Federal courts across the country are wrestling with the uncertainty caused by the Supreme Court’s holding in Universal Health Services, Inc. v. United States ex rel. Escobar regarding the requirements to state an implied certification claim under the False Claims Act (“FCA”). As we’ve previously reported, the Third Circuit has read Escobar’s requirements restrictively. District courts in the Second Circuit appear to be trending the same way, as shown by the United States District Court for the Southern District of New York’s recent decision in United States ex rel. Forcier v. Computer Sciences Corporation. Although this trend is a welcome development for defendants facing implied certification claims, Computer Sciences adds uncertainty to the law surrounding FCA fraudulent inducement claims, and leaves a door open for savvy relators to use a fraudulent inducement theory as a means to circumvent Escobar in establishing liability under the FCA.
Background: Are There Different Varieties of Implied Certification Claims?
Escobar was a watershed case because it held that implied certification claims can be a basis for FCA liability, “at least where two conditions are satisfied”:
[F]irst, [when] the claim does not merely request payment, but also makes specific misrepresentations about the goods or services provided; and second, [when] the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.
Escobar determined that specific and material misrepresentations to the government can give rise to an implied certification claim and, ultimately, FCA liability. The decision, however, left unanswered the question of whether these two conditions represent the only basis for FCA liability under an implied certification theory, or whether they simply constitute one species of an implied certification claim. This was the question presented in the Southern District of New York in Computer Sciences.
Computer Sciences: A Narrow Reading of Escobar
In Computer Sciences, the state and federal government intervened in a relator’s suit alleging that the defendant Computer Sciences Corporation (“CSC”), a billing service, violated the billing requirements of a New York State program offering early intervention services to children with developmental delays. The program provides that Medicaid payments may be made to a billing service, rather than to a provider, if that service’s compensation is not tied to the amount ultimately collected for the services rendered by a provider. The intervenors attempted to establish FCA liability under an implied certification theory and a fraudulent inducement theory, claiming that CSC failed to disclose in its application to serve as a billing service that its compensation arrangement with a provider (the City of New York) included a percentage bonus based on amounts that CSC collected. CSC moved to dismiss.
The Court granted CSC’s motion to dismiss with respect to the intervenors’ implied certification claim, but denied it with respect to the fraudulent inducement claim. Regarding the former claim, the Court held that an implied certification claim may only proceed if the two conditions set forth in Escobar, specificity and materiality, are met. Applying this standard, the Court determined that the intervenors’ implied certification claim failed because they did not allege how CSC’s failure to disclose the details of its compensation arrangement was materially misleading, given that CSC’s compensation arrangement with the City of New York had “nothing to do with the services [that the City] provided.” In other words, the Court found that because the intervenors could not connect CSC’s allegedly misleading omissions to the government’s decision to pay the claims at issue, the intervenors failed to satisfy Escobar’s materiality requirement. The Court refused to dismiss the intervenors’ fraudulent inducement claim, however, reasoning that CSC was “likely aware” that full disclosure of its compensation arrangement could have affected New York State’s decision to approve CSC’s application to serve as a billing provider in the first place.
Takeaways: More Certainty Regarding Escobar, But New Questions Regarding Potential Scope of Fraudulent Inducement Claims
Computer Sciences reflects a trend that district courts – both nationally and within the Second Circuit – are reading Escobar narrowly. Although the United States Court of Appeals for the Second Circuit hasn’t yet weighed in on Escobar’s scope, a survey of Second Circuit district court opinions in Computer Sciences indicates that nearly all of those opinions have read Escobar narrowly. Notably, however, neither Computer Sciences nor any of the district court opinions cited therein offer specific reasoning as to why a more expansive reading of Escobar is incorrect. Thus, while a trend is discernible, its foundation is tenable at best.
Computer Sciences isn’t all good news for FCA defendants, either. The intervenors argued that a narrow reading of Escobar would prevent the FCA from reaching parties “who were never legally entitled to submit claims in the first place” – in other words, allegedly fraudulent procedural improprieties could escape judicial scrutiny. Although the Court rejected this argument by pointing out that Escobar requires material misrepresentations, the Court also hinted in a footnote that such parties could “be pursued (like [CSC]) under a fraudulent inducement theory of liability.” Whether a fraudulent inducement theory may function as a “catch-all” for FCA claims that don’t fall within Escobar’s strict parameters remains to be seen, but individuals and companies facing FCA allegations should be aware of and prepare for this possibility.
The Southern District of New York’s footnote also raises another important question – does a category of cases exist that would simultaneously escape FCA review under an implied certification theory and under a fraudulent inducement theory? With the right set of facts, such a situation could arise. As always, we will monitor developments in this rapidly changing area of the law.