The Supreme Court’s unanimous decision in Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7 (U.S. June 16, 2016), upholds the viability of the implied certification theory of False Claims Act liability. But it also makes cases arising from minor instances of noncompliance much harder to prove. The Court held that a knowing failure to disclose a violation of a material statutory, regulatory, or contractual requirement can create False Claims Act liability. The requirement need not be an express condition of payment, but it must be material to the Government’s decision to pay.
The requirement for proof of a misleading half-truth
Those hoping that the Court would eliminate implied certification altogether will be disappointed with the decision. It opens up the possibility of new False Claims Act cases in the Seventh Circuit and in other jurisdictions that had rejected the implied certification theory or limited its application to conditions of payment. Some cases that might have been thrown out on a motion to dismiss might stand a better chance of surviving through discovery and trial.
The Court nevertheless takes strong steps to limit misuse of the implied certification theory. According to the opinion in Escobar, liability under the implied certification theory can be imposed only when two conditions are satisfied. First, the claim for payment must make “specific representations about the goods or services provided.” An invoice that makes no affirmative statement about the quality of a contractor’s goods or services cannot be the basis for an implied certification.
Second, undisclosed non-compliance must be significant enough to the government’s decision to pay a claim that it makes the representations “misleading half-truths.” In the Court’s view, Universal Health’s claims for payment were misleading because they affirmatively represented their compliance with Massachusetts Medicaid regulations without disclosing their violations.
Minor noncompliance won’t support False Claims Act liability
The Court specifically rejects the possibility that “minor or insubstantial” instances of noncompliance can support False Claims Act liability. In the Court’s words, “[t]he materiality standard is demanding.” The fact that a requirement is designated a condition of payment does not make it material. Nor does the fact that the Government would have been entitled to withhold payment if it had known of the noncompliance.
Indeed, the government’s conduct in the administration of the contract is directly relevant to the question of materiality. The fact that the government regularly pays a claim even when it knows that some requirements are not met “is very strong evidence that those requirements are not material.”
The road ahead
Eliminating implied certification liability altogether might have been a simple way to force the automatic dismissal of many False Claims Act cases. That didn’t happen. But the practical result of the Court’s decision will be to increase the difficulty of proving a False Claims Act violation on the basis of an implied certification. It requires more equitable consideration of the underlying facts, especially the extent to which responsible Government personnel consider a particular requirement material. Disgruntled employees, relators’ counsel, and Justice Department attorneys will no longer be able to make a case simply by identifying a technical violation of a single regulation found among thousands of pages of regulations incorporated by reference in a contract. The decision in Escobar is not a magic bullet, but it is an important step in the right direction.