In qui tam case, Supreme Court oral argument addresses practical implications of limiting the scope of the implied certification theory of liability under the FCA.

The US Supreme Court heard oral argument on April 19, 2016 in Universal Health Services, Inc. v. Escobar, in which the Court granted certiorari to resolve a circuit split on the viability and proper scope of the “implied certification” theory of legal falsity under the United States False Claims Act (FCA).^[1] The Court seemed to accept that implied certification could be a viable FCA theory, but acknowledged difficulties in determining the contours of that liability.

The False Claims Act 

The FCA prohibits “knowingly” submitting or causing the submission of a “false or fraudulent claim for payment or approval.”^[2] Courts have recognized that false claims can be either “factually false” or “legally false.” A factually false claim is one that is based upon inaccurate information about the product or service billed (e.g., a physician bills Medicare for services that were not actually provided). By contrast, a legally false claim is one that includes a false certification that the contractor has complied with any conditions of payment set forth in applicable statutes, regulations, or contractual provisions (e.g., in seeking payment from Medicare for services actually rendered, a physician falsely certifies that he has not violated the Anti-Kickback Statute).

Procedural Background of Escobar

In Escobar, the relators^[3] premised their claims on an “implied false certification” theory that “attaches when a claimant seeks and makes a claim for payment from the Government without disclosing that it violated regulations that affected its eligibility for payment.”^[4] 

The relators’ teenage daughter, Yarushka Rivera, was a beneficiary of the Massachusetts Medicaid program and had been receiving mental health treatment at Arbour Counseling Services (Arbour), a facility owned by defendant. She died in October 2009 after experiencing an adverse reaction to an anti-seizure medication prescribed by an Arbour employee. Following an investigation, the Massachusetts Department of Public Health found that Arbour had violated a series of Massachusetts regulations in the course of treating Rivera by failing both to employ staff members with appropriate qualifications and to provide appropriate medical supervision. Relators alleged in the district court that defendant’s claims for payment arising from Rivera’s treatment were false because defendant knew that it had failed to comply with the Massachusetts regulations relating to licensure and supervision.

The district court granted defendant’s motion to dismiss, reasoning that the regulations that defendant had violated were merely requirements for participation in Massachusetts Medicaid, not “preconditions to payment.”^[5] The US Court of Appeals for the First Circuit reversed and remanded, holding that the regulations were conditions of payment and “each time [defendant] submitted a claim, [it] implicitly communicated that it had conformed to the relevant program requirements, such that it was entitled to payments.”[6] The Supreme Court granted certiorari on two questions:

1. “Whether the ‘implied certification’ theory of legal falsity under the FCA—applied by the First Circuit below but recently rejected by the Seventh Circuit—is viable.”

2. “If the ‘implied certification’ theory is viable, whether a government contractor’s reimbursement claim can be legally ‘false’ under that theory if the provider failed to comply with a statute, regulation, or contractual provisions that does not state that it is a condition of payment, as held by the First, Fourth, and D.C. Circuits; or whether liability for a legally ‘false’ reimbursement claim requires that the statute, regulation, or contractual provision expressly state that it is a condition of payment, as held by the Second and Sixth Circuits.”

Oral Argument

From the beginning, none of the Justices appeared to suggest that the implied certification theory was wholly invalid. Instead, the Court focused on the second question presented and, in particular, the practical implications of how to determine whether violation of a particular regulation could support FCA liability. The Justices’ questioning appeared to assume that a provision expressly conditioning payment on compliance with an underlying regulation would support FCA liability.

Much of the Court’s questioning—directed to both the parties’ attorneys, and the government’s attorney appearing as an amicus in support of the relators—instead focused on when, absent an express provision, a regulation is nevertheless a condition of payment. The argument lingered on the meaning of materiality under contract law. Justice Breyer, for one, expressly focused his analysis on the Restatement (Second) of Contracts. Counsel for the defendant, on the other hand, objected to the “tortification of contract law” and endeavored to create a sharp divide between contract law—under which the government should be able to sue for not receiving contracted-for goods—and tort law that seeks to punish fraudulent behavior. This contrast did not appear to gain much traction with the Court. Justices Kagan and Sotomayor pointed out that the original purpose of the FCA was to protect the government (during the civil war era) from receiving “guns that don’t shoot.”  

Chief Justice Roberts noted, however, as amici for defendant had pointed out, that allowing an implied certification theory to be applied broadly would increase the cost of doing business for the government, since government contractors must take such potential liability into account. Though no solution was apparent from the argument, the Court referenced the unfairness—especially as set forth by the amici—in allowing liability for failure to comply with the morass of potential “certifications” to which one might be implicitly agreeing by submitting an invoice to the government.

Conclusion

It is, of course, the ultimate in tea leaf reading to attempt to discern an outcome from the Justices’ questioning. The questions did not, however, betray any fundamental concern with the concept of an implied certification theory. Still, the Court seemed to struggle with how best to impose some practical limitations on the scope of that theory, and what limitations might be read into the theory if the expressly stated condition of payment requirement were rejected.

^{[1] For additional analysis of the circuit split, see our December 2015 LawFlash “US Supreme Court to Decide Fate of FCA’s Implied Certification Theory.”}

^{[2] 31 U.S.C. § 3729, et seq.}

^{[3] The FCA’s qui tam provision permits private plaintiffs—known as “relators”—to bring claims on behalf of the government. 31 U.S.C. § 3730(b).}

^{[4] U.S. ex rel. Wilkins v. United Health Group, Inc., 659 F.3d 295, 305 (3d Cir. 2011).}

^{[5] United States ex rel. Escobar v. Universal Health Servs., Inc., No. 11-1170-DPW, 2014 WL 1271757, at *1 (D. Mass. Mar. 26, 2014).}

^{[6] United States ex rel. Escobar v. Universal Health Services, Inc., 780 F.3d 504, 514 n. 14 (1st Cir. 2015).}