Implied False Certification Theory Expands FCA Claims

In an interesting and significant case, Universal Health Services, Inc. v. United States ex rel. Escobar¹, the United States Supreme Court was presented with the question of whether companies could be held liable for False Claims Act (FCA) violations under an “implied false certification theory” of liability, even if none of the alleged regulatory violations at issue violated a condition of payment from the United States. While Universal Health Services dealt solely with claims for reimbursement for healthcare services submitted to government payors, the case has broad implications far beyond the healthcare realm, as the FCA is routinely invoked in settings as diverse as military procurement, other government contracting, and applications for federal funds. Although the court emphasized that the FCA is “not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations,” the ruling will certainly expand the types of FCA cases brought by the Plaintiff’s bar and the government.²

The FCA³ imposes financial penalties on anyone who “knowingly presents . . . a false or fraudulent claim for payment or approval.”⁴ Respondents sought to hold Universal Health Services, Inc. liable for what has become known as the implied false certification theory of liability, which essentially treats a payment request as an implied certification by a claimant of compliance with relevant statutes, regulations or contract requirements that are material conditions of payment. Importantly, this theory treats a failure to disclose material violations of regulatory requirements pertaining to the services being provided as a misrepresentation that renders the payment claim false or fraudulent.

Such a theory is in stark contrast from earlier case law requiring an affirmative misrepresentation by the party seeking payment from the government. The district court below had granted Universal Health’s motion to dismiss finding that respondents had failed to state a claim because none of the regulations allegedly violated pertained to a condition of payment. The First Circuit, however, reversed, in part, holding that every submission of a claim is a representation of compliance with “relevant regulations, and that any undisclosed violation of a precondition of payment (whether or not expressly identified as such) renders a claim ‘false or fraudulent.’”⁵ The First Circuit’s ruling threatened to vastly increase FCA exposure even for what might be viewed as minor violations.

Justice Clarence Thomas, writing for a unanimous court, first upheld the implied false certification theory as a basis for asserting FCA liability. In short, those seeking payment from the government, by submitting a claim, are deemed to make specific representations about the goods or services provided, and when the failure to disclose non-compliance with “material statutory, regulatory, or contractual requirements makes those misrepresentations misleading” they may be liable under the FCA.⁶

The court further determined that since the FCA does not define either the terms “false” or “fraudulent,” Congress intended to use the well-settled meaning of these common law terms. The court then noted that under the common law definition of fraud, certain misrepresentations, by omission, can give rise to FCA liability. In this regard, the government contended that every claim for payment implicitly represents that the claimant is legally entitled to the payment and that failing to disclose violations of material requirements renders the claim misleading. Universal Health argued that submitting a claim involves no representations and that the non-disclosure of legal violations is not actionable absent a special duty of reasonable care to disclose such matters. The court explained that such claims may be actionable as they do more than merely demand payment, and focused on the central question of how to draw the line between a “non-actionable omission” and an omission which can be the basis for liability because it is material.

In this regard, the court reasoned that an omission may be misleading where it “fall[s] squarely within the rule that half-truths – representations that state the truth only so far as it goes, while omitting critical qualifying information – can be actionable misrepresentations.”⁷ The court then gave as an example where a seller who reveals that there may be two new roads near a property being sold fails to disclose that a third potential road might bisect the property. The court also gave another example of a case involving a misrepresentation on a resume.⁸ This common law doctrine not only seems out of place under an FCA analysis, but seemingly creates a standard that is so nebulous that is highly doubtful that it can applied by our federal judiciary in a consistent manner.

In recognizing, however, that the test the court was creating would, by necessity, require careful scrutiny of when a provision is material, it stressed that “[t]he materiality standard is demanding.”⁹ The court also reviewed common law antecedents in contract and tort law for guidance with regard to when an item is material. For example, in tort law, a matter is material in only two circumstances: (1) if a reasonable man would attach importance to it in determining his choice of action in the transaction; or (2) if the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter. It then acknowledged that there was substantial similarity whether one uses a tort or contract definition of materiality under the common law and that such common law standards could be used to govern when an omission is material.

Interestingly, the court disagreed with the government and the First Circuit’s position that any statutory, regulatory or contractual violation would be material so long as the defendant knows that the government would be entitled to refuse payment if it was aware of the violation. The Supreme Court then refused to allow the government to define the concept of materiality by simply designating compliance with some particular statutory requirement as a condition of payment. Instead, it expressed the opinion that materiality cannot be found where non-compliance is minor or insubstantial, even if under a condition of payment. Accordingly, FCA defendants will clearly use the court’s guidance here to claim even when there is a “technical violation” of a statute it may not be material and thus rise to the level of an FCA violation.

Accordingly, it seems likely that inconsistent holdings will be made by our district courts about when an omission is material under this new extension of FCA exposure. Additionally, while not discussed in the opinion, there is a huge question about who decides these common law questions – the jury or the court. Thus, depending on how things play out, it is quite possible that juries may be deciding issues of whether an omission is a misrepresentation and whether it is material for the purposes of FCA liability. If so, the outcomes will clearly be uneven to say the least. Conversely, the courts could take the position that these issues are “gateway issues” to be decided by the court, but the application of these common law questions in other areas such as tort and contract are almost always a question for the trier of fact.

Case Significance

On the whole, the decision gives some clarity as to the fact that such a theory of implied certification can lead to liability, but what the precise standards will be, in a specific FCA context, will require the development of case law. Accordingly, clients will have to determine whether, to the extent that there may be minor or technical violations of regulatory requirements (or potential violations), to disclose those violations or potential violations. Failure to disclose could lead to some very harsh results, particularly if the client is subject to any mandatory disclosure requirement. However, if a client is unaware that a violation exists, it is fair to ask whether that factors into the intent requirement underlying the FCA, which would be the case for criminal matters. In this regard, the court stated that the limit on the broad exposure to liability is “addressed through strict enforcement of the FCA’s stringent materiality and scienter provisions.”¹⁰

Conversely, from the United States’ standpoint, it seems fairly clear that the government may designate something as material, but that determination will not decide the ultimate question of whether there has been an FCA violation by omission. Accordingly, in deciding whether to intervene in FCA matters, the Department of Justice (or local U.S. attorneys) will have to calculate possible outcomes and factor them into settlement discussions with defendants.

Lastly, for the plaintiff’s bar, this theory may provide a broad tool for litigating FCA matters, with the possibility of reaching a jury (even if the government refuses to intervene) under a common law fact analysis. If nothing else, FCA litigation is likely to sharply rise in the ensuing years, and as the implied certification doctrine becomes more established, new areas of FCA exposure may take root.