FALSE CLAIM ACT: THE SUPREME COURT RECOGNIZES IMPLIED CERTIFICATION LIABILITY

In a unanimous decision delivered by Justice Clarence Thomas, the Supreme Court recently recognized the “implied false certification theory of liability” under the False Claims Act (FCA).  The FCA imposes civil liability on “any person who…knowingly presents, or causes to be presented, a false or fraudulent claim for payment” for services rendered to the Government.  The implied false certification theory admits FCA liability where a defendant makes certain representations in submitting a claim but fails to disclose noncompliance with material statutory, regulatory, or contractual requirements that renders these representations misleading.

In Universal Health Services, Inc. v. United States ex rel. Escobar, http://www.supremecourt.gov/opinions/15pdf/15-7_a074.pdf, a mental health facility operated by a subsidiary of Universal Health Services, Inc. submitted Medicaid reimbursement claims for services rendered to the decedent daughter of the respondents.  After their daughter died due to an adverse reaction to a medication prescribed by a purported psychiatrist at the facility, respondents discovered that few of the facility’s employees were actually licensed to provide the services rendered.  A qui tam suit was filed in 2011 relying on the implied false certification theory of liability, alleging that Universal Health defrauded the Government by submitting Medicaid reimbursement claims that “made representations about the specific services provided by specific types of professionals, but that failed to disclose serious violations of regulations pertaining to staff qualifications and licensing requirements for these services.” While circuit precedent had previously embraced the implied false certification theory of liability, the District Court dismissed the case for failure to state a claim because the regulations Universal Health violated were not express conditions for payment under the Medicaid program.  The United States Court of Appeals for the First Circuit reversed on that point, and the Supreme Court granted certiorari to resolve a circuit split over the validity and scope of the implied false certification theory of liability.

The Court first looked to the text of the FCA, noting that by failing to define what makes a claim “false” or “fraudulent” under the statute, Congress incorporated the well-settled common-law understanding of the terms.  Accordingly, the Court held that the claims in this case fell “squarely within the rule that half-truths—representations that state the truth only so far as it goes, while omitting critical qualifying information—can be actionable misrepresentations.”  The parties agreed that misrepresentations by omission can be the basis for liability, but Universal Healthcare argued that it had made no representations—and therefore no misrepresentations through half-truths—in submitting its claim.  The Court did not reach respondents’ counter-argument that every claim implicitly represents that the claimant is legally entitled to payment.  Instead, it held that Universal Healthcare’s claim did make such representations because it used special payment codes that correspond to specific counseling services and because its claim used National Provider Identification numbers that correspond to specific job titles.  The Court recognized the validity of the implied false certification theory where the claim submitted makes “specific representations about the goods or services provided” and the “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”

The Court, however, circumscribed the potential scope of implied false certification theory with its treatment of the issue of materiality.  At first, the Court rejected Universal Healthcare’s contention that FCA liability for failing to disclose violations of legal requirements should only attach where those requirements were designated as express conditions of payment.  The Court found nothing in the text of the FCA, nor a valid public policy reason, for so restricting liability.  On the other hand, the Court disagreed with the Government’s contention that the designation of a requirement as an express condition of payment automatically triggers liability, nor would it find that the Government’s legal entitlement to refuse payment were it aware of the violation qualifies the violation as material.   Instead, the Court found a middle ground, holding that the designation of a specific legal requirement as an express condition of payment was relevant, but not singularly dispositive, of the requirement’s materiality.  After Escobar, the FCA’s materiality requirement tracks that of other areas of the law, looking to whether the statement or omission has an “effect on the likely or actual behavior of the recipient of the alleged misrepresentation.”  In this case, the Government surely would have acted differently had it known of United Healthcare’s failure to operate its health facility with licensed staff, but the Court remanded the case for reconsideration under the now-clarified standards of FCA liability.