In an unexpected but welcome move, the U.S. Supreme Court has agreed to wade into the thorny thicket known as the “implied false certification” theory of liability and mark a clear path for how such False Claims Act (“FCA”) allegations should be decided. For nearly 20 years, courts and practitioners have been considering and debating the viability and scope of this liability theory, resulting in myriad viewpoints and often conflicting judicial opinions. Now, by granting certiorari in Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7 (U.S. Dec. 4, 2015), the Supreme Court will take on these questions, and specifically address: (1) the validity of the implied false certification theory and (2) the application of the theory, and, in particular, whether the relevant statute, regulation, or contractual provision must expressly state that compliance is a condition of payment.
For those who receive government money, including healthcare providers, government contractors, grantees, and many others that are subject to hundreds, if not thousands, of contractual, regulatory, and statutory requirements (both large and small), expansive application of the implied certification theory is a significant threat. This theory attaches FCA liability, with its extraordinary consequences of treble damages and per claim penalties, to the slightest statutory, regulatory, or contractual non-compliance. When dealing directly or indirectly with the government, companies and individuals unfairly are left exposed when non-compliance with a mundane or arcane regulation, statute, or contract provision—that was not a part of an express certification and that the agency did not make clear was important to it—is considered enough for FCA liability and the imposition of treble damages, penalties, and debarment or exclusion. Over 50 years ago, in United States v. McNinch, 356 U.S. 595 (1958), the Supreme Court recognized that the FCA’s terms must be carefully construed and its scope restricted to its purpose of protecting the government from fraud, and more recently, in Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 672 (2008), the Court specifically warned of the potential perils of allowing the FCA to become an “all-purpose antifraud statute.” The Court undoubtedly will consider that potential outcome in deciding the issues in Escobar. Given the number of cases involving the implied false certification theory, the Court’s decision has the prospect of being a watershed decision in FCA jurisprudence.
The Implied False Certification Theory
In the early years following the 1986 amendments to the statute, FCA fact patterns generally centered on allegations of “factually false” claims, such as submitting inflated invoices or billing the government for goods or services not provided. Beginning in the early 1990s, relators and the Justice Department began to file FCA cases based on a false certification theory, which contends that claims that are otherwise accurate—such as where the services were provided or the goods met all specifications—are transformed into “legally false” claims if an ancillary statute, regulation, or contract or grant provision is violated. The implied false certification theory extends liability even further: reaching instances where the defendant does not expressly certify compliance with a regulation, statute, or contract provision.
The circuit courts are divided not only on the validity of the implied false certification theory—with some courts not recognizing the theory at all—but also, in jurisdictions where the theory does apply, on what elements are necessary. See FraudMail Alert No. 15-06-15; FraudMail Alert No. 10-11-03; FraudMail Alert No. 10-12-06. Several circuit courts have limited the theory’s application, for example, to situations where compliance with the particular contract provision, statute, or regulation is a clear prerequisite to or condition of payment. See, e.g., FraudMail Alert No. 13-04-04; FraudMail Alert No. 11-08-31.
In Escobar, both the district court and the First Circuit agreed that, in order for the implied false certification theory to apply, the regulatory compliance at issue needed to be a condition of payment for Medicaid reimbursement. But their analyses differed. The district court dismissed the complaint—based on precedents in the circuit that distinguished between conditions of payment and conditions of participation—on the grounds that the state regulations were not conditions of payment as opposed to mere “conditions of participation,” which have no FCA consequences. The First Circuit ruled that there was no requirement to distinguish between the two types of conditions under the FCA, and determined that compliance with the regulations was in fact a condition of payment.
The Disturbing Facts in Escobar
Indeed, the Escobar fact pattern is emotionally charged. The underlying conduct involves the death of the relators’ teenage daughter following treatment at defendants’ mental health facility, which allegedly employed unlicensed counselors and failed to meet state regulatory requirements for staffing and supervision. These allegations would seem to present a made-to-order medical malpractice case, which courts have warned should not be allowed to escalate into FCA cases. See United States ex rel. Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001). A claim for FCA damages is meant to compensate the government for its losses due to the FCA violation, as opposed to providing remedial measures to private parties victimized by substandard medical care that did not conform to applicable regulations. The conduct at issue—supposed licensing and supervisory violations—was not meant to be policed through the FCA, but rather through mental health licensing and state enforcement agencies. Nevertheless, relators and the Justice Department consistently have tried to use the FCA as a tool for enforcement of such regulatory violations. It is expected that the Court will determine whether this is appropriate when it renders a decision in Escobar.
Courts Increasingly Have Been Reluctant to Expand the FCA’s Reach
With increasing frequency, courts have been reining in attempts to apply the FCA beyond its traditional boundaries, particularly where liability is predicated on the implied false certification theory. Following United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899 (5th Cir. 1997), a case in which the implied false certification theory was accepted to enforce fraud-type Stark and Anti-Kickback Statute violations, relators and the Justice Department have attempted to extend the theory to violations under any and all regulatory schemes—regardless of whether the regulation itself addressed fraud. However, courts are now pushing back against the implied certification theory and other seemingly unfair attempts to expand the FCA.
As a recent example, in United States ex rel. Nelson v. Sanford-Brown, Ltd., 788 F.3d 696, 711 (7th Cir. 2015), the Seventh Circuit halted efforts to expand the “blanket theory of FCA liability” that has become the hallmark of the implied false certification theory, noting that the theory “lacks a discerning limiting principle.” The Seventh Circuit determined that it would be unreasonable to hold that “an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into [a Program Participation Agreement] are conditions of payment for purposes of liability under the FCA.” Id. And, most recently, the D.C. Circuit refused to apply the FCA in circumstances involving (1) an ambiguous regulation, (2) the defendant’s reasonable interpretation of the regulation, and (3) the lack of formal guidance from the government warning the defendant away from that interpretation. See United States ex rel. Purcell v. MWI Corp., No. 14-5210, 2015 WL 7597536 (D.C. Cir. Nov. 24, 2015); see also FraudMail Alert No. 15-11-25.
Importantly, the Supreme Court already has recognized that unlimited FCA liability is impermissible. In Allison Engine Co., 553 U.S. at 669, 672, the Court imposed a limiting principle in order to prevent “almost boundless” liability that “would threaten to transform the FCA into an all-purpose antifraud statute.” And, earlier this year, in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 135 S. Ct. 1970 (2015), the Court put a stop to efforts by the Justice Department and relators to dismantle the already generous FCA statute of limitations. See FraudMail Alert No. 15-05-26.
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In Escobar, the Court could choose to reject the implied false certification theory entirely, to cabin its application to violations of explicit prerequisites to payment, or to apply another limiting principle. In any event, if prior Supreme Court decisions in FCA cases are a guide, in Escobar, the Court will seriously consider the risk of “boundless” FCA liability, recognize that implied false certification is an overly expansive theory of liability, and either reject the theory or draw a rational limitation for its application.