Seventh Circuit Revisits Sanford-Brown, Rejects Implied Certification Claim

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In one of the few cases to apply the Supreme Court’s recent decision in Universal Health Services v. Escobar, the Seventh Circuit recently revisited and affirmed its prior rejection of an implied certification claim under the FCA.  Whether this is a window into how other circuit courts might implement Escobar remains to be seen.

In United States ex rel. Nelson v. Sanford-Brown, Ltd., 788 F.3d 696 (7th Cir. 2015), the relator brought several claims, one of which was an implied certification claim, alleging that Sanford-Brown College (the “College”), which receives federal subsidies, violated the FCA by maintaining recruiting and retention practices that ran afoul of Title IV.  In particular, the College entered into a Program Participation Agreement (PPA) with the federal government to receive subsidies under the Higher Education Act, and the PPA contained boilerplate language requiring the College to affirm that it would comply with Title IV’s mandates.  The relator claimed that because the College’s practices in actuality violated Title IV, its representations in the PPA, and its attendant subsidy claims, were false.

In its pre-Escobar decision, the Seventh Circuit granted summary judgment for the College on the relator’s implied certification claim.  Though the relator and the government argued that compliance with the PPA was a condition of payment for federal subsidies under the Higher Education Act, the Seventh Circuit disagreed, explaining, “[a]bsent evidence of fraud before entry [into the PPA], nonperformance after entry into an agreement for government subsidies does not impose liability under the FCA.”  Id. at 710.  The Seventh Circuit expressed its concern that the relator’s and government’s theory of liability “lacks a discerning limiting principle.”  Id. at 711.   Indeed, as the court noted, under their theory, any single regulatory violation of the conditions in the PPA could expose the College to strict liability under the FCA, a proposition the court determined was “untenable.”  Id.  The court punctuated its conclusion by explaining it would be “unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the PPA are conditions of payment for purposes of liability under the FCA.”  Id.

In light of Escobar, the Seventh Circuit revisited and revised its holding regarding the relator’s implied certification claim.  See United States v. Sanford-Brown, Ltd., No. 14-2506, — F.3d —-, 2016 WL 6205746 (7th Cir. Oct. 24, 2016).  The Seventh Circuit, reading Escobar literally, applied a two-part test:  (1) Does the claim request payment and make specific representations about the goods or services provided?  (2) Does the defendant’s failure to disclose noncompliance with material statutory, regulatory or contractual requirements make those representations misleading half-truths?  The Seventh Circuit concluded neither condition was met and reaffirmed its grant of summary judgment in favor of the College.

As for the first condition, the Seventh Circuit determined that the College did not make any representations in connection with its claims for payment, much less any false or misleading representations.  In that regard, the court noted that the relator’s “bare speculation” that the College had made misleading representations was insufficient to survive summary judgment.

With regard to the second condition, the Seventh Circuit held that the relator failed to meet the “rigorous” and “demanding” materiality requirement established by Escobar.  In particular, there was no evidence that the government’s decision to pay the College would likely, or actually, have been different if the government had known of the College’s alleged noncompliance with Title IV.  Relevant to this conclusion was the fact that the subsidizing agency and other federal agencies had examined the College numerous times, yet failed to assess administrative penalties or terminate the PPA.  In the end, the Seventh Circuit concluded that, at most, the relator had shown the government could have declined payment in light of the College’s alleged noncompliance, but under Escobar, that is not enough to prove materiality.

It is unclear at this point whether the Seventh Circuit’s decision in Sanford-Brown represents a narrow, fact-specific application of the Supreme Court’s analysis in Escobar or a broader rebuke of the implied certification theory itself.  Time will tell, as more circuit courts wrestle with how to apply Escobar.

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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