False Claims Act: the “Implied False Certification” Theory Gets More Definition

In Fraud, United States Supreme Court by Joe Pull0 Comments

The False Claims Act, or FCA, became federal law in 1863, in response to fraud by Civil War contractors providing (or not providing) goods for the Union war effort. More than 150 years later, the courts are still resolving big questions about its meaning.

The FCA[1] creates punishing civil liability — including triple damages — for companies or individuals who submit “false or fraudulent” claims to the United States government.[2] It has a qui tam provision,[3] meaning an individual (called a “relator”) who discovers a violation of the FCA may sue the violator on behalf of the federal government. If the violator is found liable, the relator receives 15-30% of the proceeds of the lawsuit.[4]

If an FCA violator is a large company, the amount at stake in a qui tam lawsuit can be very large. In 2009, a pharmaceutical company paid $1 billion to settle FCA claims concerning one of its drugs, yielding total qui tam payments of more than $102 million to six whistleblowers. That case was unusual. But FCA cases where the amount in controversy exceeds $1 million occur with some frequency. In another 2009 lawsuit, for example, three hospitals in St. Paul, Minnesota agreed to pay $2.28 million to settle an FCA claim. And in 2011, a Minnesota company agreed to pay $23.5 million to resolve an FCA claim. The two relators in that case received total payments of more than $3.96 million.

With such high stakes, court decisions affecting the FCA, such as the June 16, 2016 Universal Health Services, Inc. v. Escobar[5] decision of the United States Supreme Court, can have big consequences. The specific issue in Escobar was the “implied false certification” theory.

“Implied false certification” sounds technical and complex, but the gist of it is quite accessible. Imagine a government contractor, the (hypothetical) Borderline Clinic, which provides treatment to Medicaid patients and then seeks reimbursement through the federal Medicaid program. No one could reasonably question that it would be a “false claim” to the government if Borderline Clinic filed for Medicaid reimbursement for treating 100 patients who did not exist. That would certainly be grounds for an FCA lawsuit, perhaps brought by a former nurse who worked at the clinic and knew about the fraud. But what if Borderline filed for Medicaid reimbursement for treating 100 real patients – without mentioning that the Borderline employee who treated the patients had never attended medical school? The clinic provided real services to real Medicaid patients. Was it “false or fraudulent” for the clinic to seek federal payments for doing so?

The second situation likely presents an “implied false certification” FCA claim. The government likely would not be willing to pay Borderline Clinic for using non-doctors to treat Medicaid patients. Therefore, it is likely fraudulent for the clinic to file a claim for Medicaid reimbursement without disclosing its use of non-doctors to treat the patients. The clinic’s Medicaid reimbursement claim is probably an “implied certification” that the clinic, when it treated the Medicaid patients, complied with all the regulations and requirements the government demands that Medicaid providers comply with. If the clinic did not comply with all the regulations and requirements, its “implied certification” was false, and its claim for reimbursement from the government was therefore “false or fraudulent” under the FCA.

That’s a pretty straightforward example. Here’s a more difficult one: What if the clinic complied with all federal rules except a very minor one? Perhaps the clinic accidentally left a patient file in a non-secure location one night, accidentally violating federal rules requiring the privacy of patient records even though no one actually looked at the file. Would that minor violation of federal law cause all the clinic’s Medicaid claims to become fraudulent?

It is these sorts of questions that Escobar addresses. Without attempting to analyze each one in depth, here are six key points from Escobar:

  1. An implied false certification claim can be a valid claim under the FCA. Escobar at 8. This conclusion is not surprising; implied false certification FCA claims have been litigated before federal trial courts and the federal circuit courts of appeal for years. However, prior to Escobar the United States Supreme Court had not expressly approved an implied false certification FCA claim. Now no doubt remains: the implied false certification FCA theory states a legal claim.
  1. Omission of statutory, regulatory, or contractual violations when submitting a claim for payment to the government can bring liability if the omission “render[s] the defendant’s representations misleading with respect to the goods or services provided.” Id. This description of an implied false certification claim – misleading “with respect to the goods or services provided” – is important because it shrinks the scope of liability, a point to which the Court’s opinion returns later. The Court is apparently saying that omitting mention in a claim for payment of a violation unrelated to the goods or services that serve as the basis for the claim of payment will not trigger FCA liability.
  1. The word “fraudulent” as used in the FCA incorporates the “common-law meaning of fraud.” Id. at 8-9. This conclusion requires an inference (the opinion says “the term ‘fraudulent’ is a paradigmatic example of a statutory term that incorporates the common-law meaning of fraud,” not “the statute is a paradigmatic incorporation of the common-law meaning of fraud”), but the inferential leap is a very short one, and it is hard to see the passage reasonably meaning anything else. Escobar‘s unqualified adoption of the common law of fraud for the FCA apparently means that the common law of fraud can be used to resolve other types of interpretive questions involving the FCA, even questions that do not involve the implied false certification theory.
  1. Three requirements must be met for implied false certification liability to arise. To create liability, (a) a claim for payment from the government must not “merely request payment,” but must make “specific representations about the goods or services provided”; (b) the specific representations made in the claim for payment must be “misleading half-truths” because of “failure to disclose noncompliance” with “statutory, regulatory, or contractual requirements,” and (c) the uncomplied-with statutory, regulatory, or contractual requirements must be “material.” Id. at 11. All three of these conditions provide potential escape hatches for an implied false certification defendant. Under Escobar, if the claim for payment from the government that was filed did not make specific representations, or if the representations were not “misleading half-truths,” or if the undisclosed violations were not “material,” then an implied false certification FCA lawsuit based on that claim for payment should fail.
  1. Express conditions of payment are neither necessary nor sufficient to establish liability. On the primary issue contested by the parties in Escobar, the Court largely agreed with the plaintiff’s interpretation of the statute. The defendant had argued that an implied false certification claim can only succeed if the undisclosed violation of federal requirements by the party seeking payment from the government was an express condition of payment by the government. In other words, the government had to expressly state that compliance with such-and-such rule was required for payment, before an implied false certification FCA lawsuit could be filed based on the allegation that such-and-such rule had been violated. Id. at 11-12. The Court disagreed, and held the government need not expressly state that it will not pay unless such-and-such rule is followed. However, the plaintiff’s victory on this issue was not complete. The Court held that the reverse is also true; even if the government does expressly state that compliance with such-and-such a rule is a condition of payment, FCA liability will not arise from an undisclosed violation of the rule unless the violation of the rule is “material.” Id. at 15-17.
  1. Materiality is the key. The Court’s holding on express conditions of payment means the deciding issue in many implied false certification FCA cases — and thus the center of much controversy — will likely be the question whether the undisclosed violation of such-and-such federal requirement was “material” to government’s decision whether to pay the contractor the money the contractor claimed the government owed. Escobar provides a brief discussion of “materiality,” providing three statements of note, none of which are surprising in light of the earlier parts of the opinion. (a) To bring FCA liability, a misrepresentation must be “material to the Government’s payment decision.” Id. at 14 (emphasis added). (b) Materiality is defined in part by reference, again, to common law; it descends from “common-law antecedents,” and looks to the likely behavior of the person who received the alleged misrepresentation, usually taking into consideration “reasonable person” principles. Id. at 14-15. (c) “The materiality standard is demanding,” and the FCA is not “an all-purpose antifraud statute.” at 15. The Court “emphasiz[ed]” that the FCA “is not a means for imposing treble damages and other penalties for insignificant regulatory or contractual violations.” Id. at 18.

Much more can (and doubtless will) be said about Escobar, both by commentators and by the lower federal courts as they apply its principles. But Escobar‘s practical import, in the near term, can be summarized in two sentences. Potential qui tam plaintiffs – anyone who learns that another person or company is violating federal rules or regulations while seeking payment from the federal government – may proceed with an implied false certification FCA lawsuit without having to show that the defendant broke a rule specifically listed on the defendant’s payment claim form or government contract. And government contractors can defend themselves against implied false certification FCA claims by showing that, even if they committed an undisclosed violation of a government regulation or requirement, the violation was not material to the government’s decision to pay their claim.

[1] 31 U.S.C. § 3729.

[2] Minnesota has a similar False Claims Act, too, which applies to false or fraudulent claims submitted to the state government. See Minn. Stat. ch. 15C. That statute is not considered here.

[3] 31 U.S.C. § 3730(b).

[4] 31 U.S.C. § 3730(d).

[5] U.S. Supreme Court No. 15-7 (June 16, 2016).

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