Supreme Court Decision Highlights Risks Related to Federal Programs, Contracts and Grants
Construction & Government Contracts Update
Date: August 04, 2016
The U.S. Supreme Court has settled a disagreement among the circuits by holding that, “at least in certain circumstances, the implied false certification theory can be a basis for liability.” The unanimous decision in Universal Health Services v. United States ex rel. Escobar, 579 U.S. __, No. 15-7 (June 16, 2016), involved claims to a state Medicaid program that were accompanied by specific payment codes, but highlights the risks for any participant in government contracts, grants and all programs subject to the False Claims Act (FCA). The Court held that “liability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement. In these circumstances, liability may attach if the omission renders those representations misleading.” Slip Op. at 1-2.
The Court further held that:
False Claims Act liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment. Id. at 2.
What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision. Id.
A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable under the False Claims Act. Id.
Implied Certification Theory
The implied certification theory has been asserted frequently under the FCA in not only Medicare/Medicaid cases but also in the context of government contracts, grants and other federal programs. In Escobar, the complaint alleged that Universal Health submitted claims to Medicaid that made representations about the services provided by specific types of professionals at one of its treatment facilities where there were violations of regulations due to unqualified, unlicensed and unsupervised staff. Id. at 5-6.
The Supreme Court reviewed the case to resolve the disagreement among the circuits “over the validity and scope of the implied certification theory.” Id. at 7. The Court held first that the implied certification theory can provide a basis of liability in “at least some circumstances,” id. at 8, when at least two conditions are satisfied:
[F]irst, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.
Id. at 11. Future FCA cases must further interpret this guidance because, in many cases where implied certification is alleged, unlike the facts here, there may be no specific representations in the claims themselves. Government contractors and other participants in federal programs must therefore be prepared to continue to defend themselves against allegations of implied certification where the case falls outside of the specific factual circumstances addressed by the Supreme Court in Escobar.
In Escobar the Supreme Court rejected the argument (and standard followed by some circuits) that the implied certification theory was valid only where a requirement was expressly designated as a condition of payment. Id. at 11-12. However, the Court stated that concerns about open-ended liability can be addressed through the FCA’s requirements of materiality and scienter (or knowledge). Id. at 14. The Court focused on the “rigorous” materiality requirement, while noting the FCA’s definition of “material” and common-law interpretations of the requirement. Id. at 14-17.
The Court stated that the standard is “demanding” and the FCA is not a “vehicle for punishing garden-variety breaches of contract or regulatory violations.” Id. at 15. Materiality is not determined solely because the government would have the option to decline payment if it knew of the noncompliance, and materiality “cannot be found where noncompliance is minor or insubstantial.” Id. at 15-16. Proof of materiality can include evidence that the defendant knows the government consistently refuses to pay claims in the case of noncompliance with the particular requirement. “Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.” Id. at 16.
The Court’s guidance thus demonstrates the potential benefits of robust disclosure to the government, as well as robust compliance measures. The Court also noted that the issue of materiality could be dispositive at either the motion to dismiss or summary judgment stage. Id. at 16, n.6. FCA defendants must, therefore, be prepared to address the issue at the outset of the case and if necessary, through discovery and summary judgment. Following Escobar, litigation over the implied certification theory will see continuous new developments in the trial and circuit courts.
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