The Supreme Court Adopts Implied Certification Theory Under The False Claims Act
The False Claims Act (31 U.S.C. § § 3729 -3733) (the “Act”) imposes significant penalties on government contractors that submit “false claims” to the federal government for the payment of services. Penalties include triple damages and payment of attorneys’ fees. In addition, the statute has a “relator” provision allowing, in certain circumstances, a private citizen to bring suit on behalf the federal government, and permitting the relator to recover a percentage of the damages. The Act has a significant history, as it was originally enacted in 1863 in an effort to stop fraudulent billing by contractors during the Civil War.
The focus of numerous previous cases was how significant the false claim or “lie” must be to qualify as a false statement under the Act. Some courts have held that the falsity had to be apparent on the face of a claim for payment itself to qualify, while other courts have held that even if the claim for payment was true on its face, if a vendor had not complied with certain conditions for payment, the certification for payment can be “implied” as a false claim. In Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the United States Supreme Court, in a unanimous decision, held that this type of implied certification theory can, under certain circumstances, be the basis for a claim under the False Claims Act.
In Escobar, teenager Yarushka Rivera received counseling services under the Federal Medicaid program as administered by the state of Massachusetts. Rivera received over five years of counseling services at Arbour Counseling Services, a subsidiary of Universal Health Services. In 2009, Rivera had an adverse reaction to medication that was prescribed during her counseling sessions. Her condition subsequently worsened, and six months later she died.
Thereafter, one of the counselors revealed to Rivera’s mother and stepfather that few Arbour employees were properly licensed to provide mental health counseling. In fact, only one of Rivera’s five counselors was properly licensed. The Medicaid program required that satellite facilities, such as Arbour, have specific types of clinicians on staff and the rules delineated specific licensing requirements for particular positions, such as psychiatrists, social workers, and nurses. Universal Health Services apparently regularly flouted these requirements. A qui tam action was filed alleging that Universal Health Services had violated the Act by implied false certification.
When the case made it to the highest court, the Supreme Court ruled that an implied certification theory can be the basis for liability when: (1) the claim does not merely request payment, but also makes specific representations about the goods or services provided; and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representation misleading half-truths.
The Supreme Court began its analysis by noting that an omission can be the basis for a common law fraud claim. The Court stated that by submitting invoices for payment using the standard code for services, the facility implied that the services were provided in compliance with the Medicaid rules under those codes. This was more than a bare request for payment. Universal Health Services thus omitted the fact that the services were not being provided by properly licensed personnel.
The Supreme Court next addressed whether liability for failure to disclose required the violation of an express condition of payment. The Supreme Court rejected the “express condition of payment” requirement. The Court also rejected, however, the other end of the spectrum: that any statutory, regulatory, or contractual violation would support an implied false certification claim, no matter how minor, so long as the government could possibly refuse payment based on that violation. The Court provided the example that liability could not be sustained when the claim for payment for medical services was accurate, but the vendor had not used American-made staplers in its office as required by contract.
Rather, the Supreme Court set forth a rather vague standard that the violation must be such that the defendant knows that the omitted disclosure would be material to the government’s payment decision. In sum, the violation must have some connection to the payment application, and the violation must be of such materiality that the defendant would know that the government would certainly not approve such payment applications if the government knew the truth.
Such a vague standard will likely be subject to a wide variety of interpretations by the lower courts in the future. In light of the Supreme Court’s decision, contractors should be extra vigilant to ensure that it is complying with contract requirements and regulations that bear on the truthfulness of a payment request.