Supreme Court Seeks Meaning in Falsity and Fraud in the False Claims Act

Alston & Bird

Oral arguments were heard Tuesday, April 19th by the U.S. Supreme Court in one of the most significant False Claims Act (FCA) cases the Court has dealt with in decades on an issue with very real impact on whistleblower suits and providers. The ruling in the case, Universal Health Services v. United States ex rel. Escobar, could have far-reaching implications for health care providers, government contractors and other companies that conduct business with the government.

The question before the Court was whether the “implied certification” theory of legal falsity is viable under the FCA (i.e., whether a claim can be false if the claimant failed to comply with a statute, regulation or contractual term), and if so, whether liability can attach to violations of a statute, regulation or contractual term that does not expressly condition payment on compliance.

By way of background, the contractor (petitioner Universal Health Services) provided services to the daughter of the relators (the Escobars) at a mental health clinic in Massachusetts. After adverse reactions to medication, the daughter passed away from a seizure. The parents claimed that UHS violated the FCA by seeking Medicaid reimbursement while in violation of a state regulation governing the hiring and supervision of staff. The district court dismissed the parents’ complaint, but the First Circuit reversed. The First Circuit panel acknowledged that there was no evidence that UHS expressly represented compliance with the regulatory staffing provision. And the provision did not expressly state that compliance with it was a condition of Medicaid reimbursement. But under the First Circuit’s own precedent, neither express statements of compliance by a defendant, nor an express condition of payment set forth in the law or contract at issue, is required to state a claim under the FCA—allegations of regulatory noncompliance, coupled with claims for payment, were sufficient. The Supreme Court granted certiorari to resolve circuit conflict regarding the validity and scope of the theory of implied false certification.

Interestingly, the Supreme Court Justices asked very few questions regarding the underlying case law. Instead, the Court focused largely on the meaning of falsity and fraud (for example, whether “false” can mean misleading or deceptive, or whether a failure to inform the government of noncompliance constitutes fraud) and the statutory interplay between materiality and scienter. It appeared that at least some of the Justices were in search of limiting principles as they balanced the competing concerns of reducing fraud on the government and treating honest contractors fairly.

The Court acknowledged the significance of the issues before it. For example, Chief Justice Roberts expressed concern about opening the floodgates of litigation to claims that actually sound in contract rather than fraud, particularly when the underlying regulation or contractual term is located somewhere within a “thousand pages” of documents. And Justice Breyer observed that the Court’s decision could disrupt several “billion-dollar” industries. Chief Justice Roberts also focused on the government’s decision not to intervene in the case—that is, if the government believed the complaint stated a claim for fraud, why did it not pursue the allegations? Deputy Solicitor General Malcolm Stewart explained that the Justice Department does not normally state its reason for declination but that the rationales can range from a basic risk-benefit analysis to availability of resources to confidence in the relator’s ability to handle the case.

In contrast to the line of questioning from Chief Justice Roberts, Justices Kagan and Sotomayor drew repeated analogies to Civil War fraud, where contractors sold to the army guns that did not shoot and boots made of cardboard. The Justices noted that these scenarios implicate fraud even though there were no accompanying false certifications (or express conditions of payment set forth by contract).

Obviously, the Court’s decision could have wide-ranging implications for FCA liability. Will the court adopt or reject implied certification in its entirety, or will it settle on a middle ground (e.g., permitting implied certification but only if the underlying regulation, statute or contractual term sets forth an express condition of payment)? Or will the Court deadlock at 4-4, leaving no precedent behind? We will update the blog when the decision is announced.

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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