An FCA Update As We Await High Court's Escobar Decision


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The federal False Claims Act may soon be reshaped. With a case pending before the U.S. Supreme Court on the controversial theory of implied false certification and a recent House Judiciary Subcommittee raising issues of FCA reform, the law may face changes in text or interpretation. Here, we take a look at the arguments made in the Supreme Court case, a pair of interesting cases in the Second Circuit that may be sending a message to the Supreme Court, and the proposals discussed in the congressional hearing. 

Universal Health Services v. United States ex rel. Escobar

On April 19, 2016, the Supreme Court heard argument on the implied certification theory of FCA liability in Universal Health Services v. United States ex rel. Escobar, a case involving treatment at a mental health clinic from unlicensed or unsupervised providers. In the First Circuit decision being reviewed, the court found that the relators had sufficiently alleged falsity under the theory that, each time the clinic submitted a claim for reimbursement under Massachusetts’s Medicaid program, it impliedly certified that its clinical director had fulfilled the duties required by state Medicaid regulations. Notably, the Massachusetts Department of Public Health had previously investigated the clinic, found regulatory violations in staff credentialing and supervision, and accepted a plan of correction to address the issues, without seeking to withhold or recover any amounts paid to the clinic. Though the state regulatory body with authority over the clinic apparently chose not to pursue recoupment, the First Circuit allowed the relator to proceed with its claims for treble damages and statutory penalties under an implied certification theory of FCA liability.

The questions before the Supreme Court are (1) whether the implied certification theory of legal falsity under the FCA is viable, and (2) if so, whether liability under the implied certification theory requires that the underlying statute, regulation, or contractual provision expressly state that it is a condition of payment.

In its briefing, Universal Health Services (UHS) urged the court to reject the implied certification theory of falsity as inconsistent with the text and the purpose of the FCA. It discussed the implied certification theory as a construct to create liability for failures to disclose noncompliance with statutory, regulatory or contractual requirements. UHS argued that the statutory language, legislative history and the underlying principles of common law fraud do not support liability for the mere failure to disclose, particularly in the absence of a duty to disclose. In the alternative, it argued that the implied certification theory should be limited to situations in which the party has not complied with an express condition of payment — as the Second and Sixth Circuits have held. It argued that any other holding would violate principles of notice and due process and subject defendants to “almost boundless” liability.

In response, the relator argued that the implied certification theory is consistent with the FCA’s text and purpose because an affirmative false statement is not a necessary element of a violation. Further, it argued that limiting such claims to violations of express conditions of payment artificially restricted the law and inappropriately restricted the government’s ability to prosecute fraud. The relator also argued that government contractors have a duty to inform the government of undisclosed defects in goods or services being provided, and that failure to do so would constitute fraud even under the common law.

The U.S. Department of Justice submitted an amicus brief, arguing that a claim may be false or fraudulent “if the claimant knows that legal or contractual requirements have not been met but seeks payment from the government without disclosing that fact.” The DOJ further noted that parties may be liable for common-law fraudulent misrepresentation for concealing or omitting a material fact. The DOJ argued that whether a statutory or regulatory violation can constitute falsity under the FCA turns on whether it was material to the government’s payment decision, not whether it was explicitly labeled a prerequisite to payment. In addition, the DOJ asserted that it would be impractical for the government to explicitly specify all prerequisites to payment with each claim submitted and that doing so would provide government contractors with a roadmap of which requirements they could disregard without fear of FCA liability.

Amicus briefs were also submitted by many health care industry stakeholders, including the American Hospital AssociationAmerican Medical Association and Pharmaceutical Research and Manufacturers of America. While the points made by these provider-friendly organizations varied, they coalesced around the idea that the FCA should not serve as a general enforcement mechanism for regulatory compliance, and that imperfect compliance is not equivalent to fraud. On the other side, nearly two dozen states, several qui tam organizations, and the chairman of the U.S. Senate Judiciary Committee, Sen. Chuck Grassley, R-Iowa, filed amicus briefs asserting that the FCA was intended to be and should remain a flexible tool for combating fraud against the government.

At oral argument, the justices did not seem open to invalidating the implied false certification theory entirely. Instead, they primarily questioned how courts should determine which statutory or regulatory violations are material to payment and whether tenets of tort or contract law were better suited to make that determination. Notably, Chief Justice John Roberts bristled at the idea that a violation affecting a limited portion of a larger claim could make the entire claim subject to FCA liability. Of course, oral argument does not always provide a clear window into the court’s thinking. A decision is expected by the end of June.

Second Circuit Opinions on Implied Certification Since the Escobar Oral Argument

In the weeks following the oral argument in Escobar, the Second Circuit issued two major FCA opinions dealing with implied false certification — the banking case Bishop v. Wells Fargo & Co. and the pharmaceutical case United States ex rel. Polansky v. Pfizer Inc. Each of these opinions could be read as a message to the Supreme Court as it considers Escobar.

Both cases note that other agencies are often better suited to police the regulatory noncompliance targeted by implied certification claims. The Second Circuit stated in Bishop, “there are other actors involved in regulating banks who are better suited to ‘assuring that’ banks comply with applicable laws and regulations while at the same time ensuring that the entire banking system remains stable.”1 In Polansky, the Second Circuit stated, “The False Claims Act, even in its broadest application, was never intended to be used as a back‐door regulatory regime to restrict practices that the relevant federal and state agencies have chosen not to prohibit through their regulatory authority.2 The Bishop opinion also relied heavily on the seminal 2001 decision by the Second Circuit in Mikes v. Straus, and its warnings about the potentially broad reach of the implied certification theory. The Second Circuit repeated its statement from the Mikes opinion that “caution should be exercised not to read this theory expansively and out of context.3

Testimony Before the House Judiciary Subcommittee on the Constitution and Civil Justice on Oversight of the False Claims Act

Amidst the increased focus on the FCA due to Escobar, the House Judiciary Committee’s Subcommittee on the Constitution and Civil Justice held a hearing on April 28 to “examine the False Claims Act’s success, but also what more can be done to prevent, detect and eliminate false claims costing taxpayer dollars, while ensuring fair and just results.” The subcommittee invited several individuals to testify about their perspectives on the FCA, including a hospital CEO, a health care fraud and abuse litigation defense attorney, the chairman of a qui tam nonprofit organization, and a law professor. Several other individuals provided written testimony, including Sen. Grassley.

The testimony before the subcommittee raised three proposals for FCA reform. The first proposal would require corporate whistleblowers to report frauds internally before filing FCA actions. Dennis Burke, president and CEO of Good Shepherd Health Care System in Hermiston, Oregon, spoke to the significance of such reform in routing out false allegations from disgruntled former employees. Specifically, he recounted for the subcommittee the experience of his hospital defending itself against false accusations of a former employee over the course of a three-year criminal and civil investigation, which unnecessarily cost the hospital “hundreds of internal man-hours and well over $1 million in attorney fees, consultation fees and undeserved settlement costs, not to mention the significant harm to [the hospital’s] reputation.”

The second proposal would subject frivolous whistleblower claims to the same scrutiny as other plaintiffs under the Federal Rules. As an FCA defense attorney explained, the qui tam provisions shield whistleblowers and their attorneys from the risk-reward proposition that governs other litigation in federal courts. Under the qui tam provisions, whistleblowers stand to gain up to 30 percent of multimillion-dollar recoveries. According to the attorney, because of a “quirk” in the statute, whistleblower attorneys recover their fees and expenses “as soon as the defendant pays $1 to the government, regardless of whether the payment is made under a settlement or after a trial.” Plus, that windfall is in addition to the substantial contingency fee plaintiffs’ attorneys usually claim based on their clients’ financial recovery. Further skewing the risk-reward calculation, qui tam provisions limit a defendant’s pursuit of fees in frivolous cases that would otherwise violate Rule 11 by requiring a defendant to prove a higher standard of “clearly frivolous, clearly vexatious, or brought primarily for the purposes of harassment.” Mr. Burke also spoke to this issue and noted the fundamental unfairness under the current statute where targeted organizations are subject to over $1 million in expenses and “in the end, the accuser is able to just walk away and say, “oops, I guess we were (I was) wrong.”

The third proposal would eliminate or narrow FCA liability for corporations that adopt a so-called “gold standard” corporate compliance program. According to Larry Thompson, former deputy attorney general and current professor at the University of Georgia School of Law, the FCA could dramatically increase its role in preventing fraud abuse before it occurs, and incentivizing high-quality compliance programs is the best way to do so. Specifically, he cited research finding that, in organizations with effective programs, misconduct has been shown to be reduced by as much as 66 percent, and reporting of wrongdoing to management increases by 88 percent.

These proposals were not met without criticism. Specifically, Sen. Grassley questioned the call for internal reporting, noting that “[f]or every allegation of a potentially overzealous plaintiff, there is a whistleblower threatened with severe retaliation for raising concerns.” Neil Getnick, chairman of the qui tam nonprofit organization Taxpayers Against Fraud Education Fund, echoed Sen. Grassley’s concerns of retaliation and expressed skepticism at the compliance program proposal, calling it a way for corporations to “escape or face reduced liability from FCA actions because they have ‘checked the boxes’ on how to establish a compliance program.” He suggested that such proposals would “merely encourage companies to game th[e] new compliance regime the same way they game contract and regulatory requirements.”

It remains to be seen whether the subcommittee hearing results in any legislative changes to the FCA. Similar congressional hearings in the recent past have generated spirited discussion, but little else. Nevertheless, against the backdrop of Escobar and other recent developments in FCA jurisprudence, this latest hearing takes on an added degree of significance.


Our understanding of the FCA may soon change. While the subcommittee hearing may not ultimately result in any amendments to the FCA, the Supreme Court is expected to decide the Escobar case by the end of June. That decision has the potential to redefine falsity under the law, changing the FCA landscape significantly. But an eight-member court could also reach a split decision, which would allow the lower court’s decision to stand without any change to existing law. Given that the FCA results in billions of dollars of recoveries to the federal government each year and threatens business in highly regulated industries with astronomical liability, its future is likely to remain a subject of debate.

[1] Bishop v. Wells Fargo & Co., Case No. 15-2449, 2016 WL 2587426 at *12 (2d Cir. May 5, 2016) (citation omitted).
[2] U.S. ex rel. Polansky v. Pfizer, Inc., Case No. 14-4774, slip op. at 17 (2d Cir. May 17, 2016).
[3] Bishop, 2016 WL 2587426 at *6.

Republished with permission. This article first appeared in Law360 on May 24, 2016.