA) liability in some circumstances, but rejecting attempts to expand liability under that theory to include any violation of a statute, regulation, or contract term that might lead the government to deny payment of a claim. The Court held that a defendant’s failure to disclose violations of “material” legal requirements could be a basis for imposing FCA liability even in the absence of an express certification of compliance, but it went on to specify how the “rigorous” and “demanding” test of materiality would cabin FCA liability to only those violations important enough to be punishable as fraud under the FCA when they are not disclosed. In so doing, the Court specifically rejected broad standards of liability asserted by the Relator and the Government. Although focused on the health care industry, this opinion has broad implications for government contractors and grantees as well.

The Essentials

  • The Supreme Court recognized implied certification as a viable theory of liability under the FCA, but plaintiffs will need to show that the defendant failed to disclose a violation that it knew was material to the government’s obligation to pay.
  • The Supreme Court made clear that the materiality standard is a demanding one. As the unanimous Court explained, it requires a showing that the government actually would deny claims if it knew about the violation, not just that the defendant violated a requirement designated as a condition of payment, or that the government has the option not to pay because of the violation. The plaintiff also must show that the defendant knew, through actual knowledge or a reasonable person standard, that the government would not pay the claim if informed of the violation.
  • The absence of a bright line rule cuts both ways. Just as plaintiffs will not be able to pursue FCA liability based solely on whether something is labeled a condition of payment, defendants will not be able to avoid FCA litigation by simply pointing out that a requirement is not expressly designated as impacting payment. Instead, a deeper analysis will be required for concepts such as whether the government knew about the noncompliance at issue or similar noncompliance and paid claims anyway. Although the Court indicated its view that materiality can be meaningfully addressed at the outset of litigation, it remains to be seen how closely district courts will hew to the limiting principles that the Court articulated in deciding whether to permit a suit to proceed.


The case before the Court, Universal Health Services, Inc. v. United States ex rel. Escobar (“Escobar”), was brought by the parents of a Medicaid beneficiary who died after receiving counseling services and prescription drugs from employees of a Massachusetts mental health facility. They alleged that the facility employed a number of unlicensed caregivers whose jobs required that they be licensed. The parents alleged further that some of those unlicensed caregivers obtained National Provider Identifiers by misrepresenting their status and that one of those unlicensed caregivers wrote prescriptions for their daughter that contributed to her death. The parents, as relators, alleged that the facility’s claims for services submitted to Massachusetts Medicaid were false claims because the facility was required by regulations to employ licensed providers in positions the facility filled with the unlicensed caregivers.

The Court’s decision sought to resolve disagreement among lower courts about the viability and scope of the implied false certification theory under the FCA. The Seventh Circuit, for example, had rejected the theory outright. The Second Circuit had held that the theory was viable only when the relevant legal requirement was expressly stated to be a condition of payment. In the decision under review by the Court, the First Circuit had held that any claim submitted by a provider “implicitly communicate[s] that it conformed to the relevant program requirements, such that it was entitled to payment,” and that any knowing misrepresentation (either express or implied) of compliance with material conditions of payment makes that claim fraudulent. The First Circuit also had held that the legal requirements allegedly violated by the defendant were per se “material” to the government’s payment because the state regulations at issue made those requirements conditions of payment.

A Viable Theory – In Theory

  • Two conditions for a viable theory of falsity. Interpreting the FCA’s prohibition of “false or fraudulent” claims under the common law definition of fraud, the Court held that a defendant can be liable for a failure to disclose non-compliance with a legal requirement only if two conditions are satisfied:
    • The defendant’s claim not only requests payment but makes “specific representations about the goods or services provided;” and
    • the defendant’s failure to disclose non-compliance with legal requirements makes those representations misleading.
  • Both conditions met here… The Court determined that both conditions were met in this case, where the facility billed Medicaid using billing codes and provider numbers that were tied to specific qualification and supervision requirements – requirements that the relators alleged the facility had knowingly failed to meet.
  • ...But perhaps not in other cases. The Court made clear that a “false or fraudulent” claim can include a misleading omission, but left for the lower courts to decide whether the relevant conditions above are met. In particular:
    • The opinion declines to resolve whether merely submitting a claim for payment is itself an implicit representation that the billing party is legally entitled to payment, as the First Circuit held, which would be a broader rule than the first prong laid out by the Court above. Instead, the Court held that the facility’s “specific representations” about the services for which it billed were an implicit representation that the facility was entitled to payment.
    • The opinion does not address how courts should apply the common law definition of fraud in other cases. For example, the Court cites restatements and treatises for the principle that actionable omissions can include “half-truths” and “omitting critical qualifying information,” but declines to analyze these standards further.
    • The Court seemed to focus the first prong of the falsity test on certain types of claims, claims like those in Escobar where procedure codes were alleged to identify the services delivered and those codes relate to services that draw definitional characteristics from rules or regulations. But the Court didn’t suggest what types of claims would not be seen as making “specific representations about the goods or services provided.”

It’s a “Material” World

The real limit the Court imposed on the theory came through its articulation of the gatekeeping role played by “materiality” in analyzing FCA liability under an implied certification theory. The Court held that FCA liability can arise from violation of a legal requirement only if the non-compliance with that requirement actually matters to the government’s decision to pay, and the defendant knew that it would. The Court described the materiality requirement as “rigorous” and “demanding,” and specifically rejected a lesser articulation of the standard offered by the Government and the Relator. The materiality test is intended to reflect the idea that only actual fraud (as opposed to minor regulatory missteps) should be subject to the FCA’s heavy penalties. Relying on established common law sources, the Court held: “[U]nder any understanding of the concept, materiality ‘looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.’” In other words, it is not enough to show, as the Government and Relator argued, that non-compliance could have had an effect on a payment decision; instead, the plaintiff must show that non-compliance would actually have had an effect on a payment decision to state a claim under the implied certification theory.

The Court’s opinion sets out several guidelines for the materiality analysis:

  • Does the government actually pay?
    • The Court explained that proof of materiality can include evidence that the defendant knows the government consistently refuses to pay claims based on non-compliance with the legal requirement at issue.
    • Conversely, the government’s routine payment of claims despite actual knowledge that a requirement is being violated is “very strong evidence” that the requirement is not material.
    • The opinion does not address what such evidence would look like or how it might be gathered. For example, if a government auditor, or other regulator, rejects one claim, or ten, based on a certain type of regulatory or contractual violation, would this constitute evidence of the government’s refusal to pay? What if the rejections are limited to a single government auditor or regulator? Does it depend on whether the claims were rejected last year or ten years ago? Are all companies, providers, or research institutions deemed to have knowledge of such claim rejections, or only those whose claims were rejected? These are all questions that the opinion leaves unaddressed and may need to be resolved in future litigation.
  • Express condition of payment is relevant, not conclusive.
    • The Relator and the Government argued that FCA liability arises whenever someone bills the government for an item or service while violating a legal requirement that is an express condition of payment under law, regulation, or contract.
    • The Court rejected this argument, concluding that “not every undisclosed violation of an express condition of payment automatically triggers liability.” The opinion adds that if any express condition of payment triggered FCA liability, then the government could simply designate all legal requirements as express conditions of payment.
    • However, the Court acknowledged that the government’s decision to expressly identify a legal requirement as a condition of payment is “relevant” to whether the requirement is material to the decision to pay.
  • Option not to pay is relevant, not conclusive. The Court also states that plaintiffs cannot prove materiality simply by showing that the government would have the option not to pay a claim if it knew the defendant had violated the requirement at issue.
  • Minor or insubstantial requirements are not actionable. The Court states repeatedly that the FCA’s treble damages and other penalties are not intended to punish “insignificant regulatory or contractual violations” that fall short of fraud, as defined under the common law. As an example of a minor regulatory violation that would not be actionable, the Court cites a hypothetical requirement that all staplers used by a claimant be American-made – though defendants likely will be looking for a higher bar than this example suggests.
  • Materiality should be tested on motion to dismiss. The Court rejected the notion that the materiality test would force defendants into costly discovery because it would be difficult to assess on a motion to dismiss. The Court noted specifically that to plausibly plead a claim with particularity, as required by the applicable pleading rules, plaintiffs would have to plead facts that sufficiently support any allegation that a particular type or instance of noncompliance met the rigorous materiality standard.

While the Escobar decision leaves the door open for implied certification claims under the FCA, the insistence of a unanimous Court that the theory is subject to “rigorous” standards of materiality and knowledge makes clear that plaintiffs and the Government will bear a heavy burden to show that a defendant’s violation was more than the type of foot fault or mishap that would not result in a denial of payment and instead amounted to a case of real fraud.