The Supreme Court has handed the Department of Justice and qui tam relators a bigger hammer to wield against government contractors with its opinion in Universal Health Services, Inc. v. United States ex rel. Escobar, confirming the viability of the implied certification theory of False Claims Act (FCA) liability.

In this case, the relators filed a qui tam action alleging that a provider of mental-health services in Massachusetts violated the FCA when it submitted Medicaid reimbursement claims that included representations about the services provided, but failed to disclose that the service providers were not properly qualified or licensed in violation of certain regulatory obligations. The district court dismissed the complaint on the grounds that no FCA violation had been pleaded because none of the allegedly violated regulations were express conditions of payment. The First Circuit, however, reversed, holding in part that noncompliance with mandatory regulations can trigger FCA liability when compliance is an express or implied precondition of payment. Universal Health appealed.

On appeal, the Supreme Court considered two questions of law concerning the viability and scope of the implied certification theory:

1. Whether the implied certification theory of legal falsity under the False Claims Act is viable.
2. Whether a government contractor’s reimbursement claim can be legally “false” under the implied theory if the provider failed to comply with a statute, regulation or contractual provision that does not state that it is a condition of payment; or whether liability for a legally “false” reimbursement claim requires the law or provision to state expressly that it is a condition of payment.

On the first question, the Court held that the implied false certification theory may be a basis for liability under the FCA, at least when two conditions are satisfied: (1) the claim does not merely request payment, but also makes specific representations about the goods or services provided; and (2) the government contractor’s failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes the contractor’s specific representations misleading half-truths.

On the second question, the Court held that (1) a government contractor’s claim for payment can be legally “false” under the implied certification theory even if compliance with the statute, regulation or contractual provision allegedly violated was not an express condition of payment; but (2) not every undisclosed violation of an express condition of payment automatically triggers FCA liability.

As the Court emphasized in its decision, the question of liability now hinges on materiality and scienter – i.e., not on whether the law or provision violated is a condition of payment. Shedding light on the materiality requirement, the Court explained that materiality looks to the effect on the likely or actual recipient of the alleged misrepresentation, but noted that the standard is demanding. Importantly, a misrepresentation will not automatically be deemed material because the government makes compliance with a certain provision or law a condition of payment, or even because the government would have the option to decline payment if it knew of noncompliance. Further, minor or insubstantial noncompliance cannot be material. Instead, courts are instructed to look at a number of factors to determine materiality. For example, whether compliance is a condition of payment is relevant to, but not dispositive of, the inquiry, as is whether the contractor knows the government consistently refuses to pay claims based on the same noncompliance, or conversely, whether the government has previously paid claims in full despite known noncompliance.

The Court’s holding on materiality forms the basis of its disagreement with the First Circuit’s decision. The First Circuit held that any violation of a statute, regulation or contractual provision is material if the defendant knows that the government would be entitled to refuse payment if it were aware of the violation. The Supreme Court, however, rejected this view as an “extraordinarily expansive view of liability,” and remanded the case for reconsideration of whether the relators sufficiently pleaded an FCA violation.

The Supreme Court’s decision in Escobar is significant, and it will have immediate implications for government contractors. It removes any doubt about the viability of the implied certification theory of liability and eliminates the “condition of payment” limitation previously adopted by some circuits that provided protection from overly zealous relators. However, contractors are not without some guard against the growing FCA hammer. The Court’s emphasis on strict enforcement of the FCA’s scienter and materiality requirements offer government contractors at least some defense against potential FCA claims, but does invite further litigation on the issue of “materiality” in implied certification FCA cases to come.

[View source.]