Notable False Claims Act decision in California attempts to restrict Escobar

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Last Tuesday, September 20, 2016, the US District Court for the Northern District of California held that the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), does not require a specific representation as a prerequisite to implied certification liability under the False Claims Act (FCA). Rose v. Stephens Inst., No. 09-CV-05966-PJH, 2016 WL 5076214 (N.D. Cal. Sept. 20, 2016).

The Supreme Court held in Escobar that implied certification may support FCA falsity when two conditions are satisfied. First, “the claim does not merely request payment, but also makes specific representations about the goods or services provided.” 136 S. Ct. at 2001. Second, “the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.” Id. Courts interpreting Escobar have held that these two conditions are prerequisites to implied certification liability. See, e.g., United States ex rel. Creighton v. Beauty Basics Inc., No. 2:13-CV-1989-VEH, 2016 WL 3519365, *3 (N.D. Ala. June 28, 2016).

However, the Supreme Court also stated that it “need not resolve whether all claims for payment implicitly represent that the billing party is legally entitled to payment.” Escobar, 136 S. Ct. at 2000. Based on this statement, the Department of Justice (DOJ) and relators' bar have argued that, while Escobar embraces one form of implied certification based on a specific representation, the decision does not preclude implied certification where the contractor makes no specific representation.

In Rose, the Northern District of California agreed with the DOJ and the relators’ bar. Specifically, Rose held that Escobar “did not establish a rigid two-part test for falsity that must be met in every single implied certification case.” Rose, 2016 WL 5076214 at *5. Thus, Rose embraces the concept that Escobar did not invalidate the various forms of implied certification that existed prior to Escobar, specifically including liability where the contractor or provider submits a factually accurate payment request but is noncompliant with some material contract requirement, law, or regulation.

The Supreme Court also held in Escobar that a violation of a legal requirement may support implied certification liability regardless of whether the government identified that requirement as a precondition of payment. Thus, if the reasoning in Rose prevails, contractors and providers may be faced with a version of implied certification that is potentially broader than it was pre-Escobar and that arguably is much broader than the Supreme Court intended. Government contractors and providers should closely monitor developments in this area.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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