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Supreme Court Clarifies “Implied Certification” Theory of Liability Under the False Claims Act

In its recent decision in United Health Services, Inc. v. United States ex rel. Escobar, the U.S. Supreme Court analyzed “implied certification” under the False Claims Act (FCA).  The Court held that “implied certification” can present a viable theory for liability in FCA cases, but also stressing the importance of the materiality requirement for FCA claims.

In this case, the Defendant sought reimbursement from Medicaid for certain mental health services.  The Relators alleged that the employees who provided the mental health services did not meet qualification and licensing requirements under Medicaid regulations.  Consequently, the reimbursement requests were allegedly false claims, since the claims for reimbursement impliedly certified that the people who provided the mental health services met the relevant regulatory requirements.

The District Court dismissed the action, explaining that a regulation had to be a “condition of payment,” and that the provider qualification regulations were not a condition of payment.  The U.S. Court of Appeal for the First Circuit reversed, finding that the provider qualification requirements were a precondition of payment.  The Supreme Court granted certiorari to resolve splits between the Circuits regarding whether implied certification was in fact a valid liability theory under the FCA, and if so, what was its scope, including whether the regulation at issue had to be a condition of payment.

The Supreme Court unanimously held that implied certification could, in some circumstances, provide a basis for liability under the FCA.  Looking to common law fraud principles, the Court found that misrepresentation by omission, or half-truths, could constitute fraud.  The Court thus held that implied certification could apply where: 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 representations misleading half-truths.  In this case, the Medicaid reimbursement claims contained information and used special codes to describe the services provided. By not disclosing the violations of qualification and licensing requirements, Defendant’s claims constituted misrepresentations, and were false, within the meaning of the FCA.

The Court also analyzed whether a regulation had to constitute a condition of payment in order to trigger implied certification, and held that it did not. Nothing in the text of the FCA requires claims to involve conditions of payment, nor did any such requirement exist under common law fraud principles. A statement that misleadingly omits critical facts is a misrepresentation irrespective of whether the other party has expressly signaled the im­portance of the qualifying information.

The Court explained that concerns about fair notice and open-ended liability could be mitigated through strict en­forcement of the FCA’s rigorous materiality and scienter require­ments. A material fact is one which has a natural tendency to influence, or is capable of influ­encing, the payment or receipt of money or property, and looks to the effect on the likely or actual behavior of the recipient due to the alleged misrepre­sentation.  The Court stated that the materiality standard is demanding.

Correspondingly, the FCA is not an all-purpose anti-fraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory viola­tions. For example, a misrepresentation would not be deemed material just because: 1) the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a material condition of payment; 2) the Government would have the option to decline to pay if it knew of the noncompliance; or 3) the noncompliance was minor or insubstantial. Factors which could affect whether a regulatory violation is material would include whether the regulation is identified as a condition of payment (though this is not dispositive either way) and whether the defendant knows that the Government consis­tently refuses to pay claims in most cases based on noncompliance with the particular statutory, regulatory, or contractual requirement. Conversely, if the Govern­ment pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is strong evidence the requirements were not material.

Based on its holdings, the Court vacated the First Circuit’s decision and remanded the case for further proceedings.

The WBK Firm regularly advises and represents companies throughout the United States against alleged violations of the False Claims Act.